from www.federalreserve.gov
January 15, 2009
Summary of Terms
Eligible Asset Guarantee
Eligible Assets: A pool of financial instruments consisting of securities
backed by residential and commercial real estate loans and
corporate debt, derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and
such other financial instruments as the U.S. government
(USG) has agreed to guarantee or lend against (the Pool).
Each specific financial instrument in the Pool must be
identified on signing of the guarantee agreement. Financial
instruments in the Pool will remain on the books of
institution but will be appropriately “ring‐fenced.”
The following financial instruments will be excluded from
the Pool: (i) foreign assets (definition to be provided by
USG); (ii) assets originated or issued on or after March 14,
2008; (iii) equity securities; and (iv) any other assets that
USG deems necessary to exclude.
Size: The Pool contains up to $118 billion of financial
instruments. More specifically, the Pool includes cash
assets with a current book (i.e., carrying) value of up to
$37 billion and a derivatives portfolio with maximum
potential future losses of up to $81 billion (based on
valuations agreed between institution and USG).
Term and Coverage of Guarantee:
Guarantee is in place for 10 years for residential assets and
5 years for non‐residential assets. Residential assets will
include loans secured solely by 1‐4 family residential real
estate, securities predominately collateralized by such
loans, and derivatives that predominately reference such
securities. Institution has the right to terminate the
guarantee at any time (with the consent of USG), and the
parties will negotiate in good faith as to an appropriate fee
or rebate in connection with any permitted termination. If
institution terminates the guarantee, it must prepay any
January 15, 2009 outstanding Federal Reserve loan (described below) in full.
Guarantee covers Eligible Losses on the Pool. Eligible
Losses are the aggregate incurred credit losses (net of any
gains and recoveries) on the Pool during the term of the
guarantee, beyond the January 15, 2009, marks and credit
valuation adjustments for the Pool (as agreed between
institution and USG). Eligible Losses do not include
unrealized mark‐to‐market losses but do include realized
losses from a sale permitted under the asset management
template (described below).
Deductible: Institution absorbs all Eligible Losses in the Pool up to
$10 billion.
USG (UST/FDIC) will share Eligible Losses in the Pool in
excess of that amount, up to $10 billion. All Eligible Losses
beyond the institution’s deductible will be shared USG
(90%) and institution (10%).
Financing: Federal Reserve will provide a non‐recourse loan facility to
institution, subject to institution’s 10% loss sharing.
Federal Reserve loan commitment will terminate (and any
loans thereunder will mature) on the termination dates of
USG guarantee. Institution has the right to terminate the
Federal Reserve loan commitment and prepay any Federal
Reserve loans at any time (with consent of Federal
Reserve).
Federal Reserve will charge a fee on undrawn amounts of
20 bp per annum and a floating interest rate on drawn
amounts of OIS plus 300 bp per annum. Interest and fee
payments will be with recourse to the institution.
Institution may draw on Federal Reserve loan facility if and
when additional mark‐to‐market and incurred credit losses
on the Pool reach $18 billion.
January 15, 2009
Fee for Guarantee – Preferred Stock and Warrants:
Institution will issue to USG (UST/FDIC) (i) $4 billion of
preferred stock with an 8% dividend rate (under terms
described below); and (ii) warrants with an aggregate
exercise value of 10% of the total amount of preferred
issued. The fee may be adjusted, as necessary, based on
the results of an actuarial analysis of the final composition
of the Pool, as required under section 102(c) of the
Emergency Economic Stabilization Act of 2008.
Management of Assets:
Institution generally will manage the financial instruments
in the Pool in accordance with its ordinary business
practices, but will be required to comply with an asset
management template provided by USG. This template will
require institution, among other things, to obtain USG
approval (not to be unreasonably withheld) before any
Material Disposition. A Material Disposition is a disposition
of financial instruments in the Pool that creates an Eligible
Loss that, combined with other dispositions of Pool
instruments in the same year, exceeds 1% of the Pool size
at the beginning of the year. This template also will
include, among other things, a foreclosure mitigation policy
acceptable to USG.
Revenues and Risk Weighting:
Institution will retain the income stream from the Pool.
Risk weighting for the financial instruments in the Pool will
be 20%.
Dividends: Institution is prohibited from paying common stock
dividends in excess of $.01 per share per quarter for three
years without USG consent. A factor taken into account for
consideration of USG consent is the ability to complete a
common stock offering of appropriate size.
