Mission statements have been around for many years and define the purpose of a company and its goals. Now the U.S. Treasury and the Federal Reserve have jointly issued a mission statement for their cooperation during this economic crisis. The key elements are:
- Since the Treasury does not have enough tools in this crisis, the Fed will use theirs (of course in close cooperation with the Treasury) to make credit flow, to prevent any systemic failures to the financial system, and fix what is wrong.
- Federal Reserve is the lender of last resort. They are to do whatever is necessary to make credit flow in all areas.
- The Federal Reserve needs more power and will go to Congress to get more.
- The Treasury will take the Maiden Lane assets (the toxic Bear Stearns “assets”) from the Fed. I thought toxic assets were profitable if you would hold to maturity (satire).
The mission of the Fed (according to their interpretation of laws) is:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
How has the Fed been doing with their monetary policy to overall achieve the “economy’s long run potential”? The economy has been slowly slipping since 2000. Have you heard an alert from the Fed that the economy they were watching was degrading? We did hear how strong and vibrant the economy was.
Exactly how is the Fed to accomplish maximum employment? Increase the number of Fed employees? With only monetary tools at their disposal, they need to create an environment so business can expand. Whatever they were doing they failed. Was the Fed at fault? Absolutely. When you are given a task to perform and you are failing, you speak up even if you believe others are at fault.
The Fed has been successful on consumer prices – if you accept that the Consumer Price Index (CPI) is a good indicator of costs. I suspect that this index is manipulated as pay and social program increases are geared to the CPI. There is a magnifier effect as a cost goes through the supply chain. The probability is that the CPI increases should be larger than the Producer Price Index (PPI). Consumers have been seeing significant cost increases since 2002.
The only place where the Fed clearly is a winner is on interest rates.
Judging from the Fed performance since 2000, there is little evidence they have been doing a good job, nothing compelling enough that they should be given additional powers. Further, it seems the Fed in issuing this joint statement with the Treasury is politicizing the monetary control. The one great advantage of the Fed having monetary control was their relative political independence compared to other currencies in the world.
The government and the Fed are reacting to an undefined problem – and continue to pretend it is defined. The first step in problem solving is defining the problem. No one knows how much money needs to be thrown in to save the too big to fail shit heads. Most people do not know that the CDS issue which AIG is bleeding taxpayer money is 70% of Citibank’s (C) exposure and 20% of JPMorgan’s (JPM). The guarantees the government has issued to date are many times the GDP.
We are not MANAGING this crisis. The government is reacting like undisciplined children who have stolen mother’s purse.
As the government is not large enough to backstop a doomsday economic scenario, a less aggressive strategy needs to be formulated where a monetary limitation is put on solutions. Planners will be forced to prioritize their responses, and not believe they can throw taxpayer money at trying to solve every problem and / or using weapons of limited effectiveness.
The Fed must not be given additional powers until they prove they can effectively manage our economy.
Additional Economic Events from This Past Week
The event which affected the markets most this week was the Public-Private Investment Program introduced by Treasury Secretary Tim Geithner. The concept in its simplest form is to
- purchase the toxic assets from the banks, and
- loan money to the banks
using competitively bid investor pools of money combined with matching dollars thrown in by the government. There are all sorts of government guarantees – and all bear similar structure to the packaging of securities which got us into this financial crisis.
The giant sucking sound you will be hearing shortly is market sideline money rushing over to participate in this program. Although I do not think it is an appropriate moment to be in the equities market anyway, they are all but ensuring the sideline money is being drained to subdue market rallies. The government believes fixing the banks will fix the economy – and I believe fixing the economy will fix the banks. No matter how bankers see it, banks are not the economy.
And where does the government want investor money to go? Housing? Treasuries? Equities Market? Toxic Assets? Almost $13 trillion has been evaporated from the private sector according to the Fed. And the equity market power is at 1998 levels. Seemingly, the government has an unlimited amount of money – but private investor money is finite.
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Fed Chairman Bernanke has stated that the AIG bonus type issues could be avoided in the future:
- If Congress would pass legislation where companies getting government money are put into a type of receivership. (I agree fully)
- If there was more “strong, effective consolidated supervision of all systemically important financial firms”.
You always can do a better job of auditing. But it is easier to pass good laws which mandate jail time for those involved in wrongdoing. Forget about corporate or personal monetary fines. From personal experience, auditors cannot find their ass using both hands – no matter how good they are (unless they are tipped off where to look).
