Those sound like many of the reasons that I am not President. Plus the fact that you need to run for the position, which is a real pain in the arse.

Anyway,

The IMF credibility is not improving here in my view. They say US banks need 300B to get back to pre-crisis leverage levels?

1) Why would we want to when the old level of leverage was unsustainable (along with the old global GDP).

2) How do you reconcile the other numbers of $2.8T in US bank losses(and $4T global) with a “need” for only $300B?????

And the IMF lends to governments…not the customers that banks are supposed to lend to. So I think the IMF will be dealing with another level of insolvency…not the one we see now with banks and the private economy.(yes, I know the governments will stimulate the private sector…but we always wonder about the path the money takes to get there.)

But the recent G20 announcement that the IMF will have $1 trillion to lend (we will have to see if that happens still, of course) was well received by foreign currency and sovereign bond markets.

Here’s a chart of my favorite foreign bond fund. It has been looking like a stock chart the past year, just less magnitude in the swings. It does have a average A credit rating and is mostly in better rated sovereign bonds but doesn’t have US treasuries and that AAA rating pushing up the fund credit quality.

http://finance.yahoo.com/q/bc?s=TGBAX&t=6m

But it tells a story…something magical happened on March 9th that I still haven’t been able to put my finger on, then it got another nice boost from the G20 announcement about IMF lending. So private flows are loosening up somewhat.

However, $1 trillion is still just a drop in the bucket relative to a $55T global GDP…

2fish — suspect it is philip swagel not paul swagel

Can you cite the particular section of the Federal Reserve Act?

The only section I know of that allows this is Section 14(b) which limits the Fed to purchasing fully guaranteed Treasury bonds.

http://www.federalreserve.gov/aboutthefed/section14.htm

The Fed can lend under Section 13(3), and they have been stretching 13(3) through Maiden Lane LLC.

The other problem is that the Fed can’t legally force you to borrow money or even take money if you don’t want to.

Richman: The other actions that I suggest are no more radical in their extension of Fed power than the long-term loans that the Fed has been issuing lately.

And the extensions of Fed power took heaven and earth to pass. The big extension to the power of the Fed and Treasury was EESA and that took two tries after both Bernanke and Paulson (correctly) argued that it would be a disaster if they didn’t pass.

There is a wonderful paper that by Paul Swagel that discusses what people were thinking and when, and he complains that people were advocating solutions that involved legal powers the the Federal Reserve just doesn’t have.

http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009_spring_bpea_swagel.pdf

Richman: You wrote that the Fed did not have the authority to guarantee the Chinese investment in the agencies. You are correct. The guarantee was implicit not explicit. Brad discussed this implicit guarantee in his September 21 2008 posting.

1) Implicit guarantees are worth nothing. There is an explicit guarantee of about $100 billion against the Agencies. That’s it. Any more losses than that, then you take your chances with Congress.

2) The Chinese government obviously doesn’t believe any of those guarantees, otherwise they wouldn’t be dumping them right now.

You wrote that the Fed doesn’t have the authority to do what I suggest. However, since 1962 they have had the authority to purchase currency reserves under their own account without being subject to any control by the U.S. Treasury.

The other actions that I suggest are no more radical in their extension of Fed power than the long-term loans that the Fed has been issuing lately.

You wrote that the Fed did not have the authority to guarantee the Chinese investment in the agencies. You are correct. The guarantee was implicit not explicit. Brad discussed this implicit guarantee in his September 21 2008 posting.

The Fed doesn’t have legal authority to do any of what you suggest, and you can’t really force someone to take a loan if they don’t want it. Now Congress can act and give the Fed this authority, but it probably won’t. If you give subsidies for one industry, all of the other industries will start screaming.

Richman: The Fed could deny the PBoC access to American financial markets until it got this access.

