November 24, 2020

Stimulus by Fed Is Disappointing, Economists Say

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.

“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.

Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.

The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.

The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially.

A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle.

The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.

As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.

But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return.

“Such purchases seem likely to have their largest effects during periods of economic and financial stress,” he said.

The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.

But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

Article source: http://feeds.nytimes.com/click.phdo?i=a4c1e32f9981aaa78e23f7e1457a6c71

DealBook: Goldman Sachs Trumps Expectations as Revenues Fall

Goldman Sachs on Tuesday reported first-quarter net income of $2.74 billion, down 21 percent from the period a year earlier, as the investment bank took a big one-time hit to pay back the billionaire investor Warren E. Buffett.

The results, $1.56 a share in the quarter ended March 31, represent a big step backward from a year earlier when Goldman earned $5.59. But the investment bank handily beat analysts’ expectations of 82 cents a share, according to Thomson Reuters.

Excluding the big payment to Mr. Buffett, the company posted a per-share profit of $4.38, with key businesses like investment banking and investment management experiencing a pickup.

Revenue from investment banking, for example, rose 5 percent, driven by a significant rise in bond and stock underwriting. But institutional client services, the largest unit, saw revenue decline 22 percent, to $6.65 billion.

“We are pleased with our first-quarter results,” Lloyd C. Blankfein, chief executive officer, said in a statement. “Generally improving market and economic conditions, coupled with our strong client franchise, produced solid results. Looking ahead, we continue to see encouraging indications for economic activity globally.”

The bulk of Goldman’s earnings decline reflected the cost of the lifeline extended to the investment bank by Mr. Buffett during the depths of the financial crisis. The government gave approval for Goldman to repay the money earlier this year as part of the second round of bank stress tests.

It was critical cash, but costly. Mr. Buffett’s Berkshire Hathaway pumped $5 billion into Goldman in 2008, and the bank paid back $5.64 billion — not including the hefty dividends it had previously coughed up.

Putting the Berkshire Hathaway deal aside, Goldman’s results were mixed, with some businesses showing signs of improvement and others continued weakness.

During a call with investors firm the firm’s chief financial officer David Viniar said Goldman saw increased client activity in quarter, despite continued economic concerns. Still he noted that business volumes were “subdued.”

Net revenue for investment banking came in at $1.27 billion, 5 percent higher than in the first quarter of 2010. Much of that growth came from stock and debt underwriting, while financial advisory was down 23 percent.

Investment management, too, was a strong point. Overall revenue rose 16 percent, to $1.3 billion.

Much of the firm’s weakness was centered on its largest division, institutional client services. Revenue for the unit dropped 22 percent, which helped drag Goldman’s total net revenue down 7 percent.

Revenue in the largest segment of institutional client services, which trades bonds, currencies and commodities, fell to $4.33 billion. That was 28 percent below results in the first quarter of 2010, a particularly strong period for Goldman. The division is a big money center for the bank, accounting for roughly 36 percent of all revenue generated in the first quarter.

In a nod to just how difficult the environment has become, Goldman’s annualized return on equity, a measure of profitability, fell to 12.2 percent in the quarter from 20.1 percent in the period a year earlier. In 2006, return on equity was 32.8 percent.

There has certainly been a lot of pain to go around. On Monday, Citigroup reported earnings of 10 cents a share, down from 15 cents a share in the period a year earlier, as it dealt with mortgage woes and sluggish economic growth. Similar factors hurt the results of Bank of America and JPMorgan Chase last week.

The lackluster economy and global uncertainty has weighed on financial stocks, too. Goldman closed on Monday at $153.78, down about 8 percent for the year. Shares of Goldman were down modestly in early trading on Tuesday.

There was some good news for shareholders in the earnings release. Goldman declared a dividend of 35 cents a common share, to be paid in June.

For the quarter, Goldman set aside $5.23 billion in compensation, down 5 percent from the period a year earlier. This represents almost 44 percent of the bank’s net revenue and is inline with how it previously compensated employees.

Goldman will not decide what it will pay out until the fourth quarter. There were also more people on the payroll — 35,400 at the end of quarter — up 7 percent from the period a year earlier.


This post has been revised to reflect the following correction:

Correction: April 19, 2011

Due to an editing error, an earlier version of the story incorrectly added the word “billion” to the company’s per shares earnings in 2010. Goldman earned $5.59 a share in the first quarter of 2010.

Article source: http://dealbook.nytimes.com/2011/04/19/goldman-sachs-trumps-expectations/?partner=rss&emc=rss

DealBook: Goldman Sachs Trumps Expectations, As Revenues Fall

Goldman Sachs on Tuesday reported first-quarter net income of $2.74 billion, down 21 percent from the period a year earlier, as the investment bank took a big one-time hit to pay back the billionaire investor Warren E. Buffett.

The results, $1.56 a share in the quarter ended March 31, represent a big step backward from a year earlier when Goldman earned $5.59 billion. But the investment bank handily beat analysts’ expectations of 82 cents a share, according to Thomson Reuters.

Excluding the big payment to Mr. Buffett, the company posted a per-share profit of $4.38, with key businesses like investment banking and investment management experiencing a pickup.

