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Sales of New Homes Fall Sharply as Mortgage Rates Rise

August 23, 2013 by

Sales of newly built homes dropped 13.4 percent to a seasonally adjusted annual rate of 394,000, the Commerce Department said on Friday. That is the lowest in nine months. And sales fell from a rate of 455,000 in June, which was revised down from a previously reported 497,000.

The housing rebound that began last year has helped drive economic growth and create more construction jobs. But mortgage rates have climbed a full percentage point since May. The increase has begun to steal some momentum from the market.

Sales of new homes are still up 7 percent in the 12 months ended in July. Yet the annual pace remains well below the 700,000 that is consistent with a healthy market.

July’s drop “may mark an ‘uh-oh’ kind of moment for the housing recovery,” said Mark Vitner, an economist at Wells Fargo Securities.

Homebuilder stocks declined sharply on Friday, even as overall market indexes rose. Shares of Toll Brothers, D. R. Horton and Lennar — three of the nation’s largest builders — all fell more than 2.5 percent at the close of trading.

And major homebuilders’ shares have been dropping steadily since late May. The slide began after the Federal Reserve chairman, Ben S. Bernanke, first signaled that the Fed might reduce its bond purchases later this year. The bond purchases have helped keep mortgage rates and other borrowing costs low.

The average rate on a 30-year mortgage reached 4.58 percent this week, according to Freddie Mac. That’s up from 3.35 percent in early May and the highest in two years.

Potential buyers appear to have noticed that financing a home purchase has become more expensive. The number of Americans applying for mortgages to buy homes has plummeted 16 percent since the end of April. And in July, builders began work on the fewest single-family homes in eight months. Most economists expect the housing recovery will continue, albeit at a slower pace.

“We’ve been spoiled by low rates,” Greg McBride, senior financial analyst at Bankrate.com. “People are gnashing their teeth now over a rate we had never seen four years ago.” He notes that, based on their figures dating back to 1985, rates on the 30-year loan had never sunk below 5 percent until 2010.

The impact of higher mortgage rates has surfaced in the new-home market faster than the resale market because the new-home sales are measured when contracts are signed.

Higher rates may have also caused potential buyers to cancel some purchases of new homes. Mr. Vitner says that may explain why sales were revised down in May and June. Most of the revisions occurred in sales of homes not yet under construction. Buyers do not need mortgages until construction begins.

Sales of previously occupied homes reached a nearly four-year high last month. But that report measured completed sales, which typically reflects mortgage rates locked in a month or two earlier.

The jump likely reflected a rush by home buyers to lock in lower rates. Next week, a measure of contract signings in July will be released. Many economists expect that will drop.

Fed officials are closely watching the impact of higher mortgage rates on the housing recovery. The drop in sales could strengthen the hand of those Fed members who want to delay reducing the bond purchases.

Article source: http://www.nytimes.com/2013/08/24/business/economy/sales-of-new-homes-fall-sharply-as-mortgage-rates-rise.html?partner=rss&emc=rss

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Wall Street Flat at the Open

July 16, 2013 by Leave a Comment

Financial markets were lackluster Tuesday as investors paused for breath ahead of testimony from the Federal Reserve chairman, Ben S. Bernanke.

In afternoon trading the Standard Poor’s 500-stock index fell 0.4 percent, the Dow Jones industrial average fell 0.3 percent and the Nasdaq was 0.3 percent lower.

Mr. Bernanke’s comments on Wednesday to lawmakers in Congress could set the tone in markets for the rest of the summer. In particular, investors will be looking for any further guidance on when the Fed will start to reduce its monetary stimulus.

The Fed is currently spending $85 billion a month buying financial assets in the hope of keeping long-term borrowing rates low and stimulating the American economy. The new money created in recent years has been one of the key drivers of markets.

Economic figures in the United States are being largely viewed through the prism of Fed policy. Tuesday’s batch of numbers did little to affect expectations. The 0.3 percent monthly rise in industrial production during June was in line with expectations while the uptick in the annual inflation rate to 1.8 percent from 1.4 percent was largely discounted because it was because of a sharp rise in gasoline prices.

“It’s certainly possible that they could begin tapering their bond purchases later this year, but the absence of higher inflation and the stubbornly high jobless rate suggests that it may not need to do so in the near-term, particularly if those growth expectations fail to materialize,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors.