Executive Compensation:
An executive compensation plan, including bonuses, that
rewards long‐term performance and profitability, with
appropriate limitations, must be submitted to, and
January 15, 2009
approved by, USG. Executive compensation requirements
will be consistent with the terms of the preferred stock
purchase agreement between USG and institution.
Corporate Governance:
Other matters as specified, consistent with the terms of the
preferred stock purchase agreement between USG and
institution.
The foregoing is accepted and agreed
by and among the following as of
January 15, 2009:
DEPARTMENT OF THE TREASURY
FEDERAL RESERVE BOARD
BANK OF AMERICA CORPORATION
FEDERAL DEPOSIT INSURANCE CORP
So we now have the playbook on how the government will ring-fence (nationalize? I guess its a matter of semantics at this point) the big banks. None of the systematically important big banks will be allowed to fail. The government will provide guarantees on bad assets. It might be better to actually remove these assets from the balance sheets and create a bad bank. This will provide the banks will more confidence to lend. But this shouldnt be done without mechanisms for appropriate oversight. This move is important and is a good move. It begins to restore confidence in the financials. Transparency is still missing but hopefully the new administration will be able to provide that in the future. The tackling of insolvency has begun in the first quarter and overall this is very positive news. There are still other institutions out there. We need to get those under control asap as well. This slow bleed - Countrywide, Merill, Wachovia, Freddie / Fannie, AIG, Bank of America is unfortunate. There are others with bad assets - those should all be dealt with speedily and in this quarter!
Showing posts with label Fed. Show all posts
Showing posts with label Fed. Show all posts
Friday, January 16, 2009
Tuesday, December 16, 2008
We're all ZIRP! now
ZIRP - Zero Interest Rate Policy
FOMC Statement from http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm
Release Date: December 16, 2008
For immediate release
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
Ok so I havent posted in a long time. I was caught up in the post election euphoria that we actually elected Barack Obama. Well I'm back - shocked into writing again - by what else - a historic decision by the US Federal Reserve under Ben "Helicopter" Bernanke. Clearly, and I mean clearly, we're in uncharted waters now. Since the white house is not taking the proper policy actions - the Fed is throwing everything and the kitchen sink into play here. I knew that we might end up here about a year ago when I read and commented on the Calculated Risk blog - about Fed members speculating about zero bound. But to actually be here... holy crapsheet. I think the banks at some point will have no choice but to start lending again. But some of them are still insolvent. The market may bounce for now, but until the insolvency issue gets resolved - I dont think you will have a sustainable rally. But it does seem that the Fed is trying very, very hard to ring fence that issue and let the rest of the economy recover. There are still structural issues in the economy - such as the fact that manufacturing accounts for a much smaller pie in GDP and that US consumers are becoming savers - that we will need to surmount - but ring fencing the problems on Wall Street is certainly welcome. That combined with the Obama Stimulus Plan in Jan 2009 will mitigate the seriousness of this recession. With these actions, I still continue with my prior prediction of an end to this recession late 2009 / early 2010 and a possible HUGE expansion worldwide later in 2010. Time will tell.
FOMC Statement from http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm
Release Date: December 16, 2008
For immediate release
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
Ok so I havent posted in a long time. I was caught up in the post election euphoria that we actually elected Barack Obama. Well I'm back - shocked into writing again - by what else - a historic decision by the US Federal Reserve under Ben "Helicopter" Bernanke. Clearly, and I mean clearly, we're in uncharted waters now. Since the white house is not taking the proper policy actions - the Fed is throwing everything and the kitchen sink into play here. I knew that we might end up here about a year ago when I read and commented on the Calculated Risk blog - about Fed members speculating about zero bound. But to actually be here... holy crapsheet. I think the banks at some point will have no choice but to start lending again. But some of them are still insolvent. The market may bounce for now, but until the insolvency issue gets resolved - I dont think you will have a sustainable rally. But it does seem that the Fed is trying very, very hard to ring fence that issue and let the rest of the economy recover. There are still structural issues in the economy - such as the fact that manufacturing accounts for a much smaller pie in GDP and that US consumers are becoming savers - that we will need to surmount - but ring fencing the problems on Wall Street is certainly welcome. That combined with the Obama Stimulus Plan in Jan 2009 will mitigate the seriousness of this recession. With these actions, I still continue with my prior prediction of an end to this recession late 2009 / early 2010 and a possible HUGE expansion worldwide later in 2010. Time will tell.
