Archive for September 22nd, 2008

Impact of economic news on fin markets

September 22, 2008

I came across this very useful light read on how various economic news -GDP, inflation, unemployment etc. impact various kinds of financial markets – equity. bond, currency etc.

Exploring how the release of new economic data affects asset prices in the stock, bond, and foreign exchange markets, the authors find that only a few announcements—the nonfarm payroll numbers, the GDP advance release, and a private sector manufacturing report—generate price responses that are economically significant and measurably persistent. Bond yields show the strongest response and stock prices the weakest. The authors’ analysis of the direction of these effects suggests that news of stronger-than-expected growth and inflation generally prompts a rise in bond yields and the exchange value of the dollar.

It also is a nice primer on the way certain financial markets should react to the economic news.

The grandmother of all bail-outs

September 22, 2008

In its 19 Sep daily, Eurointelligence had called the anticipated Treasury support mother of all bailouts.

Looking at the amount involved (around USD 700 billion) it has added Grand to its daily on 22 sep, 2008 – Grandmother of all bailouts.  This 22 Sep 2008 daily has a lot of expert views on the step.

The official statement is here. The purpose:

This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system. ….As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth

What will it include:

Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets.  

The statement is not very clear and it is best kept to the state of the markets when this is enacted. Looking at the current developments, every asset looks distressed and will have to be covered under the program.

The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.Cash received from liquidating the assets, including any additional returns, will be returned to Treasury’s general fund for the benefit of American taxpayers.

This is really dubious stuff. How will they be broght through market mechanisms when markets themselves have collapsed. And how will the prices be arrived? Ideally, a distressed asset is sold at a discount. But here, if the prices are kept low, the banks remain undercapitalised and the problem continues. And it cant be sold at a high price as Congress will not pass it as it leads to higher deficit.

Funding for the program will be provided directly by Treasury from its general fund.  Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly.  As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement. ..Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program. 

One good thing about all these mishaps is learning so many concepts. For instance, Treasury’s General Fund is the main account of the US Government. I just checked the recent statement (19 sep 2008) and it says the public debt limit at present is USD 10.6 trillion (actual debt stands at USD 9.6 trillion). So, if this is new USD 700 billion fund is passed the limit will increase to USD 11.3 trillion. Likewise, MMMF funding was done by The Exchange Stabilization Fund. So, Treasury has to now dip into all the funds it is running.

Let us now see whether Congress approves this and modifications if any.

Assorted Links

September 22, 2008

1. The hectic developments continue over every weekend. Treasury has offered a plan to Congress to buy USD 700 bn of distressed assets from the various financial firms.  WSJ Blog points to the plan and economists’ reactions.

2. G-Sachs and M-Stanley have been made bank holding companies and will now be regulated by Fed. WSJ Blog discusses

3. Mankiw points to his fanmail. He points to some views on Treasury plan

4. Krugman ponders on the Treasury plan. Econbrowser as usual is very good with the analysis

5.JRV points to places where only long buy is permitted.

6. TTR on resolution trust corp

7. IDB on how growth has helped reduce caste based discrimination.

8. ACB points to how fin sector crisis in US will impact India

9. ACB points to some fine reading on fin sector. I have added a few more on the comments section.

10. Rodrik asks Where did we go wrong?

11. Econbrowser points to a paper on subprime crisis


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