April 1, 2023

At a Fed Conference, Views Differ Sharply on Stimulus’s Effect

Unconventional monetary policy “has been a significant success altogether,” Christine Lagarde, managing director of the International Monetary Fund, said in a lunchtime address. She said the efforts continued to yield benefits and should not be unwound too quickly.

Even for developing countries, which have sometimes criticized the efforts, the effects are “still positive,” she said. “Marginally, but still positive.”

But the conference, convened by the Federal Reserve Bank of Kansas City, underscored again the striking divide between academics, where skepticism is widespread about the benefits of the Fed’s asset purchases, and policy makers, where confidence is equally widespread.

The Fed has accumulated more than $3 trillion in Treasury securities and mortgage-backed securities, and since last December it has been expanding those holdings by $85 billion a month in an effort to drive down unemployment and promote growth.

The day began with a series of academic presentations criticizing the power of that approach. The most supportive said that the Fed’s purchases of Treasuries had little value, but that its purchases of mortgage-backed securities “likely have had beneficial macroeconomic effects.”

That study, by Arvind Krishnamurthy, an economist at Northwestern University, and Annette Vissing-Jorgensen, an economist at the University of California, Berkeley, still found little economic benefit in holding on to the mortgage bonds and Treasuries, a basic element of the Fed’s stimulus campaign. And it argued the Fed was undermining its own efforts by failing to articulate a clear plan for the purchases.

Policy makers tend to view these critiques as triumphs of theory over reality. They point to events in June as a kind of perverse evidence, noting that a wide range of interest rates jumped after the Fed’s chairman, Ben S. Bernanke, announced that the Fed intended to reduce its monthly asset purchases by the end of the year. The implication, they said, is that the purchases had been suppressing those rates.

“The paper doesn’t comport very well with the experience of the last couple of months,” said Donald L. Kohn, a fellow at the Brookings Institution and a former Fed vice chairman. “We’ve had a very broad set of asset price changes.”

Academic economists, in turn, say policy makers are claiming credit without presenting evidence.

While it seems clear, for example, that the Fed’s purchases of mortgage bonds have reduced interest rates on mortgage loans, some economists see evidence that current economic conditions have limited the benefits of lower mortgage rates. Banks have retained some of the benefit rather than passing it on to customers. Tighter qualification standards mean that many would-be borrowers cannot benefit from the lower rates. And those who are borrowing may not be inclined to spend more.

“Showing Fed affects interest rates doesn’t mean it automatically affects real activity,” one of those skeptics, Amir Sufi, an economist at the University of Chicago, said on Friday in an exchange of messages on Twitter. “Quantitative significance must be established.”

These debates, of course, are not merely academic. Fed officials are divided over when to begin cutting their monthly asset purchases — and when they do so, they must decide whether to buy fewer Treasuries, fewer mortgage bonds, or some combination.

Mr. Bernanke chose not to attend the conference as he prepares to step down in January, and no other Fed official spoke in his place.

Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said on Friday that he would support a cut when the Fed’s policy-making committee meets in September as long as there was no particularly bad news between now and then.

“I would be supportive in September as long as the data that comes in between now and then basically confirm the path we’re on,” he told CNBC.

Mr. Lockhart, however, does not hold a vote on the Federal Open Market Committee this year. One official who does, James Bullard, the Federal Reserve Bank of St. Louis president, told CNBC in a separate interview that he was undecided. “I don’t think we have to be in any hurry in this situation,” he said. “Inflation is running low, you’ve got mixed data on the economy, so I’d be cautious. I wouldn’t want to prejudge the meeting.”

Policy makers from developing countries urged the Fed to clarify its plans so they can prepare for potential disruptions. Low interest rates in the developed world have sent vast quantities of money sloshing into those countries. Ms. Lagarde said that net flows to those countries had risen by $1.1 trillion since 2008, about $470 billion above expectations based on long-term trends.

As rates rise, history suggests that some of the money may come sloshing back, with hugely disruptive consequences.

Investors already are selling foreign currencies and buying dollars in the expectation that the Fed will begin to decelerate its stimulus campaign, allowing the dollar to strengthen. The Indian rupee lost 4 percent of its exchange value in about a week, prompting the Reserve Bank of India to impose restrictions last week on the outflow of money.

Agustín Carstens, governor of the Bank of Mexico, said, “Advanced country central banks should mind the spillover effects of their actions.” He added, “Otherwise the crisis will be reactivated with new actors.”

Article source: http://www.nytimes.com/2013/08/24/business/economy/at-a-fed-conference-views-differ-sharply-on-stimuluss-effect.html?partner=rss&emc=rss

Investors Search for Financial Safe Havens

The bank, DNB, like its home country, has experienced a rush of money from American investors looking for safety while they wait out the debt crisis in Europe and slowing economic growth in America and China. Just about every day, the front desk receptionist at DNB takes cold calls from investors wanting to buy Norway’s bonds or some other asset tied to Scandinavia’s healthy economy.

“A few years ago, these people wouldn’t have known where Norway was on the world map,” said Clifford Queen, a DNB bond trader in New York.

