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Days Before 2007 Crisis, Fed Officials Doubted Need to Act

January 18, 2013 by Leave a Comment

Worries about the health of financial markets dominated a meeting of the Fed’s policy-making committee on Aug. 7, but officials decided there was not yet sufficient evidence that the problems were affecting the growth of the broader economy.

Just three days later, the Fed’s chairman, Ben S. Bernanke, convened an early-morning conference call to inform them that the central bank had been forced to start pumping money into a financial system that was suddenly seizing up. More than five years later, the system remains heavily dependent on those pumps.

“The market is not operating in a normal way,” Mr. Bernanke said on that August call, in a moment of historic understatement. “It’s a question of market functioning, not a question of bailing anybody out. That’s really where we are right now.”

The actual conversations from the Fed’s meetings are released once a year after a five-year delay. With a wealth of detail beyond the terse statements and formal minutes issued in the hours and weeks after the meetings, the transcripts provide fresh insights into the debates, actions and judgment of policy makers.

August 2007 was the month that the Fed began its long transformation from somnolence to activism. Mr. Bernanke and his colleagues would continue to wrestle with misgivings about the extent of the Fed’s powers, and about the limits of appropriate action. At times they would hesitate or move slowly. At times they even would reverse course, most importantly in standing by as Lehman Brothers collapsed the following year. But it is now widely accepted that their efforts helped to arrest the economic chaos unleashed by the financial crisis.

Some of what followed might have been predicted by close readers of Mr. Bernanke’s work as an academic. He had long argued that the big lesson of the Great Depression was that a central bank should never allow its financial system to run short of money. Even more than its efforts to reduce borrowing costs, the Fed’s policy over the coming years would be defined by its determination to provide the funding private investors were withholding.

But in the face of an unprecedented crisis, Mr. Bernanke also would set aside his own work. He had long argued that the Fed should strive to respond to economic circumstances as transparently and predictably as possible, a break from the intuitive and unpredictable style of his predecessor, Alan Greenspan.

By the end of 2007, even as the available economic data remained fairly strong, Mr. Bernanke and his colleagues instead concluded that they could see the future, that they did not like what they saw, and that it was time to act.

“Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes,” Mr. Bernanke said in an October 2007 speech that marked the beginning of his public embrace of the need for pre-emptive action.

The Fed’s most dramatic steps did not begin until December 2007, when it created the Term Auction Facility, the first in a series of new programs intended to pump money into the financial system, and arranged to pump dollars into the European financial system in partnership with the European Central Bank.

And by January 2008, the Fed’s response to the crisis was in full swing.

The Fed began 2007 still deeply immersed in complacent disregard for problems in the housing market. Fed officials knew that people were losing their homes. They knew that subprime lenders were blinking out of business with every passing week. But they did not understand the implications for the broader economy.

“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Mr. Bernanke said in Congressional testimony in March.

The mortgage industry was imploding by the time the Fed’s policy-making committee met on Aug. 7. American Home Mortgage, a leading subprime lender, had filed for bankruptcy the previous day. One week earlier, the investment bank Bear Stearns had liquidated a pair of mortgage-focused hedge funds. But officials did not cut interest rates. The economy, they said, “seems likely to continue to expand.” The statement did not even mention the housing market.

The transcripts show that many Fed officials at the August meeting remained deeply skeptical about the likely economic impact of those problems.

“My own bet is the financial market upset is not going to change fundamentally what’s going on in the real economy,” William Poole, president of the Federal Reserve Bank of St. Louis, told the committee on Aug. 7.

That was a Tuesday. The image of calm would last exactly two more days. By Thursday morning, the European Central Bank was offering emergency loans to Continental banks and the Fed was following suit. And Mr. Poole and his board voted that day to ask for the Fed to reduce the interest rate on such loans, becoming the first official arm of the central bank to push for stronger action.

Two weeks later, at 6 p.m. on a Thursday, Fed officials dialed in to an emergency conference call where they agreed to adopt the St. Louis Fed’s proposal.

The central bank began to make it easier for strapped financial companies to borrow money, an effort that would expand dramatically over the coming years as the crisis intensified and private investors withdrew funding.

Article source: http://www.nytimes.com/2013/01/19/business/economy/fed-transcripts-open-a-window-on-2007-crisis.html?partner=rss&emc=rss

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Consumer Confidence Climbs to a 5-Year High

November 10, 2012 by Leave a Comment

An increasingly upbeat view of the economy and the jobs market drove consumer sentiment to its highest level in more than five years in early November, while a jump in wholesale inventories suggested the economy grew more than initially estimated last quarter.