Revenue from investment banking, for example, rose 5 percent, driven by a significant rise in bond and stock underwriting. But institutional client services, the largest unit, saw revenue decline 22 percent, to $6.65 billion.

“We are pleased with our first-quarter results,” Lloyd C. Blankfein, chief executive officer, said in a statement. “Generally improving market and economic conditions, coupled with our strong client franchise, produced solid results. Looking ahead, we continue to see encouraging indications for economic activity globally.”

The bulk of Goldman’s earnings decline reflected the cost of the lifeline extended to the investment bank by Mr. Buffett during the depths of the financial crisis. The government gave approval for Goldman to repay the money earlier this year as part of the second round of bank stress tests.

It was critical cash, but costly. Mr. Buffett’s Berkshire Hathaway pumped $5 billion into Goldman in 2008, and the bank paid back $5.64 billion — not including the hefty dividends it had previously coughed up.

Putting the Berkshire Hathaway deal aside, Goldman’s results were mixed, with some businesses showing signs of improvement and others continued weakness.

During a call with investors firm the firm’s chief financial officer David Viniar said Goldman saw increased client activity in quarter, despite continued economic concerns. Still he noted that business volumes were “subdued.”

Net revenue for investment banking came in at $1.27 billion, 5 percent higher than in the first quarter of 2010. Much of that growth came from stock and debt underwriting, while financial advisory was down 23 percent.

Investment management, too, was a strong point. Overall revenue rose 16 percent, to $1.3 billion.

Much of the firm’s weakness was centered on its largest division, institutional client services. Revenue for the unit dropped 22 percent, which helped drag Goldman’s total net revenue down 7 percent.

Revenue in the largest segment of institutional client services, which trades bonds, currencies and commodities, fell to $4.33 billion. That was 28 percent below results in the first quarter of 2010, a particularly strong period for Goldman. The division is a big money center for the bank, accounting for roughly 36 percent of all revenue generated in the first quarter.

In a nod to just how difficult the environment has become, Goldman’s annualized return on equity, a measure of profitability, fell to 12.2 percent in the quarter from 20.1 percent in the period a year earlier. In 2006, return on equity was 32.8 percent.

There has certainly been a lot of pain to go around. On Monday, Citigroup reported earnings of 10 cents a share, down from 15 cents a share in the period a year earlier, as it dealt with mortgage woes and sluggish economic growth. Similar factors hurt the results of Bank of America and JPMorgan Chase last week.

The lackluster economy and global uncertainty has weighed on financial stocks, too. Goldman closed on Monday at $153.78, down about 8 percent for the year. Shares of Goldman were down modestly in early trading on Tuesday.

There was some good news for shareholders in the earnings release. Goldman declared a dividend of 35 cents a common share, to be paid in June.

For the quarter, Goldman set aside $5.23 billion in compensation, down 5 percent from the period a year earlier. This represents almost 44 percent of the bank’s net revenue and is inline with how it previously compensated employees.

Goldman will not decide what it will pay out until the fourth quarter. There were also more people on the payroll — 35,400 at the end of quarter — up 7 percent from the period a year earlier.

Article source: http://feeds.nytimes.com/click.phdo?i=545097e2438bf2353dd57b03a3726a57

Economix: Trust Me, We’re Rich

Within the developed world, Danes are the most trusting people and Chileans the least, according to new data from the Organization for Economic Cooperation and Development.

The results are based on survey responses to the question, “Generally speaking would you say that most people can be trusted or that you need to be very careful in dealing with people?” Within the United States, just less than half of people expressed a high level of trust in others.

DESCRIPTIONSource: Organization for Economic Cooperation and Development

Across the countries included in the analysis, levels of trust have increased modestly on average over the last decade. From an economic standpoint, that is probably a good thing, as higher levels of trust can help foster better economic relations. You’re more likely to do business with someone if you don’t assume that person will cheat you.

But this relationship is likely a two-way street: Not only does trust affect economic conditions, but economic conditions may also affect trust.

O.E.C.D. analysts found that higher levels of trust were generally correlated with higher household income levels:

DESCRIPTION Source: ESS (European Social Survey), ISSP (International Social Survey Programme), O.E.C.D. (2008) Growing Unequal? Income Distribution and Poverty in O.E.C.D. Countries (www.oecd.org/els/social/inequality).

Again, it’s not clear which is cause and which is effect. “Trust may promote gainful economic activity, or trust may be a luxury affordable only by richer countries,” the group’s report says.

Additionally, higher levels of income inequality correlated with lower levels of trust. The relatively egalitarian Nordic countries like Denmark, for example, have high levels of trust. On the other hand, more unequal societies like Mexico and Turkey have relatively low levels of trust.

DESCRIPTIONSource: ESS (European Social Survey), ISSP (International Social Survey Programme), O.E.C.D. (2008) Growing Unequal? Income Distribution and Poverty in O.E.C.D. Countries (www.oecd.org/els/social/inequality).

The causal relationship is debatable here as well.

“Income inequality may make it more difficult for people in different strata to share a sense of common purpose and to trust each other,” the report says. “Or low levels of trust may impede positive social bonds developing, which in turn contributes to high inequality.”

Article source: http://feeds.nytimes.com/click.phdo?i=7795276456fa3e100862accd257a118d