News: 2013-11-21

Central Banks

“Cutting the extra interest on reserves banks hold with the Fed would drive down already low overnight interest rates even further, probably to just a few basis points, hurting bank profits but adding extra stimulus to the economy.

According to the minutes of its October meeting, most officials on the FOMC thought such a move “could be worth considering at some stage” as a way to signal continued easy monetary policy after they start to slow asset purchases from $85bn a month.”

Interest on Reserves Background

Will this be the ZLB/repo/collateral-scarcity solution we’ve been waiting for? | FT Alphaville

Just catching you up on this debate about interest on excess reserves because the Fed is considering cutting this as a signal to the market about policy accommodation.

“While the traditional reverse repo system involved the Fed draining a fixed amount of reserves at a rate determined by the market, the new facility would involve draining whatever quantity of reserves the market wants to supply at a rate fixed by the Fed. In our view, this is consistent with the recent evolution of monetary policy in the US as well as globally – away from adjusting the quantity of excess reserves to target a policy rate and toward setting the short-term interest rate directly by paying interest.”

Interest on Excess Reserves and Cash “Parked” at the Fed – Liberty Street Economics

Here’s the Fed on IOER. Key line: “total quantity of reserve balances held by banks conveys no information about their lending activities”

Lowering interest on excess reserves will therefore not reduce reserves. It can only be a (weak) signalling device akin to forward guidance. Changing IOER is really yet another portfolio preference trick to get banks to seek risk. That’s all. This is supposed to increase jobs?

The shadow banking system, crunched one way or another | FT Alphaville

This post on shadow banks is related to the ones on interest on reserves and reverse repos because a lot of the credit in our system is created by shadow banks that use safe asset government collateral in order to create credit. The Fed has been reducing that collateral.

FAQs: Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise – Federal Reserve Bank of New York

‘Fedspeak’ points to bank reserves idea – FT.com

Why the Fed can lower IOER soon (maybe) | FT Alphaville

“We already explained the mechanics and potential importance of the new reverse repo facility here. For now, the key point to remember is that IOER had been functioning as an added source of collateral for money market funds and other short-term lenders and repo counterparties of the banks. But because only the banks are eligible to be paid IOER, the provision of this collateral had to be transmitted through them rather than provided directly to the money market funds.

But as we noted in our explainer, the Fed’s reverse repo facility, if it is introduced on a big enough scale, would indeed be a direct source of collateral — not to mention a direct competitor to the dealer banks, which would have to look elsewhere to replace the funding provided by the money market funds.

This would further the ongoing regulatory crunch of the shadow banking system, wholesale funding markets in particular, though it would also raise controversial questions about the Fed’s increasingly expansive presence in money markets. This concern would be at least partially mitigated by the fact that lowering IOER is effectively the same as cutting a subsidy to the banks, and nobody likes those.”

Europe

Niemand ist gezwungen, deutsche Produkte zu kaufen | ZEIT ONLINE

“According to this German article, criticisms of Germany’s trade surplus are “a sign of US uncompetitiveness”

Merkel acepta el salario mínimo para lograr formar Gobierno | Internacional | EL PAÍS

Angela Merkel will accept a minimum wage as part of her negotiation for a grand coalition

BBC News – Eurozone ministers are ‘losing patience’ with Greece

ekathimerini.com | Schaeuble says EU debt sharing would spell Europe’s decline

This is perhaps just a rhetorical point in terms of WHEN debt sharing happens because even the likes of Juergen Stark have admitted they would consider debt sharing down the line.

Portugal: on the verge of a second bailout? – FT.com

EU Risks Violating Bank-Capital Pact, Basel Member Says – Bloomberg

ekathimerini.com | Greece, Italy and Germany are Europe’s birthrate laggards

North America

Cost Aside, JPMorgan May Have a Good Deal – NYTimes.com

Goldman lost more than US$1bn on currency trades in Q3 | Capital City | IFRe

This smacks of corporatism masquerading as journalism.

SAFT ON WEALTH-The age of the 5 percent Ponzi scheme | Reuters

“Things have come to a pretty pass when Ponzi schemes are luring in the chumps with promises of only a 5 percent return.”

The Unemployment Rate at Full Employment: How Low Can You Go? – NYTimes.com

Article here about the inflation-employment trade-off. These economists are talking elsewhere about federally-funded transition jobs, something I heard discussed by Chelsea Clinton at the Clinton Global Initiative in September. This is something Democrats may push, but without success because fiscal policy of this sort is not in favor in the US

Calculated Risk: Weekly Initial Unemployment Claims decline to 323,000

Calculated Risk: Retail Sales increased 0.4% in October

Analysis: U.S. retailers brace for margin hit from holiday discounts | Reuters

Warren Buffett’s Exxon Bungle – Bloomberg

Warren Buffett vs the Salad Oil Swindler, November 1963 | The Reformed Broker

Blame Rich, Overeducated Elites as Our Society Frays – Bloomberg

Interesting overall thesis. This one part struck me as true:

“High inequality is corrosive of social cooperation and willingness to compromise, and waning cooperation means more discord and political infighting. Perhaps more important, economic inequality is also a symptom of deeper social changes, which have gone largely unnoticed. “

Politico’s Mike Allen goes native : Columbia Journalism Review

Politico’s Mike Allen, native advertising pioneer

Lance Armstrong avoids deposition, reaches settlement