In Europe, the FTSE 100 index of leading British shares fell 0.5 percent to close at 6,556.35 while Germany’s DAX dropped 0.4 percent at 8,201.05. The CAC 40 in France ended 0.7 percent lower at 3,851.03.

Tuesday’s run of corporate news had little impact despite solid earnings from Goldman Sachs and Johnson Johnson. Coca-Cola’s, though, were disappointing as it reported falling profits and weak volume growth, particularly in North America.

Once Mr. Bernanke’s appearance before lawmakers is over, markets, particularly Wall Street, may return their focus to the earnings reports.

“Corporate earnings season is going to play a much bigger part in driving market sentiment in the coming weeks, than it has over the last couple of years,” said Craig Erlam, market analyst at Alpari. “With investors no longer able to rely on the Fed to drive equity markets higher, they have to make do with focusing more on the fundamentals, and nothing gives us a better overview of these than company earnings reports and their expectations for the coming quarters.”

Earlier in Asia, South Korea’s Kospi fell 0.5 percent to 1,866.36 while Hong Kong’s Hang Seng was flat at 21,312.38. China’s Shanghai Composite Index rose 0.3 percent to 2,065.72.

In currency markets, the euro was up 0.6 percent at $1.3143 while the dollar fell 0.5 percent to 99.35 yen.

Oil prices were steady, with the benchmark contract in New York down 23 cents at $106.09 a barrel.

Article source: http://www.nytimes.com/2013/07/17/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Wall Street Opens Higher

June 25, 2013 by Leave a Comment

Stocks rose solidly on Tuesday, partially recovering from recent steep declines as strong data pointed to improvements in the economy.

In afternoon trading the S.P. 500 was 0.9 percent higher, the Dow Jones industrial average gained 0.7 percent and the Nasdaq composite added 0.6 percent.

Equities were volatile for much of the session, as the data initially raised concerns about central bank stimulus, but analysts said a rebound was due coming off a large drop in Monday’s session, which itself followed the worst week for the S.P. 500 since April.

“Everyone panicked after the Fed, but the fear is starting to come out of the system now. Investors are realizing that the Fed is still a long way from raising rates,” said Mark Foster, who helps manage $600 million at Kirr Marbach Co. in Columbus, Indiana.

The recent downturn in markets started after the Federal Reserve chairman, Ben S. Bernanke, said last week that the Fed’s stimulus program may be scaled back this year if the economy improves, placing traders in a paradoxical situation where good data could indicate less stimulus, which would in turn be a threat to growth.

Economic reports topped analysts’ expectation. The Commerce Department said durable goods orders increased 3.6 percent in May, above the 3 percent forecast, the latest signs of a pickup in economic activity. Also, the S.P. Case Shiller composite index of house prices in 20 metropolitan areas gained 1.7 percent on a seasonally adjusted basis, topping forecasts for 1.2 percent, indicating the housing recovery continues to gain momentum.

Finally, consumer confidence jumped in June to its highest level in over five years, as Americans said they were more optimistic about business and labor market conditions, according to the Conference Board, an industry group.

Housing stocks were among the strongest of the day, surging on the data as well as because Lennar Corporation, the No. 3 homebuilder, posted strong results and the company pointed to a “solid housing recovery.” The stock rose 1.6 percent, while another homebuilder, PulteGroup Inc was up 4.1 percent.

Walgreen fell 7 percent after reporting weaker-than-expected results, citing slow front-end sales and a challenging economy.

Barnes Noble, the bookstore chain, slumped 19.6 percent after it reported its quarterly net loss more than doubled.

Asian markets had a day of wild swings, during which Chinese stocks plunged to their lowest since the global financial crisis, ending with a late rally on hopes authorities would step in to prevent a crisis.

“China’s new leaders are determined to address the financial risks that have built in the financial system because of excessive lending,” said Koen De Leus, senior economist at KBC.

In Europe the broad FTSEurofirst 300 index ended the day up 1.5 percent, recovering some of the 5.5 percent lost in the previous three trading days.

“After all the moves we’ve seen in U.S. dollar buying, selling bonds, selling equities, I think we’re going into a consolidation period,” said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.

Article source: http://www.nytimes.com/2013/06/26/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Markets Lackluster as Silver Sinks

May 20, 2013 by Leave a Comment

Shares on Wall Street fell slightly on Monday, failing to extend a rally that closed out a fourth consecutive week of gains on Friday.