Tuesday, September 16, 2008
Fed dances with AIG
from www.federalreserve.gov
Press Release
Release Date: September 16, 2008
For release at 9:00 p.m. EDT
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
2008 Other Announcements
Ok so they backstopped AIG at a very high interest rate .. LIBOR + 8.5% .. AIG should be able to borrow... should be... from the open market knowing that the Fed/Treasury have 85B line of credit to AIG. If AIG takes the loan - Fed/T expects to be repaid by selling AIG assets. All in all its an OK move... I am still concerned about what happens if AIG's liabilities exceed their assets. I would HOPE that the Fed/T loan would be considered most senior. Also worrying is the Fed is using up a substantial amount of its 800B balance sheet quickly. The Treasury is backstopping the Fed. Eventually we'll be asking questions about the Treasury's balance sheet. Long way from that yet... Now back to your regular programming... WaMu, Wachovia ... Is the MER transaction gonna happen? What will happen to the two remaining Investment Banks - Goldman and Morgan? Also the market cap of the largest US bank by "assets" - Citigroup has fallen dramatically - its now 3rd or 4th I think in terms of its market value... Ouch.. So what happens to Citi? These are all questions that seem to be playing out with surpising speed right here, right now in these historic days. I will never forget Sept 15 yesterday - the day when LEH and MER both got taken out.
Press Release
Release Date: September 16, 2008
For release at 9:00 p.m. EDT
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
2008 Other Announcements
Ok so they backstopped AIG at a very high interest rate .. LIBOR + 8.5% .. AIG should be able to borrow... should be... from the open market knowing that the Fed/Treasury have 85B line of credit to AIG. If AIG takes the loan - Fed/T expects to be repaid by selling AIG assets. All in all its an OK move... I am still concerned about what happens if AIG's liabilities exceed their assets. I would HOPE that the Fed/T loan would be considered most senior. Also worrying is the Fed is using up a substantial amount of its 800B balance sheet quickly. The Treasury is backstopping the Fed. Eventually we'll be asking questions about the Treasury's balance sheet. Long way from that yet... Now back to your regular programming... WaMu, Wachovia ... Is the MER transaction gonna happen? What will happen to the two remaining Investment Banks - Goldman and Morgan? Also the market cap of the largest US bank by "assets" - Citigroup has fallen dramatically - its now 3rd or 4th I think in terms of its market value... Ouch.. So what happens to Citi? These are all questions that seem to be playing out with surpising speed right here, right now in these historic days. I will never forget Sept 15 yesterday - the day when LEH and MER both got taken out.
Tuesday, July 22, 2008
Be Patient!
from www.nytimes.com
July 23, 2008
Paulson Urges Americans to Be Patient on Economy
By MICHAEL M. GRYNBAUM
Treasury Secretary Henry M. Paulson Jr., said on Tuesday that Americans need to remain patient as the economy works through its problems, and he warned of “continued stresses” in the months ahead before a full recovery can be made.
“Our markets won’t make progress in a straight line, and we should expect additional bumps in the road,” Mr. Paulson said in remarks at the New York Public Library in Midtown Manhattan. “We have been experiencing more bumps recently, and until the housing market stabilizes further we should expect some continued stresses in our financial markets.”
Although Mr. Paulson acknowledged the need for broad reforms of the nation’s existing regulatory structure, he sought to assure Americans that he expects the nation to “work through this period,” and “emerge stronger and better poised for robust growth.”
“The American people have every reason to remain confident that the U.S. banking system is sound,” he said.
Mr. Paulson spoke just a week after the government announced a plan to help prop up Fannie Mae and Freddie Mac, the giant mortgage buyers that were recently at the center of widespread market anxiety. The episode, Mr. Paulson said, made it “all the more apparent” that systemic reforms are necessary.
“Now, more than ever, we need Fannie and Freddie out there, financing mortgages,” he said. “Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions.”
Mr. Paulson said there were currently no plans for the companies to tap any federal money, even though the administration’s proposal calls for extending billions of dollars in credit if necessary. Asked about the effect of the plan on taxpayers, he said the credit lines offered a “flexibility” that “minimizes the likelihood they will be used.”
In his remarks, Mr. Paulson repeated his calls for greater transparency and effective regulation of the financial industry, saying such changes would “add to market stability and mitigate the likelihood that a failing institution can spur a systemic event.”
“We need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail,” he said. He also singled out certain sophisticated markets — including over-the-counter credit derivatives — as particularly in need of greater oversight.
Mr. Paulson pointed to the recent failure of IndyMac Bancorp as an example of the government’s ability through the Federal Deposit Insurance Corporation to protect depositors when a large bank collapses. “No one has or will lose a penny of insured deposits,” he said. “The F.D.I.C. took over the bank on a Friday, worked effectively over the weekend, and on Monday morning the bank reopened for business as usual.”