Government bonds issued by the United States, Germany and Japan are still the primary havens for scared investors around the globe. The demand has pushed down the interest rate on the 10-year United States Treasury bond to record lows around 1.5 percent. But investors have begun to worry about holding too many Treasury bonds as other safe alternatives dwindle as a result of the economic troubles sweeping the globe. This has led many investors to places that used to be on the fringes of the investing world like Norway, Sweden, Canada and Australia.

These countries offer little of the risk, or the outsize returns, that were so alluring to investors before the financial crisis. But now that fear is the main motivator — strategists call it seeking a return of equity instead of a return on equity — healthy government finances are a powerful magnet for money.

“It is getting harder to find safe assets,” said David Nagle, who helps manage money for insurance companies at Babson Capital. “We didn’t need to dig as deep a few years ago to uncover these things. But now you are scraping around for everything you can find.”

The search for investments that carry little to no risk of default has become a dominant theme driving flows of money around the world. It kicked in a few years ago when top-rated United States mortgage bonds blew up in the financial crisis, and it has intensified recently as the economic future of European countries that used to be viewed as safe investments has been thrown into question.

Foreign investors have fled from the bonds of countries like Italy and Spain, pushing up the cost of borrowing for those governments. Even those European countries with the strongest economies, like Germany, have become less attractive because of their exposure to the possible breakup of the euro currency.

Investors have instead sought out government bonds from Sweden, Finland and Norway, where rates have hit record lows this summer. Last week, while rates on Spain’s 10-year debt ranged from 6.5 to 7.5 percent, Norway’s hovered around 1.8 percent. In Norway, 70 percent of the outstanding government bonds are in foreign hands, up from 50 percent three years ago, according to Erica Blomgren, the chief strategist in Norway for the Swedish bank SEB.

The rush of money can pose serious problems. In Canada, the cheap money available to the nation’s banks has made it easier for people to get mortgages, pushing up home prices and raising concerns about a housing bubble. The Canadian government has responded by repeatedly tightening rules on mortgage lending, most recently in June, when the maximum term of mortgages was shortened to 25 years from 30.

Household debt in Norway has also risen recently, driving home prices to levels that some analysts have said are unsustainable. Unlike central banks elsewhere in Europe, which are pushing interest rates down to help encourage economic growth, Norway’s central bank cautioned in a June report that it will most likely begin increasing interest rates next year.

The influx of foreign money has also pushed up the value of currencies like the Norwegian krone, making exports less attractive and angering manufacturing companies. The central bank in Switzerland, another popular safe haven, has been aggressive in holding down the value of the franc by using its reserves to buy other currencies.

Clamor for safe assets is coming from investors of all stripes. Individuals and businesses in America have been depositing more of their cash in federally insured bank accounts. The banks, in turn, have had to find safe places to invest what they do not lend, and they have been competing against other money managers, like mutual funds and insurance companies, looking to do the same thing.

Money market mutual funds, which invest in safe, short-term debt, have an inside view on this search for safe assets because of regulations that restrict them to the highest-quality assets.

David Glocke, a portfolio manager for Vanguard’s money market funds, said that since the financial crisis he has had to cross a growing number of possible investments off his list because of the European crisis. While he used to provide very short term loans to banks across Europe, he has stopped lending to companies even in countries with the euro zone’s strongest economies, like Germany and the Netherlands.

“It’s a challenge to manage the portfolio in an environment where there are fewer names to invest in,” Mr. Glocke said.

Mr. Glocke has responded by putting over half of the money market funds’ money into short-term Treasury bonds, up from 28 percent in 2009. He has also added Australian and Canadian banks to the list of places where he will invest.

Money market fund managers around the world have found relative certainty in the government bonds of Germany, Japan and Britain, which all have interest rates on 10-year bonds that are near or below the rock-bottom United States yields. But many institutional investors have voiced concerns that the interest rates on these bonds have gone too low, particularly given the budgetary problems in the United States and Britain and Germany’s exposure to the euro.

The interest this has generated in smaller countries is evident from the short-term loans that have gone to companies like the Bank of Nova Scotia. The bank is Canada’s third-largest, but it recently overtook both JPMorgan Chase and Citibank to become the ninth-largest recipient of loans from money market funds, according to May figures from Crane Data. Canadian banks have been so attractive in part because of their good performance during the financial crisis.

Article source: http://www.nytimes.com/2012/08/07/business/investors-face-tough-search-for-financial-safe-havens.html?partner=rss&emc=rss

U.S. May Back Mortgage Refinancing for Millions

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.

But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.  

Exactly how a refinancing plan might work is still under discussion. It is unclear, for example, whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it. Federal officials have consistently overestimated the number of households that would be helped by their various housing assistance programs.

A working group of housing experts across several federal agencies could recommend one or both proposals, or come up with new ones. Or it might decide to do nothing.

Investors may suspect a plan is in the works. Fannie and Freddie mortgage bonds had been trading well above their face value because so few people were refinancing, keeping returns on the bonds high. But those bond prices dropped sharply this week.

