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Tuesday, June 2, 2009
blogging will be light today
I'm headed to Pasadena this morning to attend the ceremony in which my son-in-law will be formally accepted into the California Bar. He's also a lawyer in Argentina, and passed the bar exam on his third try. We're very proud of him.
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8 comments:
Congratulations. To both of you!
Scott
When you get back - perhaps you could help me (and others) make sense of Treas Sec Geitnher's response to rick Santelli's question about montizing the debt? Im confused - he says this is impossible becasue we have a "strong central bank"??? Should I be worried now???
Congrats! I was looking for a way to play the new commodities bull market (which I think has more legs due to the coming inflation). I was thinking about buying the DowJones-UBS Commodity Index Fund as a broad way to play it. What do you think?
Can you point me to a transcript of Geithner's response to Santelli?
There is a fund similar to what you mentioned (UCD) that looks like a decent way to get commodity exposure, albeit with some leverage. It has delivered on its promise to return double the rise in the DJAIG total return index, which is a reputable index, but I note that it quite small--$24 million market cap.
Here you go Scott:
Liesman:"Treasury is issuing over time and not so much time trillions of dollars of debt. The Fed's buying $300 billion of Treasuries. Why is this not the dreaded concept of monetizing the debt which so many economists would warn against?"
GEITHNER: There's no risk of that in the United States because, again, we have a strong independent central bank whose obligation under the law is not just to achieve maximum sustainable growth but to keep inflation low and stable over time. And I know the chairman is completely committed to that.
SANTELLI: Are we monetizing? And his answer was no, we have a strong independent central bank. Now, the latter may be true, but it certainly isn't an answer to the question. And I'd like feedback everybody, that quantitative easing can't exist without the montization process. We issue debt, we print the money to buy it. That is monetizing. I can't believe that was his answer. It's pretty disingenuous. If that's the Treasury Secretary in charge of all this activity and that was his answer, it makes me nervous. Blatantly saying they're not monetizing when the March statement for the first time ever expressed quantitative easing and put it on the map, I just think that that's the wrong answer. He's not telling the truth!
http://www.youtube.com/watch?v=ERcetyble0M
I'll try to be impartial here. I think the Fed would properly be considered to be "monetizing the debt" if they made significant purchases of Treasury securities with the objective of keeping interest rates low or stimulating the economy. If you look at the chart here:
http://blogs.wsj.com/economics/2009/05/28/a-look-inside-feds-balance-sheet-52809-update/
you can see that today the Fed actually holds fewer Treasury securities than they did prior to the crisis. So in a technical sense they haven't monetized the debt.
But obviously they have bought a whole lot of other securities (over $500 billion of MBS and agency debt). They have effectively monetized not the debt of the U.S. government, but the debt of other entities and of homeowners.
Now, the massive expansion of the Fed's balance sheet would normally be considered to be extremely inflationary. However, up until recently, it has not been. Why not? Because it was done in response to a massive increase in the demand for liquidity. The Fed was doing its job, and I think that's where Geithner could justify his remarks. Presumably the Fed will undo all this as the demand for liquidity declines and therefore it won't be inflationary.
That remains to be seen, of course, and I think they have already overstayed their welcome in accommodative territory.
So in the end I think Geithner is simply trusting that the Fed will do a good job. If he were impartial, he would be forced to say that the Fed is playing with fire, and that there is plenty to worry about.
But I thought before the crisis we had a liquidity glut?
Shouldn't we be calling this a credit quality crisis versus a liquidity crisis?
The policy prescriptions would be vastly different but that may be exactly where this ship went wrong...
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