Notes From Underground

The speeches by FOMC GOVERNOR TARULLO and Vice Chair Yellen were followed up with an Obama speech on a “major” REFI operation and many articles in the media. In today’s Financial Times, Larry Summers just happened to have a piece titled, “WHY THE HOUSING BURDEN STALLS AMERICA’S ECONOMIC RECOVERY.” It seems that the administration has awakened to the fact that the credit crisis has been wrapped in a housing crunch that has kept consumer demand lackluster at best. (Also known as the Geithner plan: Aid the banks first and maybe help the debt-laden consumer/homeowner somewhere down the line.)

Summers lays out five main points on how to tackle the housing mess:

1. Ease credit standards, especially now that prices have dropped so far how much more can lenders lose? Famous last words from a man whose entire life has been based on the use of OTHER PEOPLE’S MONEY (OPM);

2. GSE-guaranteed mortgages should be easier to REFI;

3. Move foreclosures to large buyers who can turn them into rentals, if need be;

4. GSE should become more aggressive in principal reduction;

5. Government should expedite lawsuits against lenders, thus removing some of the uncertainties facing mortgage lenders.

It is amazing that this plan was not promoted three years earlier, but then Summers and his sidekick little Timmy were too busy worrying about the Wall Street crowd to ease the burdens of Main Street. Summers states that this should not be difficult, “WITH VIRTUALLY ALL MORTGAGES IN THE U.S. PROVIDED BY THE FEDERAL GOVERNMENT OR GUARANTEED BY THE GSEs, THIS IS INEVITABLY A MATTER OF GOVERNMENT POLICY.” (emphasis mine)It is amazing how the election is bringing this issue forward as this will play in Peoria, but it should be remembered that the TREASURY nationalized Fannie and Freddie on Christmas Eve 2009 and have done little but prevent the major REFI package that was needed and probably have provided a greater stimulus to consumer spending than anything else that the economy has experienced. President Obama, how is it that Secretary Geithner is still in his Cabinet post?

Following Larry Summers’ FT article, New York Fed President Bill Dudley gave a speech laying out the threats to economic growth and proposing that the FED may have to do more prevent the economy from slipping into deflation. The four factors that Dudley cites as preventing a more economic growth are:

1. The housing market is a drag on growth and continuing foreclosures will keep the consumer very uncertain and restrains spending;

2. Local government cutbacks are a negative and the threat of curtailing Federal payouts to the states is creating more uncertainty;

3. 2012 will see the end of many of the government stimulus programs and remove the one robust aspect of spending;

4. European credit problems threaten the entire global economy at a time of great fragility.

Dudley believes that these four elements can push the U.S. into a period of DEFLATION and Dudley states: “DEFLATION tends to inhibit growth because people and companies have a harder time paying down debt and may defer investments and purchases when prices and wages are falling. Avoiding outright deflation is a very good thing.”

There you have the FED thought process in a very concise statement: “AVOIDING OUTRIGHT DEFLATION IS A VERY GOOD THING.” This is why the DOLLAR remains vulnerable and the precious metals have a strong upside bias, for how far will the FED lean to prevent deflation, especially if EUROPE fails in its attempt to halt its credit crisis.

***As NOTES suggested last week, Sarkozy told Prime Minister Cameron to shut up and stop giving advice on the EURO and European finances if he is only a bystander and has no money at the ready. The British stand to suffer a European economic downturn so PM CAMERON is merely speaking to the U.K.’s self-interest as 55% of its trade is with the European continent. Cameron plays the role of a kibitzer at the gin table. This is a tough time for PM Cameron as he is under threat of a revolt by the TORY backbenchers over the issue of a U.K. referendum on the entire EU treaty and its laws. It is no time for Cameron to be raising the ire of the European elite while trying to control his TORY backbenchers. Sarkozy was right to challenge the British PM for money talks and B.S. walks.

***It was reported that Dallas Fed Chief Richard Fisher was making hawkish statements today, but I was in total disagreement with that. A REUTERS item was headlined, “HIGH UNEMPLOYMENT, NOT INFLATION IS THE BIGGEST PROBLEM FACING THE U.S. ECONOMY.” A FED President who cites high unemployment as the main problem is not speaking as a hawk. Again, Richard Fisher is not a hawk and his vote at the next FOMC MEETING OUGHT TO BE VERY TELLING. All of the FED speeches and interviews over the last week have been suggesting the need to do more on the side of demand creation.

***Tomorrow morning the Bank of Canada announces its interest rate intentions. The consensus is for the BOC to leave its overnight lending rate at 1%. I think the Canadians may raise as the last employment data was very robust, oil prices have stabilized and credit growth in the Canadian economy is stronger the Governor Carney would like. As usual, I urge my readers to read the BOC’s statement as Mark Carney is a very solid central banker and has a highly respected global perspective.The announcement is at 8:00 a.m. CST.

***In a front page FT article it was reported that VOLKSWAGEN will over take Toyota as the world’s biggest car maker. The growth in VW‘s market share is attributed to platform-sharing across its brands, which allows it great economy of scale. VW has also been very successful in attaining market share in China as German engineering is very highly regarded. In 2008, VW CEO Martin Winterkorn made a prediction that Volkswagen would overtake Toyota by 2018. The article noted all of the fine attributes of VW but what it failed to mention was the EURO/YEN CROSS. In 2008, when Winterkorn made his prediction the EURO/YEN was averaging 165, while today the YEN has gained to 105 EURO. A 30% depreciation of the EURO against the YEN may improve an automobile’s competitive advantage. Hello, is anybody in Japan aware of the impact of the YEN appreciation? I know the Obama administration is very aware of the impact.

Tags: Bill Dudley, BOC, Cameron, Carney, deflation, Dollar, Euro, euro/yen cross, Fannie, Fed, Freddie, GSE, Larry Summers, Richard Fisher, Sarkozy, Tarullo, Timothy Geithner, Tory, U.K., Yellen, Yen

This entry was posted on October 24, 2011 at 9:00 pm and is filed under Canada, Fed, France, UK, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.