The Standard Poor’s 500-stock index and the Dow Jones industrial average ended the day 0.1 percent lower. The Nasdaq composite was also 0.1 percent lower.

Smaller businesses were in the limelight Monday as the Russell 2000, an index of small-company stocks, rose above 1,000 points for the first time. The index is outpacing the Dow Jones industrial average and the Standard Poor’s 500-stock index this year. Small stocks are doing well because they are more focused on the United States, which is recovering, and are less exposed to recession-plagued Europe than the large international companies that make up the Dow and the S.P. 500 index.

Investors will be watching the Federal Reserve this week for clues about what it plans to do next with its economic stimulus program. On Wednesday the Federal Reserve chairman, Ben S. Bernanke, will appear before Congress and the central bank will release minutes of its most recent policy meeting.

The Fed is buying $85 billion of bonds every month to keep long-term interest rates low. That has encouraged investors to put money into stocks instead of bonds.

Policy makers are unlikely to cut back on stimulus just yet because economic growth is likely to slow in the second quarter, said Scott Wren, a senior equity strategist at Wells Fargo Advisors. As a consequence, Mr. Wren said, stocks are likely to continue to rise. “At some point, we will see some sort of a pullback, but it doesn’t seem like it’s going to be right now,” he said. “In the near term we’re probably going to trade a little bit higher.”

Earlier in the session, silver had fallen more than 7 percent, to $20.25 an ounce, its lowest level since September 2010. But by afternoon in New York, the price on the Comex had risen 0.4 percent, to $22.71.

The price of gold rose for the first day in eight, as the dollar fell. The precious metal climbed $21, or 1.5 percent, to $1,385, in the afternoon. Gold has slumped this month as its attraction as an alternative investment has faded this year as the dollar has appreciated.

In government bond trading, the yield on the 10-year Treasury note rose to 1.97 percent from 1.93 percent in the afternoon.

Yahoo’s board decided on Sunday to purchase Tumblr, the popular blogging site, for $1.1 billion. Yahoo’s stock was trading 1.3 percent higher.

In Europe, the FTSE 100 index of leading British shares ended the trading day 0.5 percent higher and remained near 13-year highs. Germany’s DAX, which has set a series of record highs, rose 0.7 percent. The CAC 40 in France gained 0.5 percent.

In Asia, stock markets had a strong start to the week. Japan’s Nikkei 225 index jumped 1.5 percent, while Hong Kong’s Hang Seng rose 1.8 percent. Benchmarks in mainland China also rose, but South Korea’s Kospi fell 0.2 percent.

Article source: http://www.nytimes.com/2013/05/21/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Japan’s Bond-Buying Plan Quickly Meets Criticism

January 23, 2013 by Leave a Comment

Following the lead of their counterparts in the United States, Japan’s central bankers announced Tuesday what they called a groundbreaking effort to reinvigorate the country’s long-moribund economy and defeat deflation.

With no more room left to cut interest rates and previous steps unsuccessful, the Bank of Japan is taking a page from the Federal Reserve’s playbook and will pump trillions more yen into the economy by directly buying government bonds and other assets. It also doubled the country’s official inflation target to 2 percent. The action came after months of intense pressure on the Bank of Japan from the country’s audacious new prime minister, Shinzo Abe, to take more aggressive action to bolster the economy.

But as in the United States, there are doubts about just how much of an effect the move will have in Japan. Three rounds of asset purchases since the onset of the financial crisis have successfully headed off deflation in the American economy but failed to generate the kind of growth necessary to return employment to prerecession levels.

Japan’s move is also likely to further devalue the yen in the long term — causing some to worry about a possible round of competitive devaluations as countries weaken their currencies to bolster growth in exports. On Tuesday, however, the yen actually rose against the dollar and the euro amid disappointment that the Bank of Japan’s efforts had not gone far enough.

Traditionally, curbing inflation, not worrying about deflation, has been the principal task of central bankers. But when economies enter prolonged periods of slow growth, or even contraction, other concerns come to the fore. Ben S. Bernanke, the Federal Reserve chairman, was keenly aware of Japan’s long-running struggle with deflation as well as the American experience in the Great Depression when he began the first round of United States asset purchases, or quantitative easing, in November 2008.