In a question-and-answer session after his speech, Mr. Paulson tried to end the appearance on a more positive note. “As I look around the world, I don’t see other industrial nations, developed industrial nations that have better long-term prospects than we do,” he said.
Limited Role Seen for Fed
KING OF PRUSSIA, Pa. (Reuters) — The Federal Reserve has a limited role in a government plan to provide financial support for the ailing mortgage finance companies, Fannie Mae and Freddie Mac, the president of the Philadelphia Federal Reserve, Charles I. Plosser, said Tuesday.
“We were not the lead instigators” in the plan, Mr. Plosser said after a speech to local business leaders. “The Fed is not intentionally seeking to expand its powers.”
Mr. Plosser is a voting member this year on the Fed’s interest rate-setting Federal Open Market Committee and is known to be one of the Fed’s more hawkish members.
So... which large, complex, interconnected institutions is Paulson talking about really? List of suspects are well known.
July 23, 2008
Paulson Urges Americans to Be Patient on Economy
By MICHAEL M. GRYNBAUM
Treasury Secretary Henry M. Paulson Jr., said on Tuesday that Americans need to remain patient as the economy works through its problems, and he warned of “continued stresses” in the months ahead before a full recovery can be made.
“Our markets won’t make progress in a straight line, and we should expect additional bumps in the road,” Mr. Paulson said in remarks at the New York Public Library in Midtown Manhattan. “We have been experiencing more bumps recently, and until the housing market stabilizes further we should expect some continued stresses in our financial markets.”
Although Mr. Paulson acknowledged the need for broad reforms of the nation’s existing regulatory structure, he sought to assure Americans that he expects the nation to “work through this period,” and “emerge stronger and better poised for robust growth.”
“The American people have every reason to remain confident that the U.S. banking system is sound,” he said.
Mr. Paulson spoke just a week after the government announced a plan to help prop up Fannie Mae and Freddie Mac, the giant mortgage buyers that were recently at the center of widespread market anxiety. The episode, Mr. Paulson said, made it “all the more apparent” that systemic reforms are necessary.
“Now, more than ever, we need Fannie and Freddie out there, financing mortgages,” he said. “Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions.”
Mr. Paulson said there were currently no plans for the companies to tap any federal money, even though the administration’s proposal calls for extending billions of dollars in credit if necessary. Asked about the effect of the plan on taxpayers, he said the credit lines offered a “flexibility” that “minimizes the likelihood they will be used.”
In his remarks, Mr. Paulson repeated his calls for greater transparency and effective regulation of the financial industry, saying such changes would “add to market stability and mitigate the likelihood that a failing institution can spur a systemic event.”
“We need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail,” he said. He also singled out certain sophisticated markets — including over-the-counter credit derivatives — as particularly in need of greater oversight.
Mr. Paulson pointed to the recent failure of IndyMac Bancorp as an example of the government’s ability through the Federal Deposit Insurance Corporation to protect depositors when a large bank collapses. “No one has or will lose a penny of insured deposits,” he said. “The F.D.I.C. took over the bank on a Friday, worked effectively over the weekend, and on Monday morning the bank reopened for business as usual.”
In a question-and-answer session after his speech, Mr. Paulson tried to end the appearance on a more positive note. “As I look around the world, I don’t see other industrial nations, developed industrial nations that have better long-term prospects than we do,” he said.
Limited Role Seen for Fed
KING OF PRUSSIA, Pa. (Reuters) — The Federal Reserve has a limited role in a government plan to provide financial support for the ailing mortgage finance companies, Fannie Mae and Freddie Mac, the president of the Philadelphia Federal Reserve, Charles I. Plosser, said Tuesday.
“We were not the lead instigators” in the plan, Mr. Plosser said after a speech to local business leaders. “The Fed is not intentionally seeking to expand its powers.”
Mr. Plosser is a voting member this year on the Fed’s interest rate-setting Federal Open Market Committee and is known to be one of the Fed’s more hawkish members.
So... which large, complex, interconnected institutions is Paulson talking about really? List of suspects are well known.