Pretty hard to do. First of all, neither the Fed nor Treasury has legal authority to bar a nation from US financial markets, outside of some conditions that don’t apply here. In order to get something like that done, you’d have to get Congressional authorization, and you won’t get it.

Richman: Instead, the Fed has been doing exactly the opposite. For example, the Fed recently guaranteed that the PBoC wouldn’t take losses on its risky holdings of agency bonds.

No it hasn’t. The Fed doesn’t have authority to issue this sort of guarantee.

You are correct that the Fed cannot easily buy CNY (the Chinese currency). Chinese financial interactions with the United States are purposely kept totally assymetrical by the Chinase government.

For example, the People’s Bank of China (PBoC) buys our government bonds, but foreigners are not allowed to buy their government bonds. However, with a little determination this hurdle could be overcome. Here are some possible actions the Fed could take:

1. The Fed could buy Chinese stocks. Why should Sovereign Wealth Funds be a one-way street?

2. The Fed could finance Chinese hospital purchases of American medical equipment. Other governments have been doing this.

3. The Fed could be financing the sale of American prefabricated homes to Chinese citizens through Walmart credit cards. What better way to put the American house construction industry to work?

But the real answer is that if the Fed made an issue of the assymetry, China could be forced to open up its financial markets. The Fed could deny the PBoC access to American financial markets until it got this access.

Instead, the Fed has been doing exactly the opposite. For example, the Fed recently guaranteed that the PBoC wouldn’t take losses on its risky holdings of agency bonds.

Howard

p.s. I have been trying to figure out why the Japanese yen has been falling so fast against the dollar, from about 89 yen/dollar in February to about 99 yen/dollar today. Are there any indications that the Japanese central bank is back to buying dollars in order to support the Japan-carry market?

I don’t think so. Someone that has been taught since childhood to avoid debt and to keep their word isn’t going to suddenly change.

q: and as far as prime vs subprime, the distinction is not always that clear.

It’s actually quite clear. You can distinguish between prime and sub-prime borrowers via FICO scores, and if you look at statistical models, their behavior is very different. Prime defaults are very insensitive to LTV and everything but unemployment. Sub-prime is extremely sensitive to LTV.

In any case, as far as lending goes, prime and sub-prime are different worlds. In prime lending, you aren’t lending against the house, you are lending against the borrower.

q: take a look at the cumulative default curves for fanny / freddie mortgages (available in their 8-Ks) and compare the <2003 loan vintage with the 2005-7 vintages. it’s clear that recent ‘prime’ borrowers from the recent vintages are defaulting far, far more often than the older vintages.

I couldn’t find that particular graph. All of the one’s I’ve seen put all defaults together. It happens that Fannie/Freddie started jumping into the subprime business in a big way in 2004. In 2004, HUD loosened the regulations to allow Fannie/Freddie to into subprime, which they did in a big way.

Bad idea.

q: The reason is that they are in crappy mortgages, not that they are crappy borrowers.

The two are correlated. Crappy borrowers get themselves crappy mortgages.

If you are a crappy borrower it either means that you are selfish or naive. If you are selfish, you will try to take advantage of the bank. If you are naive, the bank will try to take advantage of you. In neither case is the outcome good.

Depends on the jurisdiction, but it doesn’t matter much. If someone defaults on their mortgage, it’s not as it they have much more income that you can get from them.

The main thing that keeps someone from defaulting a house that is underwater is that it will destroy their credit rating. This doesn’t matter for someone who is subprime, but it’s enough to keep most prime borrowers paying even if they could default.

Believe it or not, there are people out there that believe in keeping their word and will try to pay their debts even when it is not financially advantageous for them to do it. It’s sometimes hard to loan these people money, because if you offer them money and they figure that they can’t pay it back, they won’t take it.

The thing that will stop a prime borrower from paying is if they lose their job and just don’t have the money to pay. Which is why the critical thing to keep the banks solvent is to stop/slow job losses. If you can get and keep people working, then everything is going to be fine.