After a second round of quantitative easing beginning in November 2010, the Fed started a third round in September. It said in December that it would continue to purchase $85 billion in Treasury securities and mortgage-backed securities each month until the job market improved. After considerable pressure, European central bankers also began moving more aggressively last year, vowing to do “whatever it takes” to keep the euro zone from fracturing.

Given the scale of the efforts in the United States and Europe, many experts were disappointed by the Bank of Japan’s action because the expanded asset purchases will not begin until 2014. They complained that was a waste of valuable time in turning around an economy whose descent into deflation has become a test case of the effects of doing too little in the face of an economic slowdown.

To make matters worse, the Bank of Japan’s new plan to purchase 10 trillion yen, or $112 billion, in assets each month sounds more aggressive than it actually will be, said Gustavo Reis, senior international economist at Bank of America Merrill Lynch. That is because many of the securities the Bank of Japan will be purchasing are in the form of short-term debt that will quickly mature, so the additional purchases will equal about $112 billion a year — not a month — beginning in 2014.

By contrast, he said, the Fed’s balance sheet is expected to expand by a trillion dollars in 2013.

“The Bank of Japan should be more aggressive,” Mr. Reis said. “It’s a step forward, but given where their economy is, they need to do more.”

In fact, with such a small annual increase in asset purchases, it is unlikely Japan will achieve 2 percent inflation, analysts said. The Consumer Price Index for 2012 fell 0.5 percent, according to government statistics. The Bank of Japan’s announcement “will likely disappoint those who expected the policy board to answer Abe’s call for a ‘different kind of B.O.J. policy,’ or significantly ramp up its pace of easing,” Izumi Devalier, an economist with HSBC, said in a note to clients.

While certainly better than inaction, there is evidence that unconventional monetary policy can only do so much to lift overall economic growth.

The Fed’s monetary policy seems to be having a much more significant effect on asset prices than it has on the underlying economy, said Larry Kantor, head of research at Barclays. He noted that nearly four years after markets hit bottom in March 2009, stocks in the United States had more than doubled in value. By contrast, “most people would characterize the economic recovery as weak.”

For all the challenges in the United States and Europe, Japan’s economy, the world’s third largest, has been depressed for much longer; the 1990s are regarded as a “lost decade,” and the last 10 years are proving to be not much better. Deflation, an all-around fall in prices, profit and incomes, has plagued the country since the late 1990s.

Since last year, when Mr. Abe was still opposition leader, he has urged the central bank to do more after previous rounds of asset purchases failed to reverse deflation. He stepped up the pressure on the bank after a landslide victory by his Liberal Democratic Party in parliamentary elections in December, which catapulted him to office for the second time since a short-lived stint in 2006-7.

Article source: http://www.nytimes.com/2013/01/23/business/global/japanese-central-bank-in-forceful-move-to-fight-deflation.html?partner=rss&emc=rss

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Economic Growth Revised Up to 3.1%

December 20, 2012 by Leave a Comment

The Commerce Department’s third and final estimate Thursday of growth for July through September was increased from its previous estimate of a 2.7 percent annual growth rate.

Growth in the third quarter was more than twice the 1.3 percent growth in the second quarter. But disruptions from Hurricane Sandy and uncertainty weighing on consumers and businesses from the budget negotiations in Washington are likely to restrain growth in the fourth quarter, according to analysts’ forecasts. Many analysts predict an annual growth rate of just 1.5 percent for this quarter.

Robert Kavcic, an economist at BMO Capital Markets in Toronto, said the revision of third-quarter growth did not change his view that the economy is slowing in the current quarter to an annual growth rate below 2 percent. Mr. Kavcic said a temporary increase in military spending and business stockpiling in the third quarter probably is being reversed this quarter.

And many economists are not expecting much improvement in the first quarter of 2013. The latest forecast by 48 economists for the National Association for Business Economics is for an annual growth rate of just 1.8 percent in January through March. Such growth is considered too weak to significantly reduce the unemployment rate, which was 7.7 percent in November.

But if Congress and the White House reach agreement to avoid tax increases and spending cuts, growth could accelerate next year, many economists, including the Federal Reserve chairman, Ben S. Bernanke, have said.

The Fed said last week it would keep an important interest rate at a record low as long as unemployment exceeds 6.5 percent. It forecast that unemployment would stay that high until late 2015.

