Notes From Underground: G-20 Communique is Anything But (Seems Like an Agenda for a Political Platform)

This weekend brought the results of two days of meetings of the financial ministers and central banks chiefs from the 20 “most significant” economies. The purpose of this visit to Russia was to set the agenda for the September G-20 meeting in St. Petersburg. Reuters posted a piece, “Text–Closing Communique From G20 finance Ministers Meeting,” which filters the results of two days discussions to seven main points. It is a WORTHLESS effort as the communique is filled with diplomatic language that assuages the egos and policies of every participant. The finance leaders OUGHT TO BE EMBARRASSED to release this nonsense. From Reuters:

  1. Point No. 3: “The global economy remains too weak and its recovery is still fragile and uneven”;
  2. Point No. 4: “We agreed that our near-term priority is to boost jobs and growth. We are committed to further reducing financial market fragmentation, moving ahead decisively with reforms towards a banking union in Europe ….” (YRA: This international conclave with no jurisdictional power promotes a resolution for Europe when the policy makers in Brussels cannot come to a suitable plan for a unified financial entity. We know this was the hand of Draghi because it had his beloved “fragmentation” injected into the statement. The words are so politically crafted that it lacks any sense of policy.)
  3. Point No. 6, in reference to the global imbalances and states: “This requires surplus economies to boost domestic sources of growth and deficit economies to increase national savings and enhance competitiveness. We reiterate our commitments to move toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals…. We will refrain from competitive devaluation.” And the standard line: “We will resist all forms of protectionism and keep our markets open.”
  4. Point No. 7, in a paean to the U.S. and Japan: “Monetary policy should be directed toward domestic price stability and continue to support economic recovery according to the respective mandates of central banks.”

This last point removes any global pressure on Japan as it attempts to stimulate growth through massive liquidity and a weaker YEN. This final point will not sit well with Obama’s union support and the U.S. automakers. Last week I cited a piece in which Ford’s main lobbyist is pushing the Obama Administration to take a firm position with Japan and its recent currency manipulation. U.S. automakers want President Obama to negotiate stringent penalties for any member of the planned Trans Pacific Partnership (TPP) who utilizes manipulation of currency values to attain a competitive advantage.

The effort to punish Japan could be sen in Wednesday’s HOUSE testimony of Chairman Bernanke. Congressman Gary Peters of Michigan pressed Chairman Bernanke on whether or not Japan was manipulating its currency, similar to China. Bernanke did not waver in his answer that Japan was merely trying to break the back of the deflation that has plagued its economy. There might be some movement in the YEN but for the rest of the world a healthy Japan would be worth the price. Chairman Bernanke added that an increase of Japanese prices would offset the currency impact. So we should see the Japanese policy as domestically driven. But Chairman Bernanke noted that the Congressman’s home being in Michigan, he understood his concerns. But for our purposes, the YEN‘s depreciation is of concern to a very powerful political constituency of LABOR and MANUFACTURING.
After the G-20 photo-op was finished, everyone who attended received a trophy and a certificate acknowledging their efforts. A great chorus of Kumbaya resonated through the closing ceremonies.
***The results of the Japanese elections are in and I am posting a link to Observing Japan’s very solid analysis of the results. Later this week I will analyze the potential impact on the YEN, Nikkei and other Japanese instruments. Some pundits are trying to make this a mandate for ABE, but I think Tobias offers a very measured analysis.
***Bernanke’s Senate Testimony Thursday, revealed the formation of BATTLE LINES in a coming war over the power of the TOO BIG TOO FAIL BANKS. Senator Elizabeth Warren is initiating the fight to rein in the risk profile of the large money-centered banks and her attack is going to be centered on CAPITAL REGULATIONS. Sen. Warren has enlisted support for this issue from both sides of the aisle and has the backing of Senior Senator John McCain, as well as many of the Tea Party powers. But using the capital regs as the lever to dislocate the banks power Sen.Warren will get the attention of the FED. Both Warren and Senator Sherwood Brown tried to elicit an outright endorsement for their efforts from Chairman Bernanke. Mr. Bernanke was not taking the bait, but HE WAS NOT OPPOSED TO INCREASED CAPITAL STANDARDS. He just wouldn’t sign on to an aggressive timetable.
Yet here is the way I see this. The FED wants tighter capital standards as it attempts to resolve its balance sheet issues as QE tapers. WHY? Because if the FED adopts a policy of allowing its TREASURY AND MBS holdings to roll off rather than be sold, it will take severe restraints on the leverage capabilities of the TBTF BANKS. If the $3.5 TRILLION in reserves is not leveraged, restraining the velocity of the reserves will create massive inflation. THE INFLATION MAY TAKE PLACE REGARDLESS BUT WITHOUT TIGHT MACROPRUDENTIAL CAPITAL REGULATIONS the QE impact will certainly end in disaster. METHINKS BERNANKE IS A BIG SUPPORTER OF THE NEWEST SENATOR FROM MASSACHUSETTS.

