Could reforming Fannie and Freddie wreck the Fed?
And now, fresh off passing the 2300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress promises to address the “problem” of Fannie Mae and Freddie Mac.
Be afraid. Be very afraid.
Oh, not because Fannie Mae and Freddie Mac don’t need to be reformed. They sure do. They were at the heart of the U.S. housing bubble and the mortgage debacle that mutated into the global financial crisis.
And not because Congress can be counted on to compromise its way into a hash that combines the worst of private market gestures with the worst of bureaucratic rule-splitting.
No, the real danger is that a mistake in fixing Fannie and Freddie could take down the U.S. Federal Reserve. Or at least take down the Fed to the degree that any central bank, with a central bank’s ability to create money, can be taken down.
All hyperbole aside, a mistake in fixing Fannie Mae and Freddie Mac could throw the U.S. financial system into crisis again by destroying the balance sheet of the Federal Reserve.
Could we be looking at (another) global credit crunch as central banks step back from the markets?
The world is starved for credit.
I know it doesn’t seem that way what with huge stimulus packages in 2009, massive expansion of the money supply in the United States, China, and Europe, and hand-over-fist expansion of the balance sheets at the U.S. Federal Reserve and the European Central Bank.
But all that may not be enough to make up for the trillions in credit that the market for securitized debt supplied every year—until the 2007 financial crisis. That’s what Gillian Tett argues in a must-read column in today’s (June 24) Financial Times.
Time to rethink assumptions about interest rates–and income investing strategies
Reality has a nasty way of throwing investors’ assumptions onto the rubbish heap.
Take this one: The massive stimulus packages, central bank interventions, and government budget deficits will lead to a surge of inflation and rising interest rates.
That may still turn out to be true in the long run but the long run is showing a disconcerting tendency to recede into the distance these days.
It’s worth asking if the arrival of higher inflation and higher interest rates is now sufficiently delayed that the period between now and then deserves its own set of investing strategies. What kind of strategy? I’ll try to lay out the general outlines of one in this post.
China reverses another policy and starts new buying of U.S. Treasuries again
China’s decision to end a strict yuan-dollar peg is getting all the headlines today—even though the likely appreciation of the yuan versus the dollar is in the vicinity of 3% or so in 2010. That’s hardly a game changer.
But the bigger China-U.S. news dates back a few days to June 15: After reducing its holdings of U.S. Treasury debt by 6.5% from November 2009 through February 2010, China reversed policy. In March and April China increased its investment in U.S. government notes and bonds by 2.6% to $900.2 billion.
Most of China’s buying went into the longer-term end of the Treasury market. In the 12 months that ended in April China’s buying of Treasuries with maturities of two years or more jumped by 46%. These purchases at the longer end of maturities reversed a swing that had seen China putting most of its cash (in 2008, for example) into short-term Treasury bills.
Chinese buying has been one factor pushing yields on 10-year Treasuries, the benchmark for many U.S. mortgages, down to just 3.25% on June 21. On May 25, the yield on 10-year Treasuries dropped to 3.06%. According to Freddie Mac, the rate on a 30-year fixed mortgage is now just 4.75%. That’s near the all time low of 4.71% set in December 2009.
The U.S. housing market isn’t in good shape, but it’s frightening to think how bad it would be if mortgage rates weren’t this low.
I don’t think there’s anything especially altruistic about China’s buying.
Could the Fed keep rates at 0% into 2012? Some at the Fed think it should
The Federal Reserve will hold its short-term interest rate target at 0% to 0.25% until 2012, according to a new research paper by economist Glenn Rudebusch.
That’s a much longer delay than Wall Street now anticipates. Estimates there for when the Federal Reserve will start to raise rates range from late this year to the first half of 2011.
It’s worth taking this new report seriously. Rudebusch is associate director of research at the San Francisco Fed so his paper, while by no means an official statement of Fed policy, is an indication of what some inside the Fed are thinking about interest rates. And in this case “some” most likely includes Janet Yellen, president of the San Francisco Fed and President Barack Obama’s nominee for the No. 2 slot to Chairman Ben Bernanke at the Federal Reserve.