It was the fourth month that Americans adopted a rosier economic outlook, even as financial markets showed increasing anxiety on fear that the spending cuts and tax increases set to take effect in the new year could push the country back into recession.

Separate data from the government on Friday showed wholesale inventories rose in September by the most in nine months, prompting economists to raise their forecasts for third-quarter growth. Inventories are a key element of the government’s measure of economic growth and can highlight underlying strength or weakness.

The index of consumer sentiment from Thomson Reuters and the University of Michigan rose to 84.9 in November from 82.6, topping economists’ expectations for a reading of 83.

It was the highest level since July 2007. The measure of consumer expectations also hit the highest level in more than five years, rising to 80.8 from 79.0. Most interviews for the survey were done before Tuesday’s presidential election.

“It shows that the U.S. economy is on a decent footing heading into the so-called fiscal cliff,” said Joe Manimbo, a market analyst at Western Union Business Solutions in Washington. “There’s a lot at stake, and there’s a lot of momentum that could be lost if lawmakers don’t get their act together.”

The survey director, Richard Curtin, said the re-election of President Obama should not have an impact on overall expectations, but if Washington does not act quickly to avoid the $600 billion in automatic spending cuts and tax increases, consumers could face a shock.

But the chances of a comprehensive legislative solution to the tax increases and spending cuts before Jan. 1 are considered slight, and members of Congress have been looking for a temporary fix to buy time.

While a negative conclusion to the discussions poses a risk to confidence and spending, “uncertainty over the ultimate outcome doesn’t appear to have troubled consumers unduly thus far,” a Barclays economist, Peter A. Newland, wrote.

The Commerce Department reported that total wholesale inventories gained 1.1 percent to $494.2 billion, beating even the highest estimate in a Reuters poll of analysts.

JPMorgan and Barclays raised their estimates for third-quarter gross domestic product growth to 3.2 percent from 2.8 percent after the release of the report.

Article source: http://www.nytimes.com/2012/11/10/business/economy/consumer-confidence-climbs-to-a-5-year-high.html?partner=rss&emc=rss

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Fundamentally: Companies Are Spending on Dividends if Not Jobs

August 31, 2011 by Leave a Comment

“People keep repeating it as if it were a mantra: ‘Companies refuse to hire; companies refuse to spend,’ ” says James W. Paulsen, chief investment strategist at Wells Capital Management.

But this criticism isn’t quite right, Mr. Paulsen says.

It’s certainly true that most businesses haven’t been willing to expand payrolls significantly in the last two years, says Richard Weiss, head of asset allocation strategies at American Century Investments. “But there’s cash being used in less visible ways,” he adds.

To be sure, this type of spending — from dividend increases to corporate acquisitions — may not be enough to pull the economy out of its rough patch. But at least “it indicates that companies are more confident in the economic recovery” than some might think, says Brian G. Belski, chief investment strategist at Oppenheimer Company.

In June, manufacturing and trade sales rose more than 12 percent from June 2010, according to the most recent Census Bureau data. Stripping out petroleum products, whose value was recently inflated by high oil prices, this is still the highest level for business sales in more than five years.

And some companies aren’t just continuing to pay dividends despite the sluggish economy — they are increasing them. (Monsanto and General Mills are just two examples.) This is something that investors didn’t see in the 2008 downturn.

So far this year, there have been 241 dividend increases or initiations among Standard Poor’s 500 companies, versus only three dividend cuts, according to Howard Silverblatt, S. P.’s senior index analyst.

Collectively, those moves have increased payments to shareholders by nearly $29 billion, he says. That’s more than double the amount of dividend increases that S. P. 500 companies delivered in the first eight months of last year and is a reversal from the $41 billion in dividend cuts made from January to August 2009.

“The bottom line is that dividends are doing extremely well,” Mr. Silverblatt says.

Investors with dividend-paying stocks have also fared relatively well. While most types of equities are down this year on recession fears, dividend-paying stocks have held up far better than average. PowerShares Dividend Achievers, an exchange-traded fund that invests in stocks that have bolstered their annual payouts for at least 10 consecutive years, has lost 3.7 percent year to date, versus a 9.5 percent loss for the S. P. 500.

Strategists say companies seem comfortable returning profits to shareholders because of stronger-than-expected earnings and all the cash on their balance sheets. S. P. 500 companies are sitting on $1.13 trillion in cash and short-term investments — two-thirds more than they had heading into the recession in 2007, according to Capital IQ.