The government’s final estimate of a 3.1 percent growth rate for third-quarter gross domestic product is a sharp improvement over its initial estimate of 2 percent — a figure that it later increased to 2.7 percent based on a buildup in business stockpiles.

The further increase this month reflected stronger consumer spending, which accounts for about 70 percent of economic activity. The government said consumer spending grew at an annual rate of 1.6 percent in the third quarter. Its previous estimate was 1.4 percent.

The Commerce Department also raised its estimate of spending by state and local governments to show a gain of 0.3 percent — the first quarterly increase in three years. State and local governments had been cutting payrolls and other spending in the aftermath of the recession. Total government spending grew at an annual rate of 3.9 percent in the third quarter, reflecting a surge in military spending.

The economy was also helped by trade in the third quarter. Exports grew at a faster pace than previously estimated.

The National Association for Business Economics forecasting panel has said it expects G.D.P. to grow 2.1 percent in 2013, little changed from the expected 2.2 percent expansion this year.

Article source: http://www.nytimes.com/2012/12/21/business/economy/economy-grew-3-1-in-3rd-quarter-according-to-revision.html?partner=rss&emc=rss

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States Want to Have Say During Talks Over Budget

November 25, 2012 by Leave a Comment

They have been down this road before — Congress has already missed several self-imposed deadlines to cut the deficit — but many say they fear that this time, the talks in Washington to avert the so-called fiscal cliff will actually lead to deep cuts.

So they want a say in the negotiations.

“The main message is that it’s important to remember that, on a lot of areas of governance, we’re partners — and that these issues can’t be solved simply by cost-shifting to the states, because the states aren’t really in a position to do all that,” said Gov. Jack Markell of Delaware, chairman of the National Governors Association. “We just want to make sure that we have a voice as these decisions are being made.”

But there is a long history of the federal government’s giving short shrift to the needs of states and cities — by making cuts in federal aid that forced service cuts or tax increases at the local level, or by passing laws requiring localities to take expensive actions without giving them the money to do so.

So in recent days, more than a dozen mayors with the United States Conference of Mayors have gone to Washington to lobby lawmakers. And last Monday, Mr. Markell, a Democrat, joined several governors from both parties to discuss the issue on a conference call with Vice President Joseph R. Biden Jr.

The states, whose tax collections are still below the peak levels they reached in 2008, are in something of an unusual situation. That is because the automatic tax increases and spending cuts that are scheduled to begin in January, called “the fiscal cliff” by Ben S. Bernanke, the Federal Reserve chairman, are actually better for them in some respects than many of the alternate proposals in Washington.

Half of the cuts scheduled to take effect at the beginning of next year would be to military spending, which would affect states only indirectly. The scheduled cuts to domestic programs would leave Medicaid, the single biggest source of federal aid to states, untouched. And the planned federal tax increases would increase revenues in states whose tax codes are closely linked to the federal code.

But governors said that no one was rooting for President Obama and Republicans in Congress to fail to reach a financial accord, in part because they fear that the resulting combination of spending cuts and tax increases could prompt another recession, which their states can ill afford.

Gov. Rick Snyder of Michigan, a Republican, noted that the spending cuts and tax increases were intended to be so undesirable that they would spur opposing sides in Washington to overcome their antagonism and strike a deal on taxes and spending just to avoid them.

The plan “was designed to be a terrible answer,” Mr. Snyder said, “and I think they did a fairly effective job of doing that.”

Pat McCrory, the Republican governor-elect of North Carolina and former mayor of Charlotte, said state and local officials needed a greater voice in Washington.

“I don’t think the debate should be just between the White House and Capitol Hill, but the state and local government should be at the table,” Mr. McCrory said. “Because I assume some of their answers are going to be pass-throughs to the states or to cities, as I saw as mayor in the past.”

The automatic cuts would hurt states in several areas. A recent analysis by the Pew Center on the States found that roughly 18 percent of the federal grant dollars flowing to the states would be subject to across-the-board cuts, including money for education, public housing and nutrition programs for low-income women and children.

But some governors fear that any “grand bargain” struck by Mr. Obama and Congress could lead to even deeper cuts to states, and they worry that it could include tax provisions that they believe would be harmful, like ending the tax-exempt status of municipal bonds that makes the bonds more attractive to investors.

But the needs of states and cities have often been an afterthought when Washington has talked about curbing spending.

