to Wolf conservative morphs into cautious, which translates into long-term failure

From Alphaville:

"Obamanomics: bailout conservatism v fiscal splurge Posted by Sam Jones on May 13 18:35.

Fox Business reports:

The municipal bond market is in trouble, and Congress wants to grant it a federal guarantee.

Yes, yet another contingent liability foisted upon the US taxpayer.
The House Financial Services Committee is scheduled to consider a series of bills that would provide massive government backing and intervention to the municipal bond market. Draft legislation is expected to be introduced as early as this week. A full committee hearing on municipal bonds is tentatively scheduled for Thursday, May 21, according to an internal staff schedule.

It all makes this op-ed in today’s FT - “America’s triple A rating is at risk” - nothing if not timely:
…exploding healthcare and Social Security costs threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

And as was reported earlier today - in a portent, perhaps, of such things - the US government experienced its first April budget deficit. April being a month in which the government almost always records a surplus, because of the tax year ending April 15th. The last time April saw a deficit was in 1983. Figures released Tuesday show the excess of government spending over receipts came in at $20.9bn, compared with a surplus of $159.3bn in April 2008.

Sean Corrigan at Diapason securities produced this graph, which rather puts that into perspective.

All of which has got quite a few people chattering about another FT op-ed, this time by the esteemed Martin Wolf. The point of debate: Can Obama really be called a “conservative” when it comes to fiscal matters?

As Robert Teitelman over at the Deal summarises:to Wolf conservative morphs into cautious, which translates into long-term failure. Much of his larger critique of Obama hinges less on the economics of the situation, and more on a projection about the politics.

One final datapoint worthy of note: just 6 per cent of economic stimulus funds have so far been spent.

This entry was posted by Sam Jones on Wednesday, May 13th, 2009 at 18:35 and is filed under Capital markets."

Me:

Don the libertarian Democrat May 13 20:06

In the real world, it's hard to consider Bair, Bernanke, Geithner, and Pres. Obama, cautious. I wish that they had done more, but the response has been massive. On the seizing of Holding Companies, since there is pending legislation to put that on the fast track in Congress, what more could the administration possibly do?

Wolf's right to worry about reforming the financial system, but we've thrown a fair amount of caution to the wind in responding to this crisis, and it couldn't be otherwise, given the fact that one man's caution is another man's insane risk.

will Aurelius seek to appeal the determination decision in court, especially since they are already suing MBIA

TO BE NOTED: From Alphaville:

"Aurelius Capital fails to trigger MBIA CDS payouts Posted by Sam Jones on May 11 19:49. Comment.

Alea spotted this statement out from ISDA:

It’s from the newfangled ISDA CDS determinations committee, and it refers to an earlier formal request for the committee to ascertain whether CDS written on MBIA - the failed bond insurer - could be said to have been triggered under the terms of a “succession event”. More…

Alea spotted this statement out from ISDA:

It’s from the newfangled ISDA CDS determinations committee, and it refers to an earlier formal request for the committee to ascertain whether CDS written on MBIA - the failed bond insurer - could be said to have been triggered under the terms of a “succession event”.

The Mod-r clause in CDS contracts contain provisions whereby the contracts can be triggered by a range of modification or restructuring scenarios beyond the straight-out default of the company.

Had the committee determined that a succession event had occurred, CDS referencing MBIA would have been triggered. In other words, anyone who had bought CDS protection on the bond insurer would be in line for a payout from those who sold protection.

Alas, the ISDA determinations committee has declared there was no succession event under ISDA rules. Which will jar the investor that lodged the determinations request: Austrian hedge fund, Aurelius Capital.In its submission to ISDA, two weeks ago, Aurelius asserted that, by its calculations, “more than 25.7 per cent” of MBIA’s obligations had been succeeded to by MBIA Illinois: at such a level, that would indeed trigger a succession event under ISDA rules. ISDA determines that such an event occurs if more than 25 per cent of “obligations” cede to a new successor entity.

FT Alphaville presumes Aurelius has a CDS position against MBIA (late on a Monday evening, Aurelius could not be reached for comment) - certainly that would explain their activism insofar as doggedly seeking the activation, and arbitration, of the determinations committee.

That being so, will Aurelius seek to appeal the determination decision in court, especially since they are already suing MBIA?

Worth noting seperately: FT Alphaville also understands Aurelius is in a rather uncomfortable position regarding a large CDS contract it entered into with Credit Suisse. Under the contract, Aurelius wrote protection on a basket of structured products, including, but not limited to, CLOs, CDOs and RMBS.

Related links:
MBIA: Transformation or transgression - The Deal
Aurelius Capital
ISDA

A policy mistake made by some major central bank may bring inflation risks to the whole world

TO BE NOTED: From Alphaville:

"Quote du jour: fears of competitive devaluation Posted by Sam Jones on May 07 11:35.

A policy mistake made by some major central bank may bring inflation risks to the whole world. As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.

- People’s Bank of China quarterly report, May 6 (via Bloomberg)

The PBC has been getting gradually more vocal in its criticisms of the Fed and the BoE. Things cant be great if you’ve got a mountain of US Treasuries, of course.

We’ll be watching to see what the BoE has to say about QE - if anything - at noon.

This entry was posted by Sam Jones on Thursday, May 7th, 2009 at 11:35 and is filed under Capital markets. Tagged with currencies, People's Bank of China, quantitative easing."

And:

"China Says Global Easing Policies Risk Devaluation (Update2)

Share | Email | Print | A A A

By Sandy Hendry

May 6 (Bloomberg) -- Global central banks risk inflation, currency devaluation and a “big consolidation” in bond markets by pumping cash into their economies, the People’s Bank of China said in its quarterly monetary policy report.

