10 replies to this topic

[phineas_gage]

Our dollars are going to countries who are not spending them on our goods and services i.e.: China and Middle east. They have very high savings rates, thus reducing the global velocity of money.

At the same time, domestic US savings rates have collapsed. Arguably (my opinion, not his words) we are upside down on our "national mortgage."

We face a demographic headwind to mitigating the savings situation as the baby boom ages, and the domestic workforce contracts.

We need to find a way to attract foreign capital back to dollar denominated assets, and at the same time we need to encourage savings and discourage consumption domestically.

Read the spech yourself here: http://www.federalre...ke20070911a.htm

***Warning: Personal opinion follows***

The logical conclusion to what Ben is saying is that risk free unlevered rates of return need to go up here in the US. At the same time, on a relative basis, these rates need to be attractive in terms of the currencies of the countries that enjoy a savings surplus.

How are you going to get the dollar down and raise interest rates at the same time?

Answer: Don't cut rates, let asset prices drop to the point of attractiveness. To foreigners, our domestic services based economy just amounts to a bunch of wackos giving each other expensive haircuts and backrubs.

I see this spech as shockingly hawkish. I know he'll be gradual, and of course I know the audience, but I suspect he's sending a message to the Euro crew that he'll be more Volcker than Greenspan.

Later today, if the proprietary desks aggressively sell (they're debating it right now in the wood panelled corner office), then I think I have my proof.

[mike123]

They have already officially said that they want the market to readjust for risks. Why do people still bid up stock and bond prices? Mortgage brokers say customers couldn't refinance 10:35 a.m. 09/11/2007 Provided by NEW YORK (Reuters) - Some 57 percent of mortgage broker customers with adjustable-rate loans were unable to refinance into a new loan to avoid higher monthly payments in August, a national survey reported on Tuesday. The poll of 1,744 brokers in the last week of August found that subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a statement from Campbell Communications, the Washington-based research firm that conducted the survey. Prime borrowers were impeded by appraisals and high loan-to-value ratios, it said. About 5 million adjustable-rate mortgages will reset to higher rates in the next 18 months, according to Lehman Brothers. Economists warn the housing slump could deepen if those homeowners are unable to refinance loans as lenders tighten underwriting guidelines and home values stagnate or fall. Lenders cut off credit to customers at an especially fast rate in August as many investors stopped buying the debt banks use to finance the home loans. Broker customers with subprime, or weak, credit faced the most problems, with 64 percent unable to refinance their ARMs in August, the survey said. Half of prime borrowers were turned away from ARM refinancing, it said. The survey also found that a third of home purchase closings were canceled in August. Loan closings were canceled for 56 percent of subprime borrowers in the month amid failed approvals, while closings for 21 percent of home buyers with good credit were foiled.

[ogm]

If you don't cut rates and let assets depreciate, you're running a threat of collapse in domestic spending. That will probably hurt the dollar. And Will increase rates even more. ( Shrinking economy = higher budget deficit = weaker currency = higher rates) So you'll end up with depreciating assets denominated in depreciating currency. That won't encourage foreign investement. What you need to turn economy into export economy. That can be accomplished only through weaker dollar. Weaker dollar is inflationary, but it will boost exports, which will in turn stabilize labor markets and domestic spending. There is no choice but to inflate, IMO. Too much debt outstanding, the situation may go out of control. Falling assets, lower employment = less taxesto payt Federal debt, less taxes to pay municiapal debt, higher corporate defaults and so on. Debt must be repaid with cheaper dollars. Anything else will be bad. Really bad.

[mike123]

If foreiners stop buying our debts (CDO, MBS, Bonds), lowering interest rate will not help. We will follow Japan if FED cuts interest rate to zeo.

[NAV]

To foreigners, our domestic services based economy just amounts to a bunch of wackos giving each other expensive haircuts and backrubs.

I like your sense of humor

[jack]

"We need to find a way to attract foreign capital back to dollar denominated assets, and at the same time we need to encourage savings and discourage consumption domestically."