Alice M. Rivlin, a former director of the Office of Management and Budget who served on two recent high-profile federal commissions — the National Commission on Fiscal Responsibility and Reform, better known as the Simpson-Bowles Commission, and the Bipartisan Policy Center’s Debt Reduction Task Force — acknowledged as much in an appearance this summer.

“I’ve served on not one but two commissions on the federal deficit,” Ms. Rivlin said when another group she belongs to, the State Budget Crisis Task Force, released a report warning of the fiscal problems facing states. “And I can attest that although we were certainly aware that the proposals we made would impact state and local government, we did not do a serious analysis of what would happen.”

Gov. John R. Kasich of Ohio, a Republican, has been on both sides of the federal-state divide: trying to cut the federal budget as a chairman of the House Budget Committee, and now seeking to preserve services, especially for the poor, as a governor.

“I’m just saying that if you’re going to affect us, you’d better realize there’s a bottom line that affects flesh and blood and real people,” he said this month at a meeting of the Republican Governors Association. “And you can easily throw every one of these budgets into the red by just trying to get a nice number.”

The absence of a formal dialogue between the federal government and the states was cited as a danger by the State Budget Crisis Task Force, a private group led by Richard Ravitch, a former lieutenant governor of New York, and Paul A. Volcker, a former chairman of the Federal Reserve.

“There are no standing structures and procedures within the federal government for analyzing the impacts on states and localities of reduced federal spending or federal tax changes, and there is little dialogue about these issues between the federal government and state and local governments,” its report said last summer. It recommended creating something like the Advisory Commission on Intergovernmental Relations, which lasted from 1959 to 1996.

John Kincaid, a former executive director of the advisory commission, which included federal and state officials, said it grew less effective as political polarization increased.

“No matter what happens in Washington, it’s going to hit state and local governments very hard,” said Mr. Kincaid, who is now a professor of government and public service at Lafayette College in Easton, Pa. “I think, by and large, states have become accustomed to this pattern of decision-making, so they’re going to brace themselves for whatever comes. State and local officials will lobby very hard to get what they can out of this bargain, but they won’t be all that significant as players.”

Article source: http://www.nytimes.com/2012/11/25/us/politics/states-want-to-have-say-during-talks-over-budget.html?partner=rss&emc=rss

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As Financial Gloom Deepens, Reform of British Banking Rules May Wait

September 8, 2011 by Leave a Comment

On Monday, a government-appointed banking commission is expected to present its final recommendations on how to protect taxpayers from bearing the costs of any future bank collapses. The plan aims to separate a bank’s deposit-taking business from the riskier trading and investment banking operations, which would be allowed to fail should they run into trouble.

But at a time of heightened economic uncertainty, the government of Prime Minister David Cameron has grown nervous about the proposed changes, said two government officials who declined to be identified because no final decision has been made.

Mr. Cameron is concerned that the changes will drive up banks’ financing costs and in turn limit their ability to lend to British businesses, which would threaten an already weak economy, the officials said.

So even if the Independent Commission on Banking proposes far-reaching changes, London is likely to delay their implementation until after the next election, planned for 2015, the officials said.

“This is a political and not a financial thing now,” said Simon Gleeson, a partner at the law firm Clifford Chance. “What everybody hoped was that by the time we got to reforming banking regulation we’d have a more stable economy. But we don’t and that’s the biggest challenge.”

The British economy grew just 0.2 percent in the second quarter, and the Bank of England has cut its growth forecast for this year to 1.5 percent from 1.9 percent.

The British proposal would make it considerably more expensive to raise capital for investment banking and would be much more painful for Britain’s banks than the so-called Volcker Rule in the United States.

Under the United States approach, originally advocated in a stronger form by Paul A. Volcker, the former Federal Reserve chairman who served as an adviser to President Obama, banks’ freedom to trade with their own capital and manage hedge funds would be limited. But they would still be able to borrow money economically because their balance sheets would remain unified.

British banking executives, nervous that the new rules would increase their financing costs and threaten their credit ratings, have stepped up lobbying efforts in recent weeks.

Barclays and Royal Bank of Scotland would be the most affected by the new rules because they have large investment banking businesses and could see profit drop by a third, according to a research note by JPMorgan Chase.