Thursday, June 26, 2008
Fed keeps rates at 2%
from www.federalreserve.gov
FOMC Meeting
Release Date: June 25, 2008
For immediate release
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Richard Fisher was right in voting for a rate increase. The rate decreases are helping banks recapitalize I suppose but are directly contributing to the bubble in commodities. The ECB on the other hand has indicated that it is likely to raise rates next month. While everyone is counting on slower consumer growth to cool inflation - I am not so sure that will play out. Stagflation has a better than 50% chance in my opinion
FOMC Meeting
Release Date: June 25, 2008
For immediate release
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Richard Fisher was right in voting for a rate increase. The rate decreases are helping banks recapitalize I suppose but are directly contributing to the bubble in commodities. The ECB on the other hand has indicated that it is likely to raise rates next month. While everyone is counting on slower consumer growth to cool inflation - I am not so sure that will play out. Stagflation has a better than 50% chance in my opinion
Tuesday, June 3, 2008
Bernanke breaks silence
from www.federalreserve.gov
Chairman Ben S. Bernanke
Remarks on the economic outlook
At the International Monetary Conference, Barcelona, Spain (via satellite)
June 3, 2008
As you know, financial markets in the United States and in a number of other industrialized countries have been under considerable strain since late last summer. Financial market conditions have in turn affected economic prospects, most notably by affecting the cost and availability of new credit.
Much discussion of the turmoil has focused on problems that have arisen with respect to specific financial markets and financial instruments. Understanding these institutional details is, of course, essential to the task of restoring more normal functioning to the financial system. Stepping back, however, one can see--at least in retrospect--that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments.
Today, I will briefly discuss some longer-term factors that underlie recent developments; trace how these factors, individually and in combination, have affected both the financial markets and the economy; and describe how the Federal Reserve has responded to the challenges we face.
The Sources of the Financial Turmoil: A Longer-Term PerspectiveAlthough the severity of the financial stresses became apparent only in August, several longer-term developments served as prologue for the recent turmoil and helped bring us to the current situation.
The first of these was the U.S. housing boom, which began in the mid-1990s and picked up steam around 2000. Between 1996 and 2005, house prices nationwide increased about 90 percent. During the years from 2000 to 2005 alone, house prices increased by roughly 60 percent--far outstripping the increases in incomes and general prices--and single-family home construction increased by about 40 percent. But, as you know, starting in 2006, the boom turned to bust. Over the past two years, building activity has fallen by more than half and now is well below where it was in 2000. House prices have shown significant declines in many areas of the country.
A second critical development was an even broader credit boom, in which lenders and investors aggressively sought out new opportunities to take credit risk even as market risk premiums contracted. Aspects of the credit boom included rapid growth in the volumes of private equity deals and leveraged lending and the increased use of complex and often opaque investment vehicles, including structured credit products. The explosive growth of subprime mortgage lending in recent years was yet another facet of the broader credit boom. Expanding access to homeownership is an important social goal, and responsible subprime lending is beneficial for both borrowers and lenders. But, clearly, much of the subprime lending that took place during the latter stages of the credit boom in 2005 and 2006 was done very poorly.
A third longer-term factor contributing to recent financial and economic developments is the unprecedented growth in developing and emerging market economies. From the U.S. perspective, this growth has been a double-edged sword. On the one hand, low-cost imports from emerging markets for many years increased U.S. living standards and made the Fed's job of managing inflation easier. Moreover, currently, the demand for U.S. exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit. On the other hand, the rapid growth in the emerging markets and the associated sharp rise in their demand for raw materials have been--together with a variety of constraints on supply--a major cause of the escalation in the relative prices of oil and other commodities, which has placed intense economic pressure on many U.S. households and businesses.
In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom.1 The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries--notably the United States--that received these flows.
To be sure, the large inflows of savings and low global interest rates presented a valuable opportunity to the recipient countries, provided they invested the inflows wisely. Unfortunately, this did not always occur, as an increased appetite for risk-taking--a "reaching for yield"--stimulated some financial innovations and lending practices that proved imprudent or otherwise questionable. Regulators identified some of these issues in real time; for example, federal banking regulators issued new guidance on nontraditional mortgage lending and on commercial real estate lending. The Federal Reserve, in cooperation with the other supervisors, encouraged improvements in market infrastructure and conducted a series of targeted reviews designed to improve risk-management practice with respect to derivatives, exposures to hedge funds, leveraged lending, and other areas. And, in preparation for the new Basel II capital regulations, supervisors required more-demanding standards for the measurement and management of risk. Despite these efforts, however, the risk-management systems of many financial institutions proved inadequate in the face of a major housing downturn and substantial disruptions in market liquidity.
The current economic and financial situation reflects, in significant part, the unwinding of two of these longer-term developments--the housing boom and the credit boom--and the continuation of the pressure of global demand on commodity prices.