In a slow-growth economy, this cash also gives companies the flexibility to increase revenue and profit growth through mergers and acquisitions, says Richard Peterson, a director at S. P.’s valuation and risk strategies unit. He notes that domestic companies are on track to post their first year of $1 trillion or more in deal activity since 2006.

What’s more, the third quarter is on track to be the busiest period for mergers and acquisitions since the spring of 2007, Mr. Peterson says. About halfway in, some $194 billion in M. A. deals have been announced, versus $269.8 billion in the full second quarter.

“Despite what’s transpired in the markets in the past several weeks,” he says, “there are very few signs of a pause in activity.” Just last week, Google announced a planned $12.5 billion acquisition of the mobile phone maker Motorola Mobility.

Mr. Peterson says the trend is likely to continue, not only because of companies’ cash on hand, but also because investment-grade corporations can still borrow cheaply in the bond market, thanks to strong demand for high-quality bonds.

Duncan W. Richardson, chief equity investment officer at Eaton Vance , says that “this is very different than 2008,” as companies are in much better shape today.

As for job creation, Mr. Richardson says it always tends to come in the later stages of an economic expansion. But he says that “if investors wait on the sidelines for the job situation to pick up dramatically, they’ll probably be jumping in too late” to make any money.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

Article source: http://feeds.nytimes.com/click.phdo?i=408b9067b941582d127d4c03cabbcb3a

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Media Decoder: Frank Bruni Named Times Op-Ed Columnist

May 24, 2011 by Leave a Comment

Frank Bruni, whose writing career at The New York Times has spanned two presidential campaigns, part of a papacy and more than five years as chief restaurant critic, has been named an Op-Ed columnist.

Andrew Rosenthal, editor of the opinion pages, said in an e-mail to the staff on Monday that Mr. Bruni would write a new column in The Times’s redesigned Sunday Op-Ed pages.

“This column, which will be a new anchor feature of the section, will be a sharp, opinionated look at a big event of the last week, from a different or unexpected angle, or a small event that was really important but everyone seems to have missed, or something entirely different,” Mr. Rosenthal said. “It will fast become a destination for our readers with Frank at the keyboard.”

He said Mr. Bruni would also write a column one other day of the week, most likely Thursday.

Mr. Bruni, 46, is the first openly gay Op-Ed columnist in The Times’s 160-year history.

He said he would take on a wide variety of subjects.

“I’m excited and really grateful. At The Times and beforehand, I’ve been lucky to be able to write about many different topics, and I’m eager to take on a job that will allow me to range across most or all of them in a reflective, analytical and sometimes — I hope — spirited way.”

His new job— he was a writer at large for The New York Times Magazine — is a piece of the broader reshuffling of the Sunday Week in Review. The section, which will be renamed and run by the editorial department rather than the newsroom, will focus on opinion pieces.

Mr. Bruni joined The Times from The Detroit Free Press in 1995. While in Detroit, he was a finalist for the Pulitzer Prize for feature writing for his portrait of a convicted child molester. He is the author of two New York Times best sellers, “Ambling into History,” an account of George W. Bush’s first presidential campaign, and “Born Round,” a memoir about his struggles with weight. He spent three and a half years in The Times’s Washington bureau, covering Congress and the White House and writing for the magazine. He was named Rome bureau chief in 2002, a job he held until 2004, when he was named chief restaurant critic.

Mr. Rosenthal’s full memo is below.

To all:

I am very excited to announced today that Frank Bruni has agreed to join the ranks of Times Op-Ed columnists. Frank will be, first off, writing the Page 2 column in the remake of the Week in Review.

This column, which will be a new anchor feature of the section, will be a sharp, opinionated look at a big event of the last week, from a different or unexpected angle, or a small event that was really important but everyone seems to have missed, or something entirely different. It will fast become a destination for our readers with Frank at the keyboard.

Frank also will be writing a regular Op-Ed column in our print pages and online, most likely on Thursdays. He is a net addition to our lineup, not a replacement for anyone or anything.

Frank needs no introduction. His work as a political writer, a foreign correspondent, food critic and magazine writer for the Times have been popular with our readers for almost 16 years.

His first column will appear in the first edition of the new section, unless, of course, he decides to write sooner.

Andy Rosenthal

Article source: http://feeds.nytimes.com/click.phdo?i=2b2531c1da48e964a4de49255b7da8a9

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