Notes From Underground: FOMC MINUTES … Is This a Balance Sheet Recession?

The August 9 FOMC minutes from were released today and there was a great deal of discussion about the issue of leaving rates at the present level for the next two years. It seems that one of the dissenters opposed the measure for he didn’t want the FED to be locked in to a decision and thought the measure should be subject to newly released data. There was much discussion about European banks and the efforts by the ECB to calm the storm and prevent a bank run. The FED did acknowledge that the biggest drag on U.S. growth was the “efforts to rebuild balance sheets and caution on the part of households facing an uncertain economic environment.”

Richard Koo and others have warned of this since 2007. So what has the FED been thinking for the last four years?!? Lower interest rates will not get consumers to spend while they are repairing their credit. Downsized consumer businesses are not going to build their capital base when demand is so uncertain. The Obama administration dropped the ball in the housing arena. If the Geithner-led Treasury had done more to ameliorate the problem of homeowners being squeezed by negative equity and exploding ARMS, the foreclosure problem could have been lessened. I know that some will argue that the forced refinancing of mortgages at a low fixed rate by the U.S. government would have been an abrogation of contractual rights. BULLSHIT!

All debt workouts are a contract redo under court direction and to do so to holders of RMBS and other types of CDOs would have relieved the need for many foreclosures. The role of low teaser rates to attract suspect borrowers should have been punished by forcing the lenders to lock in rates at the U.S. government’s borrowing costs, for Fannie and Freddie have been NATIONALIZED anyway. Geithner chose to protect the large banks and let them squeeze borrowers and now the economic analysts wonder where the consumer has gone.

The decision to aid the bottom line of the banks was not free and the cost of that decision has created an economy of zombies. This issue is going to be part of Obama’s NEW ECONOMIC PLAN as it seems that mortgage refinancing relief is coming just as the 2012 election cycle kicks into gear. It is not a bad thing from an economic point of view. It is more the question of what took so long? If the banks, the GSEs and holders of RMBS take a hit and homeowners get immediate REFINANCING at a much lower rate this will be the best economic stimulus yet. Get ready for here it comes!

Quick Hitter #1: My disdain for Christine Lagarde is under review as it seems that the French and German leaders are all angered by her speech in Jackson Hole. The Germans believe that Lagarde was way off base in pushing for Europe’s large banks to raise capital to meets their losses from sovereign debt. It seems that with Chancellor Merkel under political attack, the German government does not want the IMF jumping into the fray. Today, Bank of France President Christian Noyer said that Lagarde was badly informed by her IMF staff on bank recapitalization. This is after the market had spent the previous four weeks selling French bank stocks. So Mr. Noyer, it seems that more than the IMF staff is ill-informed. President Noyer claimed that the action in the French bank stocks is due to market dysfunction in the summer. If that is so, why doesn’t Warren Buffett spring into action?

Quick Hitter #2: Bank of America announced that is was selling off its holdings in the China Construction Bank as it realized a large profit and needs to shore up its balance sheet to calm jittery markets. Normally it is not a positive to sell off potential great assets but China is another story. It seems to me that China is overbanked and certainly questionable as to the health of the Chinese banking sector. The credit mechanism in China is not market directed but a vehicle for the Communist Party leadership to direct money and favors to the chosen. Thus, it is difficult to ascertain how the banking system actually works. Readers of NOTES generally know that I am skeptical of all data released from China so it may very well be a positive to unload an appreciated asset at this time.

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6 Responses to “Notes From Underground: FOMC MINUTES … Is This a Balance Sheet Recession?”

  1. Kevin Says:

    “In a market economy, the financial sector plays a resource allocation role, but in a planned economy it merely plays an accounting role.” Andrew Crocket JPM (former head of the BIS) at the JPM China conference a few years back.

  2. asherz Says:

    “It is more the question of what took so long? If the banks, the GSEs and holders of RMBS take a hit and homeowners get immediate REFINANCING at a much lower rate this will be the best economic stimulus yet.”
    I’m not sure the hit will be aimed at the institutions. If the Fed or Treasury buys this paper at inflated values, it is you and I who will be paying for this and benefit the homeowners, banks and GSEs. If that will be the case I hope Congress makes sure those who made the injudicious decisions to pay for their recklessness.

  3. arthur Says:

    So, are we in a recession or not?

  4. yra Says:

    asherz–that is certainly a consideration but I don’t think that will paly on main street in 2012 and Obama is looking to main street.Plus there are respected voices lining up against that action–people like Chris Whalen ,Simon Jonhson,Luigi Zangari

  5. yra Says:

    arthur–labels are not important unless you are the NBER.As some cynic s say –a recession is when your neighbor loses his job and a depression is when you lose yours.

  6. arthur Says:

    OK, good point.

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