The housing boom came to an end because rising prices made housing increasingly unaffordable. The end of rapid house price increases in turn undermined a basic premise of many adjustable-rate subprime loans--that home price appreciation alone would always generate enough equity to permit the borrower to refinance and thereby avoid ever having to pay the fully-indexed interest rate. When that premise was shown to be false and defaults on subprime mortgages rose sharply, investors quickly backpedaled from mortgage-related securities. The reduced availability of mortgage credit caused housing to weaken further.
The losses from subprime mortgages have been significant in themselves, but their greater impact was to trigger the end of the broader credit boom. Notably, as subprime losses forced the credit rating agencies to downgrade what had been highly rated mortgage-backed securities, investors also came to doubt the reliability of ratings that had been awarded to other highly complex securities. As a result, investors became much more cautious and reversed their aggressive risk-taking of the credit boom period. The resulting pullback affected a much broader range of securities, including leveraged and syndicated loans, asset-backed commercial paper, commercial mortgage-backed securities, and a variety of structured credit products. Large financial institutions, especially in the United States and Europe, were particularly affected by these events, having reported a total of roughly $300 billion in writedowns and credit losses. These institutions have also been forced to bring onto their balance sheets the assets of sponsored investment vehicles that can no longer be financed on a standalone basis. Fortunately, most financial institutions entered this episode with strong capital positions, and many have raised substantial amounts of new capital. Still, balance sheet pressures and the relatively high cost of new bank capital have reduced the willingness and ability of these institutions to make markets and extend new credit. Prospectively, financial conditions seem likely to be closely tied to both domestic and global economic developments, including the course of the prices of oil and other commodities.
This brief overview makes clear that both global and domestic factors have played important roles in recent developments in the United States. The housing and credit booms were driven to some extent by global savings flows, but they also reflected domestic factors, such as weaknesses in risk measurement and management and lax standards in subprime lending. Higher commodity prices are for the most part a global phenomenon, but U.S. dependence on oil imports makes this country quite vulnerable on that score.
The OutlookWith this broader perspective as background, I turn now to a brief discussion of the current situation and outlook. Broadly speaking, the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery. Some borrowers, such as highly-rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate.
Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms. Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall. Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand. However, the strength of foreign demand for U.S. goods and services has offset, to some extent, the slowing of domestic sales.
Overall economic growth was quite slow but apparently positive in both the fourth quarter of 2007 and the first quarter of this year. Activity during the current quarter is also likely to be relatively weak. We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009. However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth.
Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict--albeit with a great range of uncertainty--that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010. Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.
The Federal Reserve's Policy ResponseThe Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning.
The Federal Reserve is pursuing its objectives through several means. First, we have eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. Our decisive policy actions were premised on the view that a more gradual reduction in short-term rates could well have failed to contain the financial and economic problems confronting us. For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.
In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations. Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.
Second, to improve market liquidity and functioning, we have taken a range of measures to ensure that financial institutions have adequate access to central bank liquidity.2 The resulting reductions in funding pressures, together with the increased confidence created by the assurance that backstop liquidity is available to eligible institutions, should help to promote an orderly resolution of current market dislocations. In recognition of the global nature of financial markets, we have also cooperated with other major central banks to ensure that central bank liquidity is deployed where needed.
Finally, we are taking action in our role as regulators. We have worked with lenders and servicers to encourage appropriate modifications of distressed mortgage loans, and we have proposed new rules to improve disclosure and to ban unfair or deceptive acts and practices in mortgage lending. We are also collaborating with other regulators, both domestically and abroad, to put in place changes that will help make the financial system less vulnerable in the future. Among the changes we expect to see are strengthening of capital and liquidity rules, greater disclosure requirements, an increased emphasis on the measurement and management of firmwide risks, and further steps to increase the transparency and resilience of the financial infrastructure. Our goal is to emerge from this difficult period with a financial system that will be more stable without being less innovative, with a more effective balance between market discipline and regulation.
ReferencesBernanke, Ben S. (2005). "The Global Saving Glut and the U.S. Current Account Deficit," speech delivered at the Homer Jones Lecture, Federal Reserve Bank of St. Louis, St. Louis, Mo., April 14.
Bernanke, Ben S. (2008). "Liquidity Provision by the Federal Reserve," speech delivered at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Ga., May 13.