The chief executive of Barclays, Robert E. Diamond Jr., and his counterpart at R.B.S., Stephen Hester, have held lengthy discussions with the government, arguing in favor of the universal banking model, that is, leaving consumer and investment banking linked. They claimed this had helped their banks to withstand risks, according to a Treasury official who declined to be identified because the talks were private.

In a preliminary report in April, the Independent Commission on Banking suggested limiting the use of consumer deposits to finance the investment banking operation by setting up a so-called ring fence around the consumer operations. On Monday, the commission is expected to give more detail on exactly which businesses should be “ring-fenced” and how strict the separation should be. As an example, banks could be restricted to using deposits only for personal loans and the purchase of government bonds.

Angela Knight, the head of the British Bankers Association, an industry group, said the commission’s proposals would weaken rather than strengthen the financial sector. “Ring-fencing becomes unattractive to investors of all types as it reduces the benefits of diversification, gives borrowers a worse deal, and is inefficient from a capital, funding and operational perspective,” she said.

Among the biggest fears for banking executives is that the new rules would increase the financing costs of investment banking by implying the business would be allowed to fail. Interbank lenders, the executives argue, would demand higher rates in return for the higher risk. The banks’ total financing costs could rise by about £2 billion a year, according to a report by Citigroup analysts.

Eric Dash contributed reporting from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=831467389fc9350a49bcde1b58e03c95

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Common Sense: Vitriol for Bernanke, Despite the Facts

September 2, 2011 by Leave a Comment

On Aug. 16, while speaking in Iowa, Gov. Rick Perry of Texas, a Republican presidential candidate, took the demonization of Mr. Bernanke to a new level. He declared in much-quoted remarks — and to appreciative laughter from the crowd — that “we would treat him pretty ugly down in Texas,” and that Mr. Bernanke’s monetary policy was “almost treacherous — or treasonous, in my opinion.”

The next day, in New Hampshire, Mr. Perry was less inflammatory but more pointed. “They should open their books up,” he said of the Fed. “They should be transparent so that the people of the United States know what they are doing.”

Despite getting in “trouble” for calling Mr. Bernanke a traitor, as Mr. Perry subsequently put it, Mr. Perry vaulted to the top of polls and is now the unofficial Republican front-runner. Representative Michele Bachmann, the winner of the Iowa straw poll, has been burnishing her anti-Bernanke credentials, too, criticizing the Fed as “opaque” and reminding voters in South Carolina that she’s against “printing” money.

Nor are such sentiments confined to Republican presidential candidates looking for quick political gain. Last week, I bumped into an acquaintance I’ve always considered thoughtful and intelligent. He, too, lit into Mr. Bernanke and the Fed with great fervor. He quoted the Austrian School, the once-obscure but newly vocal group of zealous free-market economists who trace their roots to the Hapsburg Empire, disdain the scientific method in economics and blame the Fed for the financial crisis and the faltering recovery.

No one in government, including the quasi-independent Federal Reserve chairman, should be above criticism. But if Mr. Bernanke is going to be the centerpiece of such a heated debate, it should be conducted on the facts. And in that respect, “The level of ignorance among some of the Republican presidential candidates about monetary policy is stunning,” Mark Gertler, a professor of economics at New York University, said this week. “Mr. Perry has been taken to task for his choice of language, but not for the substance of his remarks, which is outrageous.” (Mr. Gertler said he was a political independent but considered himself a friend of Mr. Bernanke, a Republican.) Even President Obama was curiously restrained in coming to Mr. Bernanke’s defense, saying in a CNN interview only that Mr. Perry should be “a little more careful about what you say.” Although the Fed only belatedly identified the banks that received many billions of dollars of emergency loans during the crisis — for which it has rightly been taken to task — the Fed could hardly have been more transparent than it was recently about monetary policy.

It’s hard to believe the Fed’s critics have read the minutes of the Aug. 9 Fed Board and Federal Open Market Committee meeting, which were released this week. They may not read like a Robert Ludlum thriller, but they’re nothing if not transparent. They spell out in great detail the Fed’s reaction to the latest discouraging unemployment data, tepid economic growth and stock market volatility, including specific measures that might be used to address these problems.

Some members thought none of these measures would do any good. A majority nonetheless thought that something needed to be done, and chose to announce that the Fed would keep interest rates low for at least two years — “forward guidance,” in Fed-speak — as a “possible way to reduce interest rates.” Others wanted to peg the duration of low rates to a specific unemployment target, something that the board deferred to an expanded two-day meeting in September, when it will also consider other policy options.