Administration discussions about housing proposals have taken on added urgency this summer because the housing market is continuing to deteriorate. On Wednesday, the government said that prices of homes with government-backed mortgages fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009. More than one in five homeowners with mortgages owe more than their homes are worth. Some analysts are now predicting waves of foreclosures and a continuing slide in home prices.

There is not much time to help the market before the 2012 election, and given Congressional resistance to other types of stimulus, housing may be the only economic fix in reach. Federal programs to assist homeowners have been regarded as ineffective so far, and they are complex.

“We are looking at trying to encourage more participation in all of the programs, including those that help with refinancing,” said Phyllis Caldwell, who oversees housing policy at the Treasury Department.

Some economists say that with housing prices and interest rates at affordable levels, only fear is keeping consumers out of the market. Frank E. Nothaft, the chief economist at Freddie Mac, said the federal action could instill confidence.

“It almost seems to me you want to have some type of announcement or policy, program or something from the federal government that provides that clear signal that we are here supporting the housing market and this is indeed a good time to really consider buying,” Mr. Nothaft said.

The refinancing idea has been around since at least 2008, but proponents say the recent drop in interest rates to below 4 percent may breathe new life into the plan.

“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,”  said Christopher J. Mayer, an economist at the Columbia Business School. “So I think this is low-hanging fruit.” Mr. Mayer and a colleague, Glenn Hubbard,  who was chairman of the Council of Economic Advisers under President George W. Bush, proposed an early version of the plan.

The idea is appealing because it would not necessarily require Congressional action. It also would not tap any of the $45.6 billion in Troubled Asset Relief Funds that was set aside to help struggling homeowners. Only $22.9 billion of that pool has been spent or pledged so far, and fewer than 1.7 million loans have been modified under federal programs. But Andrea Risotto, a Treasury spokeswoman, said whatever was left would be used to reduce the federal deficit.

Article source: http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html?partner=rss&emc=rss

A.I.G. to Sue Bank of America Over Mortgage Bonds

The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.

It claims that Bank of America and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the mortgages placed in securities and sold to investors, according to three people with knowledge of the complaint.

A.I.G., still largely taxpayer-owned as a result of its 2008 government bailout, is among a growing group of investors pursuing private lawsuits because they believe banks misled them into buying risky securities during the housing boom. At least 90 suits related to mortgage bonds have been filed, demanding at least $197 billion, according to McCarthy Lawyer Links, a legal consulting firm. A.I.G. is preparing similar suits against other large financial institutions including Goldman Sachs, JPMorgan Chase and Deutsche Bank, said the people with knowledge of the complaint, as part of a litigation strategy aimed at recovering some of the billions in losses the insurer sustained during the financial crisis.

The private actions stand in stark contrast to the few credit crisis cases brought by the Justice Department, which is wrapping up many of its inquiries into big banks without filing any charges. The lack of prosecutions — the Justice Department has brought three cases against employees at large financial companies and none against executives at large banks — has left private litigants, mainly investors and consumers, standing more or less alone in trying to hold financial parties accountable.

“When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”

Though many in the public have called for more accountability for parties involved in the financial crisis, criminal charges on complex financial matters can be difficult to prosecute.

A spokeswoman for the Justice Department said the government was vigorously pursuing cases where appropriate, and she pointed to a recent jail sentence for the chairman of the mortgage company Taylor, Bean Whitaker. The spokeswoman, Alisa Finelli, declined to say how many people the government had assigned to that task.

“Prosecutors and agents determine on a case by case basis the importance of relevant evidence developed in private litigation and how such evidence should be pursued,” Ms. Finelli said. “Civil litigation involves a lower standard of proof than is required for a criminal prosecution, where prosecutors must have sufficient evidence to prove beyond a reasonable doubt that a crime has been committed.”

On Friday, the department announced it had concluded its investigation into Washington Mutual, the Seattle-based bank that nearly collapsed because of its risky mortgages, without finding evidence of criminal wrongdoing. The Justice Department has also concluded its investigation into Countrywide’s conduct leading into the financial crisis, according to a person with knowledge of that case.

Even more investigations may soon be shut down because the Justice Department is heavily involved in negotiations between big banks and state attorneys general that may give the banks broad immunity against future claims. The state attorneys general are weighing these requests in the mortgage servicing and foreclosure cases, even though the government has not pursued the most basic investigation of these practices.

As it has in similar cases, Bank of America is likely to dispute A.I.G.’s claims, in the suit, which is expected to be filed on Monday in New York State Supreme Court. When asked generally about the quality of mortgage bonds issued by companies that are now part of the bank, Lawrence Di Rita, a spokesman for Bank of America, said the disclosures were robust enough for sophisticated investors. He said many of the loans lost value because housing fell.

“Now you have a lot of investors and lawyers who are seeking to recoup the losses from an economic downturn,” Mr. Di Rita said. The bank has not yet seen A.I.G.’s suit.

Article source: http://feeds.nytimes.com/click.phdo?i=3c0797a94cbccbbd732fe0aa23354813