Interesting analysis. He lays the blame of the rise in commodity prices at the door of Chindia. The problem ofcourse is more complicated. Chindia only partially contributed to the current crisis. It is the Fed's own actions (cutting rates under CPI while non-core and supposedly variable commodities like food and oil BOOMED) that have contributed to the rise in the prices of commodities. The Fed is only getting concerned about the dollar NOW? Where were they in the last 5 years? The US has had officially been in a low dollar policy (orderly decline in USD) for some time. Does this signal and end to the low dollar policy? I doubt it.
Chairman Ben S. Bernanke
Remarks on the economic outlook
At the International Monetary Conference, Barcelona, Spain (via satellite)
June 3, 2008
As you know, financial markets in the United States and in a number of other industrialized countries have been under considerable strain since late last summer. Financial market conditions have in turn affected economic prospects, most notably by affecting the cost and availability of new credit.
Much discussion of the turmoil has focused on problems that have arisen with respect to specific financial markets and financial instruments. Understanding these institutional details is, of course, essential to the task of restoring more normal functioning to the financial system. Stepping back, however, one can see--at least in retrospect--that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments.
Today, I will briefly discuss some longer-term factors that underlie recent developments; trace how these factors, individually and in combination, have affected both the financial markets and the economy; and describe how the Federal Reserve has responded to the challenges we face.
The Sources of the Financial Turmoil: A Longer-Term PerspectiveAlthough the severity of the financial stresses became apparent only in August, several longer-term developments served as prologue for the recent turmoil and helped bring us to the current situation.
The first of these was the U.S. housing boom, which began in the mid-1990s and picked up steam around 2000. Between 1996 and 2005, house prices nationwide increased about 90 percent. During the years from 2000 to 2005 alone, house prices increased by roughly 60 percent--far outstripping the increases in incomes and general prices--and single-family home construction increased by about 40 percent. But, as you know, starting in 2006, the boom turned to bust. Over the past two years, building activity has fallen by more than half and now is well below where it was in 2000. House prices have shown significant declines in many areas of the country.
A second critical development was an even broader credit boom, in which lenders and investors aggressively sought out new opportunities to take credit risk even as market risk premiums contracted. Aspects of the credit boom included rapid growth in the volumes of private equity deals and leveraged lending and the increased use of complex and often opaque investment vehicles, including structured credit products. The explosive growth of subprime mortgage lending in recent years was yet another facet of the broader credit boom. Expanding access to homeownership is an important social goal, and responsible subprime lending is beneficial for both borrowers and lenders. But, clearly, much of the subprime lending that took place during the latter stages of the credit boom in 2005 and 2006 was done very poorly.
A third longer-term factor contributing to recent financial and economic developments is the unprecedented growth in developing and emerging market economies. From the U.S. perspective, this growth has been a double-edged sword. On the one hand, low-cost imports from emerging markets for many years increased U.S. living standards and made the Fed's job of managing inflation easier. Moreover, currently, the demand for U.S. exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit. On the other hand, the rapid growth in the emerging markets and the associated sharp rise in their demand for raw materials have been--together with a variety of constraints on supply--a major cause of the escalation in the relative prices of oil and other commodities, which has placed intense economic pressure on many U.S. households and businesses.
In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom.1 The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries--notably the United States--that received these flows.
To be sure, the large inflows of savings and low global interest rates presented a valuable opportunity to the recipient countries, provided they invested the inflows wisely. Unfortunately, this did not always occur, as an increased appetite for risk-taking--a "reaching for yield"--stimulated some financial innovations and lending practices that proved imprudent or otherwise questionable. Regulators identified some of these issues in real time; for example, federal banking regulators issued new guidance on nontraditional mortgage lending and on commercial real estate lending. The Federal Reserve, in cooperation with the other supervisors, encouraged improvements in market infrastructure and conducted a series of targeted reviews designed to improve risk-management practice with respect to derivatives, exposures to hedge funds, leveraged lending, and other areas. And, in preparation for the new Basel II capital regulations, supervisors required more-demanding standards for the measurement and management of risk. Despite these efforts, however, the risk-management systems of many financial institutions proved inadequate in the face of a major housing downturn and substantial disruptions in market liquidity.
The current economic and financial situation reflects, in significant part, the unwinding of two of these longer-term developments--the housing boom and the credit boom--and the continuation of the pressure of global demand on commodity prices.
The housing boom came to an end because rising prices made housing increasingly unaffordable. The end of rapid house price increases in turn undermined a basic premise of many adjustable-rate subprime loans--that home price appreciation alone would always generate enough equity to permit the borrower to refinance and thereby avoid ever having to pay the fully-indexed interest rate. When that premise was shown to be false and defaults on subprime mortgages rose sharply, investors quickly backpedaled from mortgage-related securities. The reduced availability of mortgage credit caused housing to weaken further.