The minutes provide a detailed portrait of a well-intentioned group of economists struggling to eke the maximum benefit from a dwindling and largely untested arsenal of monetary options, hardly a treasonous cabal bent on secretly conspiring to inflate its way to — what? World domination?

The Fed has never in its history provided such explicit forward guidance, and so far that has had exactly the effect the Fed hoped for. Longer-term interest rates have dropped, with two-year rates dipping below 2 percent for the first time in over half a century. This is significant, since it reduces borrowing costs for consumers and businesses. The stock market seems to have stabilized, at least for the moment. Though the Fed has been moving toward more openness for some time, Mr. Bernanke “has been the most open and transparent Fed chairman in history,” Mr. Gertler asserted.

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Global Finance Leaders Pledge Bold Action to Calm Markets

August 8, 2011 by Leave a Comment

The shock of the downgrade Friday of long-term United States government debt and the worsening situation in Europe added new urgency to the efforts to restore confidence and prevent an extension of the stock market slide that began last week.

After conducting an emergency conference call late Sunday, the European Central Bank said it would “actively implement” its bond-buying program to address “dysfunctional market segments,” while welcoming efforts by Spain and Italy to restructure their economies and cut spending. The bank did not identify which bonds it would buy, but its statement is likely to be interpreted as a sign that it will intervene to prevent borrowing costs for the two countries from growing unsustainable.

The move was a concession that Europe’s previous efforts to stanch its debt crisis have fallen short, and underscored the importance of propping up Spain and Italy. Those two countries are central pillars of the euro zone, unlike the countries on the periphery — Portugal, Greece and Ireland — that have already received bailouts, and their collapse would threaten the euro currency and intensify the turbulence in world markets.

Shortly afterward, finance officials from the Group of 7 nations — including Treasury Secretary Timothy F. Geithner and the Federal Reserve chairman, Ben S. Bernanke — held a conference call to discuss the United States downgrade and other challenges. In a statement issued after the nearly two-hour meeting, the group said it was ready to “take all necessary measures to support financial stability and growth.”

Earlier Sunday, the Obama adminstration announced that Mr. Geithner would be staying on as secretary, a move whose timing appeared intended to reassure nervous investors.

As officials huddled to discuss strategy, traders and investors around the world also prepared for the fallout from the downgrade of the United States’ credit rating, as markets in Asia neared their opening Monday. Although many experts said the impact in the bond market would not be as stark as first feared, the ruling by Standard Poor’s on Friday has already unnerved global stock markets.

Shares across the Middle East fell sharply Sunday, with stocks in Israel falling 7 percent, the steepest daily fall in more than a decade. United States stock futures were lower, as well.

Stock markets in the Asia-Pacific region fell Monday, with the Nikkei index in Japan down 1.3 percent at midday, and the price of gold — considered a safe haven at times of uncertainty — jumped to yet another nominal record high, to more than $1,688, underscoring the lingering anxiety. Futures on the Standard Poor’s 500 were 1.8 percent lower, and the price of oil sagged $3 a barrel.

After the G-7 conference call, Yoshihiko Noda, the Japanese finance minister, told reporters that global markets’ trust in both United States Treasuries and the dollar remained “unshaken.”

With signs of slowing growth in the United States and Europe, and government budgets and central bank balance sheets already stretched to the limit, the options for policy makers are dwindling. “None of them have a lot of things to do to alleviate the crisis,” Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said Sunday. “Fiscal stimulus is not an option right now.”

In addition, it was not clear whether Washington would be able to break out of its partisan stalemate and produce in the next few months the kind of overarching deficit reduction that credit agencies and the markets will most likely demand.

“I just keep asking for the sake of the economy: can’t we wait on the things that we’re going to yell at each other about and start on the things that we agree on,” Austan Goolsbee, chairman of the White House Council of Economic Advisers, said on NBC’s “Meet the Press.”

In an interview with CNBC on Sunday, Mr. Geithner emphasized how critical it was for lawmakers to put aside their differences. “Congress ultimately owns the credit rating of the United States,” he said. “They have the power of the purse of the Constitution. And they’re going to have a chance now to earn back the confidence of the investors around the world.”

The country, he said, “is much stronger than Washington.”

Judy Dempsey contributed reporting from Berlin, and Liz Alderman from Paris.

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