The Fed began monetizing the debt this week purchased $7.5 billion of treasuries. One of the three treasury auctions this week saw week demand. Overall $98 million of treasuries were auctioned. It is too early to start speculating about the unintended effects of the Fed screwing around purchasing treasuries. I am afraid this might turn out to be a very big story with ramifications throughout the financial system. Why I would be interested in competing with the government to buy debt when they can influence the outcome?
Treasury Secretary Timothy Geithner has unveiled his concept to preventing the repeat of the financial system failure which has occurred. It travels the same road of increased and more effective financial system surveillance which has occurred after each failure in the past. This surveillance approach has not worked in the past – and it will not work in the future to prevent the next financial system failure. I have suggested an alternate path to follow which revamps the existing banking system.
4Q 2008 Gross Domestic Product (GDP) final number showed an annualized decline of 6.3% slightly worse than the preliminary negative 6.2%. I would expect the 1Q 2009 GDP decline to also be around this rate of contraction.
The Mortgage Bankers Association is now projecting that 2009 will be the fourth-biggest mortgage year in history after the boom years of 2002, 2003 and 2005 due to the low interest rates. Most of the mortgages will be refinancing of existing mortgages. We are imbedding a significant amount of debt at very low interest rates. This will hinder the Fed’s ability to raise interest rates to fight inflation – any rise in interest rates damages the bond market holding this low interest debt. Last week, mortgage applications increased over 30% week-over-week with 78% of all mortgage applications for refinance. The average 30 year mortgage is now at 4.63%. This is a great time to refinance your mortgage.
There was 4.7% increase in new home sales in February 2009 month-over-month, and a 41% decrease year-over-year. At the current rate of new home sales, this represents a 12.2 month supply of new homes on the market. There is really nothing to say about this information as it will take many, many months of increases before this new housing glut goes away.
Advanced data for new orders for manufactured durable goods in February 2009 shows an increase of 3.4 percent. This increase follows six consecutive monthly decreases, including a 7.3 percent January decrease. Excluding transportation, new orders increased 3.9 percent. Excluding defense, new orders increased 1.7 percent. A slight uptick in new orders is not unexpected following months of decline. There are many reasons a monthly uptick occurs other than a sign of a bottom or recovery. As this is advance data, there is no detail to review.
Personal Income declined very slightly and Personal Consumption increased very slightly month over month in February 2009. If chained dollars (inflation adjusted) are used, both income and consumption declined slightly. In any event, this is another indicator of poor economic conditions. If the economy was bottoming, we would expect to see increases in the chained dollars of 0.08% (population growth per month) for both income and consumption.
The rate of job destruction remained essentially constant into the second week of March with the four week moving average with 649,000 jobs being lost every 4 weeks.
Filing for Bankruptcy: Dial-a-Mattress Operating Corporation (owned by Napoleon Barragan) and Charter Communications (CHTR). Charter is a prearranged bankruptcy – and therefore should emerge quickly from bankruptcy. Bank failures this week: Omni National Bank (Atlanta, GA)
Economic Indicators Published This Past Week
So many punters are latching on to up-ticks in economic data and claiming the equity market will take off as good times are coming. The markets may very well take off but it is not due to changes in the economic fundamentals. Overall economic fundamentals are poor and continuing to degrade. The economy has gone through a great financial shock, and will take some time to repair.
There reaches a level where equilibrium is reached in each sector of the economy. Some of these sectors are near, at, or overran the equilibrium points. Other sectors have some way to go until that point is reached. It is important to understand that for-profit companies need to optimize their organizations to maximize profits based on the current trade levels.
This will result in additional layoffs which most analysts expect will continue to grow well into next year, Because of the size of the unemployment problem during this recession, combined with the size of the debt during this recession – there will be significant resistance to growth during recovery.
The WLI from ECRI continues to demonstrate poor market conditions six months from now. In their statement last Friday, they said “With WLI growth recovering to a 21-week high, the pace of contraction in the U.S. economy should begin to ease in coming months.” This is interpreted to mean that in the next six months you will still notice some deteriorating conditions, but the feeling that the economy is free falling will be contained.
The Chicago Fed’s National Activity Index (uses 85 indicators to judge national economic activity) was remained negative in February 2009 but improved slightly over January. This is a coincident indicator and gives you no new information – but confirms the results of the other coincident indicators earlier this month.
If you would like a summary of all government financial indicators, click here.
Disclosures: None