The losses from subprime mortgages have been significant in themselves, but their greater impact was to trigger the end of the broader credit boom. Notably, as subprime losses forced the credit rating agencies to downgrade what had been highly rated mortgage-backed securities, investors also came to doubt the reliability of ratings that had been awarded to other highly complex securities. As a result, investors became much more cautious and reversed their aggressive risk-taking of the credit boom period. The resulting pullback affected a much broader range of securities, including leveraged and syndicated loans, asset-backed commercial paper, commercial mortgage-backed securities, and a variety of structured credit products. Large financial institutions, especially in the United States and Europe, were particularly affected by these events, having reported a total of roughly $300 billion in writedowns and credit losses. These institutions have also been forced to bring onto their balance sheets the assets of sponsored investment vehicles that can no longer be financed on a standalone basis. Fortunately, most financial institutions entered this episode with strong capital positions, and many have raised substantial amounts of new capital. Still, balance sheet pressures and the relatively high cost of new bank capital have reduced the willingness and ability of these institutions to make markets and extend new credit. Prospectively, financial conditions seem likely to be closely tied to both domestic and global economic developments, including the course of the prices of oil and other commodities.
This brief overview makes clear that both global and domestic factors have played important roles in recent developments in the United States. The housing and credit booms were driven to some extent by global savings flows, but they also reflected domestic factors, such as weaknesses in risk measurement and management and lax standards in subprime lending. Higher commodity prices are for the most part a global phenomenon, but U.S. dependence on oil imports makes this country quite vulnerable on that score.
The OutlookWith this broader perspective as background, I turn now to a brief discussion of the current situation and outlook. Broadly speaking, the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery. Some borrowers, such as highly-rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate.
Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms. Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall. Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand. However, the strength of foreign demand for U.S. goods and services has offset, to some extent, the slowing of domestic sales.
Overall economic growth was quite slow but apparently positive in both the fourth quarter of 2007 and the first quarter of this year. Activity during the current quarter is also likely to be relatively weak. We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009. However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth.
Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict--albeit with a great range of uncertainty--that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010. Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.
The Federal Reserve's Policy ResponseThe Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning.
The Federal Reserve is pursuing its objectives through several means. First, we have eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. Our decisive policy actions were premised on the view that a more gradual reduction in short-term rates could well have failed to contain the financial and economic problems confronting us. For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.
In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations. Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.
Second, to improve market liquidity and functioning, we have taken a range of measures to ensure that financial institutions have adequate access to central bank liquidity.2 The resulting reductions in funding pressures, together with the increased confidence created by the assurance that backstop liquidity is available to eligible institutions, should help to promote an orderly resolution of current market dislocations. In recognition of the global nature of financial markets, we have also cooperated with other major central banks to ensure that central bank liquidity is deployed where needed.
Finally, we are taking action in our role as regulators. We have worked with lenders and servicers to encourage appropriate modifications of distressed mortgage loans, and we have proposed new rules to improve disclosure and to ban unfair or deceptive acts and practices in mortgage lending. We are also collaborating with other regulators, both domestically and abroad, to put in place changes that will help make the financial system less vulnerable in the future. Among the changes we expect to see are strengthening of capital and liquidity rules, greater disclosure requirements, an increased emphasis on the measurement and management of firmwide risks, and further steps to increase the transparency and resilience of the financial infrastructure. Our goal is to emerge from this difficult period with a financial system that will be more stable without being less innovative, with a more effective balance between market discipline and regulation.
ReferencesBernanke, Ben S. (2005). "The Global Saving Glut and the U.S. Current Account Deficit," speech delivered at the Homer Jones Lecture, Federal Reserve Bank of St. Louis, St. Louis, Mo., April 14.
Bernanke, Ben S. (2008). "Liquidity Provision by the Federal Reserve," speech delivered at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Ga., May 13.
Interesting analysis. He lays the blame of the rise in commodity prices at the door of Chindia. The problem ofcourse is more complicated. Chindia only partially contributed to the current crisis. It is the Fed's own actions (cutting rates under CPI while non-core and supposedly variable commodities like food and oil BOOMED) that have contributed to the rise in the prices of commodities. The Fed is only getting concerned about the dollar NOW? Where were they in the last 5 years? The US has had officially been in a low dollar policy (orderly decline in USD) for some time. Does this signal and end to the low dollar policy? I doubt it.
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