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12 Responses to “Notes From Underground: G-20 Communique is Anything But (Seems Like an Agenda for a Political Platform)”

  1. Mark T Says:

    Warren-McCain proposes to bring back Glass-Steagall which has nothing to do with capital levels ( and nothing to do with the fin crisis, which was caused by over -leverage against real estate). Brown-Vitter is the bill that proposes to increase bank capital.

  2. usikpa Says:

    YIra, could you elaborate on the below?

    if the FED adopts a policy of allowing its TREASURY AND MBS holdings to roll off rather than be sold, it will take severe restraints on the leverage capabilities of the TBTF BANKS. If the $3.5 TRILLION in reserves is not leveraged, restraining the velocity of the reserves will create massive inflation.

  3. yra Says:

    Mark T—while the return of Glass Steagall is not directly an assault on capital regs -the outcome will in fact be to effect the amount of leverage in the sytem—by removing the backstop of government of FDIC insurance from the huge risk takers you will deleverage the system for the costs of borrowing for the risk based institutions will soar—I think the hedge funds costs of money will be a “model”—also,wihtout the TBTF banks lending their balance sheets to risk takers via the PRIME BROKER system the amount of leverage will drop—and I could go on.

  4. yra Says:

    USIKPA—I am theorizing here.The Bank of England’s Adair Turner opened up this idea about 18 months ago.I thought he was crazy for if the FED did not sell off the QE bought assets and just allowed the huge amount of reserves to remain in the system–remember by rolloing off there is no reverse repo action draining reserves.Now Bernanke raises the possibility of the asset purchases just rolloing off as the expiration date arrives,but that of course will cause a huge amount of reserves to remain in the system—if the huge reserves are allowed to be used within present guidelines of regulation the impact on inflation COULD be enormous—if the FED is forced to sell its huge stockpile of MBS and Treasuries rates will soar as the market senses that the economy is improving and the hit to the FED and thus the Treasury will be huge and the rise in rates from the selling of its balance sheet will halt any rise in the economy—I can also theorize as this has never been tried before

  5. JohnM Says:

    Surely it is time to replace the phrase “too big to fail” with “too big to prosecute”. We need politicians with the guts to force regulators to apply the law.

  6. Michael Greenberg Says:

    Why don’t they just use the reserves to pay interest on treasuries? Having money flow to people who own treasuries would be a market oriented way of allocating capital in a prudent manner.

    But then, I own treasuries.

  7. Shocked To Find Gambling Says:

    As I understand it, the banks get credit in their accounts at the FED, NOT cash, when they sell Treasuries and MBS to the FED. So, if the FED let’s the assets just roll off, I assume these credits would also gradually decrease, as the FED takes the cash from the maturing assets and gives it back to the banks, thereby cancelling
    the credits at FED. Now the banks have cash, instead of credit at the FED. Is this how you understand it, and what are the implications?

  8. ronald ferrill Says:

    Really no surprise, just more disappointment that we (USA) continue to give credence to these institutions that politically want to bring down the USA to their levels of thought poverty, and promote the now popular euphemism “globalization”, which means nothing more than a global ruling class using political power to maintain their own personal largess. Did the Medicis morph?

  9. Jacob Steelman Says:

    What did we expect from the G20 criminal gangs of politicians and bureaucrats as each gang attempts to loot their respective countries and loot each other for their various special interests?

  10. Dustin L. Says:

    Yra- I’m with USIKPA in trying to wrap my head around the liquidity and price effects of allowing MBS and treasuries to “roll” off the Fed’s balance sheet and I apologize for my lack of understanding here. First I am inferring that by “roll” you mean hold to maturity and not reinvesting the proceeds? This then to me would imply a tightening of reserves in the system, much like selling off the balance sheet would achieve, as Fed would receive principal upon maturity. Albeit, the optimization of timing (as if the Fed could actually know the optimal timing anyways but their models will certainly encourage their bravado) would be less in their control and market effects would be similar which, would lead me to believe they might do a mix of both. But, given your analysis I assume I am completely misunderstanding things here and maybe you can help to clear them up?

  11. Dustin L. Says:

    Also, I came across this very good piece through a friend the other day and thought I would share it with you and your readers. It is very powerful stuff!!

  12. yra harris Says:

    Dustin L–great questions and tahnks for the add to the info—I am also trying to wrap my head around this —and rolling off is holding to maturity which means the FED can take in reserves or purchase new assets but not increase the balance sheet.and assuming the FED can optimally time it but remember that kevin warsh made the comment that a central bank’s job is to “buy time”

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