So whos is the target audience? Is he just trying to give the outside world an impression or do we
not only have a recession but a planned deflation? This is certainly talking the talk.

[phineas_gage]

There is no choice but to inflate, IMO. Too much debt outstanding, the situation may go out of control.

OGM,

I don't disgree with your conclusion about the US needing to shift to exports. I know a smart guy in Omaha that has done two things in the last twelve months. He's made a huge short bet on the dollar, and he's buying up the infrastructure (Rails) that feed our shipping ports. He obviously knows what he's doing.

But I think what Ben is saying, is that inflating will not affect REAL rates of return, as the increases to our savings at a national level will be wiped out in foreign terms by inflation. No what I am saying is that Ben intends to carry out a RTC like selloff in capital assets, including debt, while at the same time protecting this investment (for foreigners) with a hawkish fed stance. Here's the checklist:

The dollar needs to drop.

Foreigners need to be the buyers of this debt mountain we've created, and Ben's willing to give it to them for pennies on the dollar

Domestic consumption needs to slow down. He'll take a recession in a lame duck presidency year to do it.

Rates need to stay (relatively) high.

IMHO, of course.

"We need to find a way to attract foreign capital back to dollar denominated assets, and at the same time we need to encourage savings and discourage consumption domestically."

So whos is the target audience? Is he just trying to give the outside world an impression or do we
not only have a recession but a planned deflation? This is certainly talking the talk.

Thats exactly what I'm saying- a recession and a planned deflation- just like the RTC, but on an international level and without any press releases as to whats really going on.

The speech targets are the Euro block, China, and the Middle East.

It just may work too. But like any garage sale, the people have to show up.

If he talks reflation, they won't.

Edited by phineas_gage, 11 September 2007 - 11:30 AM.

[SemiBizz]

Ben's been fairly consistent with his "Everything is fine in the economy statements". What is hurting him now is that he said for months that subprime was no problem, and now the employment report (a lagging indicator) is saying something else about the economy. Add to that the spew of his juniors in the Fed ... creating speculation over 1/4, 1/2 or none at all and it sets up a mystery for the street to sell, that's all this is, because even if Ben cuts, it's not going to change the outcome. His credibility is shot at the moment. The street is starting to not like this guy.

[qqqqtrdr]

Ben's been fairly consistent with his "Everything is fine in the economy statements". What is hurting him now is that he said for months that subprime was no problem, and now the employment report (a lagging indicator) is saying something else about the economy. Add to that the spew of his juniors in the Fed ... creating speculation over 1/4, 1/2 or none at all and it sets up a mystery for the street to sell, that's all this is, because even if Ben cuts, it's not going to change the outcome. His credibility is shot at the moment. The street is starting to not like this guy.

Agreed about the rate cut not helping much. I do think it will help a little however. Dropping rates I don't think will hurt or help the markets at this point. The market itself appears to be ready to take off upwards for another good run. The economy is starting to pick up steam ( except housing ). I know some of you will say the economy and housing are almost one in the same. But there are other sides of the Economy are set to take off in 2008 - 2010 ( first technology mobile computer ( not laptop ) ).

Barry

[SandStorm]

If the global imbalance of savings vs consumption and investments all work out as Ben hopes, the short-run pain for the US is a near certainty as adjustment /transition usually does not come smoothly. Still not sure about Volcker style, but there are strong evidence that Ben is much more hawkish than Alan G -- what a surprise. Alan G is too much of a politican while Ben an academic as the reason? Could be. Or maybe Ben is still just a greenhorn. Anyways, if Ben is serious about doing our part in solving the imbalance problem, and we have to since it is also up to the savings countires to make changes, then I predict he dares to sacrifice the economy for it. Already he is trying to teach Wall Street a lesson about risk-taking, I will not be surprise for Ben to extend that lesson to Main Street, too, about the risk of careless and excessive present consumption without much regard for saving for the future. Disclaimer: all of my fundamental discussions here are merely intellectual expressions. They have little to do with how I position myself on the daily basis, duh! lol

Edited by SandStorm, 11 September 2007 - 05:07 PM.