The Federal Reserve and the Bank of England this year started quantitative easing, or printing money to buy government bonds, a policy that the Bank of Japan pioneered to revive its economy at the start of the decade. The European Central Bank’s 22-member board, which meets tomorrow, is split on whether it should buy financial assets to tackle its recession.

“A policy mistake made by some major central bank may bring inflation risks to the whole world,” China’s central bank said in the report today. “As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.”

Chinese Premier Wen Jiabao expressed concern in March that the dollar will weaken, eroding the value of China’s holdings of Treasuries, as the U.S. borrows unprecedented amounts to spend its way out of recession. China’s Treasury holdings climbed 52 percent in 2008 and stood at about $744 billion as of the end of February, according to U.S. government data.

“In the medium and long term, as the financial markets stabilize and economies gradually recover, increasing inflation expectations, rising interest rates and central bank’s liquidity-absorbing operations may cause a ‘big’ consolidation in bond prices,” the central bank’s statement said.

Bernanke

Federal Reserve Chairman Ben S. Bernanke told the congressional Joint Economic Committee yesterday that inflation will “remain low” even as a recovery gets underway because businesses will be slow to build back production and payrolls.

ECB council member Athanasios Orphanides yesterday said the financial crisis needs “drastic” measures. Orphanides and fellow member George Provopoulos from Greece have indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy.

ECB Executive Board member Lorenzo Bini Smaghi said on April 28 that policy makers should be “wary of the possible side-effects” of unconventional measures.

The euro may rise against the dollar because ECB policy makers will probably decide against introducing so-called quantitative easing when they meet May 7, Bank of Tokyo- Mitsubishi UFJ Ltd. said.

“The failure to move to quantitative easing in the near term should help support the euro, especially against the dollar, given the Federal Reserve’s contrasting aggressive monetary easing approach,” Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo, wrote in a note yesterday.

To contact the reporter on this story: Sandy Hendry in Hong Kong at shendry@bloomberg.net"

Me:

Don the libertarian Democrat May 7 15:08

I keep quoting this speech, which pretty much details China's position on QE in a financial crisis:

http://www.pbc.gov.cn/english//detail.asp?col=6500&ID=138

"2. The role and contribution of China, as a responsible big country, in Asian financial crisis

In order to mitigate the impact of Asian financial crisis and help crisis-stricken Asian countries walk out of the plight, then China's Premier Zhu Rongji promised, on behalf of the Chinese government, to the world that the RMB would not depreciate, followed by a series of active measures and policies.



(1) China made vigorous efforts to participate in the IMF's rescue operations to help related Asian countries. After the outbreak of financial crisis, under the arrangement framework of the IMF, the Chinese government provided a total of over US$4 billion assistance to Thailand, as well as export credit and emergency free medicine assistance to Indonesia and other East Asian countries, although China had inadequate foreign exchange reserves at that time.



(2) China actively cooperated with relevant parties to participate in and advance regional cooperation. At the sixth ASEAN informal leaders' meeting, then China's President Jiang Zhemin unveiled three proposals of strengthening regional cooperation to refrain the crisis from spreading, reform and improve international financial system, and respect self-selected measures of relevant countries and areas to overcome financial crisis. At the second informal ASEAN+China, Japan and Korea leaders' meeting and the informal ASEAN+China leaders' meeting, then Vice President Hu Jintao emphasized that East Asian countries should vigorously engage in reform and adjustment of financial system, with the most pressing need to intensify the management and supervision over short-term capital flow. He called on the East Asian countries to strengthen exchange on macroeconomic issues such as financial reform, have dialogue between deputy finance ministers and deputy governors of central bank, and form expert team at appropriate time to launch in-depth research on specific measures on managing short term capital flow. The above measures adopted by the Chinese government received positive response and support from most crisis-stricken countries.



(3) China promised that the RMB would not depreciate. Being a highly responsible country, the Chinese government made the decision of no depreciation of the RMB with an aim of safeguarding regional stability and promoting development, which played a pivotal role in maintaining economic and financial stability of the Asian countries and the world at large, as well as Asian countries' economic recovery and regaining of rapid growth in later years.



(4) China implemented policies to boost domestic demand and stimulate economic growth. While sticking to no depreciation of the RMB, the Chinese government took a wide range of measures to boost domestic demand and stimulate economic growth, which safeguarded health and stability of domestic economic growth, mitigated difficult situation in the Asian economies, and fueled recovery of Asian economy.



The adoption of these measures by the Chinese government embodied that as a part of Asia, China had a full awareness of collective interests and responsibility and has made its due contribution to the rapid recovery and regaining of growth momentum of the Asian economy."

"In the final few months of 2007, Moody’s downgraded more bonds than it had over the previous 19 years combined"

Interesting post on the FT by Sam Jones on Moody's and the rating system:

"Then, on August 16 last year, after an internal revision of its ratings practices, Moody’s made an announcement that heralded the beginning of the credit crunch."

And:

"The action was the first in a series of surprises for the credit markets. In each of the succeeding weeks, it seemed, Moody’s and the other rating agencies had more bonds to downgrade. And each set of downgrades was a convulsive shock. In the final few months of 2007, Moody’s downgraded more bonds than it had over the previous 19 years combined. Panic gripped trading floors. Titanic structured vehicles, created by banks to warehouse their “riskless” mortgage bonds, became untouchable for short-term investors. As a result, two big German banks revealed that they were within a whisker of collapse, and virtually overnight all the world’s banks stopped lending to one another."

Please read it.