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Roach: The Fed Is Going To Blow The Exit, Get Ready For Another Massive Bubble
Henry Blodget|Dec. 12, 2009, 9:09 AM | 3,369 |comment17
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Tags: Economy

Stephen RoachThe Fed is stuck in a bind:

With 10% unemployment, it can’t raise interest rates. With zero interest rates, however, it can’t prevent another asset bubble.

The problem, Stephen Roach, says is the Fed’s impossible dual mandate: protect the value of our money AND keep the economy humming.

That combination will cause the Fed to keep rates too low for too long.

Simon Kennedy, Bloomberg: The Federal Reserve may cause another crisis by botching the withdrawal of liquidity from the U.S. economy, Morgan Stanley Asia Chairman Stephen Roach said…

“There is a great risk in the coming exit strategy,” said Roach, a former Fed economist. “They are lacking primarily a political will to execute the exit in a timely and expeditious fashion that will avoid the mistakes of the last crisis.” The traditional view of central bankers that asset bubbles are hard to spot and deflate with rates is “ludicrous,” he said.

“This is a failed flaw in the intellectual construction of modern central banking that must be addressed,” said Roach. “If we don’t fix this problem we’re doomed to repeat the failed asymmetric policies of the past and set ourselves up” for another crisis.

http://www.businessinsider.com/russian-central-bank-buys-30-tons-of-gold-from-state-repository-2009-12

Easy money could have a high price

By Michael Mackenzie in New York

Published: December 11 2009 19:01 | Last updated: December 11 2009 19:01

From the perspective of US financial markets, a Japanese-style lost decade has defined the performance of equities and bonds since the start of 2000.

From the heady days of the technology bubble, the S&P 500 is 11 per cent lower over the decade, when you include the reinvestment of dividends. In contrast, an index of long-term Treasury bonds has risen more than 116 per cent, according to Barclays Capital.
EDITOR’S CHOICE
Long View: A return to boring – Dec-11
US Treasury debt sales rely on dealer network – Dec-10
Short View: The lost decade for US stocks – Dec-08

The doubling in the value of long-term Treasuries helps explains why the famed “bond vigilantes” of prior decades have been missing in action. This has largely been a decade of disinflationary forces thanks to the internet and globalisation. There have been two very aggressive cycles of rate-cutting since 2000 by the Federal Reserve and it is little wonder that bonds have been the big beneficiary. Instead of “bond vigilantes” worried about inflation and rising deficits, the decade is described by some as one where “risk vigilantes” have ruled the roost.

When the technology bubble popped, the risk of a nasty recession and deflation meant markets moved quickly to price in big rate cuts. On that score, the Fed delivered – an extended period of easy money softened the blow of recession in 2001, sowing some of the seeds of a massive mortgage and credit bubble which culminated in the financial crisis of 2007/2008.

Today, the current policy prescription of even cheaper money has many worried about the value of the dollar and the risk of higher inflation in coming years, given the outlook of massive budget deficits and record issuance of US Treasuries. Amid fears of a new financial bubble in commodities and bonds, some forecast the Fed could start raising rates late next summer and wean the US economy off easy money. Except, by next March, the Fed will cease its planned purchase of $1,250bn in mortgages. The central bank’s hefty purchases this year has encouraged investors and banks to buy either corporate bonds and/or Treasuries.

That has kept market rates low, but as new mortgages and other debt is priced into the market next year and the US Treasury keeps pumping out government bonds at a record pace, the odds of the clearing price for debt rising are very short.

Unless the private sector is rapidly hiring workers next year, rising long term rates could easily derail a sustainable recovery.

Already the market is showing its hand and expects the risk vigilantes to test how far they can push the Fed towards expanding its bond purchases in 2010. This week the difference between two-year and 30-year Treasury yields rose to a record steep level of 3.72 percentage points. Sales of 10-year, and 30-year debt found little demand.

Whether a rapid rise beyond 4 per cent or even 4.5 per cent in 10-year paper sparks a further expansion of quantitative easing by the Fed is an open question.

More QE runs the risk of further damaging the dollar and would intensify concerns about inflation risk and the US government’s triple A rating.

But the Fed, which has been willing to err on the side of accommodative policy this decade, does have some tools at its disposal. One such tool, which could accompany any expansion of bond buying, is a reverse repurchase agreement.

The Fed has been testing reverse repos with dealers. The tool allows the Fed to sell assets such as Treasuries to dealers for cash, with an agreement to buy them back later at a slightly higher price. By draining reserves, it prevents excess money held by the banks, currently around $1,100bn, from entering the broader economy, and igniting inflation. The reverse repo could thus reassure inflation hawks and sterilise further purchases of long te

http://finance.yahoo.com/news/Homebuilder-sentiment-index-apf-287163691.html?x=0&sec=topStories&pos=main&asset=&ccode=

evo sad će božićni reli šta ga kolege najavljuju već mjesec dana! [thumbsup]

Božić Bata če ove godine malo da okasni. Zavejalo ga na putu do berze. Vidiš da su vani sneg i vetar. I ova tema če da dođe na red samo ima da još malo posedimo prvo.

Kolega Badman, pa gdje su sad utemeljitelji ove vrijedne teme??? Ja stalno čekam da se oglase i kažu kad će taj bull ili bar Lokalni Vrh………………pa nije valjda da su izgubili vjeru u vlastitu bezgriješnost??

Ne treba gubiti nadu……jel tako kolega De Luks?

Pozivam kolege konji vjeruju u ovu temu da se aktiviraju………….ne smije se dozvoliti da nad optimistima poput De Luksa, Geronima, Governera, Plavog i ostalih……. zavlada Depresija!!!!
Kome ću prodavati ove dionice koje sam skupio zadnjih dana ako i njih zahvati defetizam??????
Kome???
Nije dobro, nije…..
[pray]

Ciji Bozic? Koji Bozic? Koje godine?

Kolega Cicerone, vi se šalite, ali ja bih se na vašem mjestu pripremio i nakrcao dionicama!!!!!!!!
Pogledajte što kaže naš guverner Rohatinski ( imam osjećaj da je krcat ko brod dionicama??? )

Kaže da smo prebrodili financijsku krizu!!!!!!!!!!

http://business.hr/hr/Naslovnica/Ekonomija/Rohatinski-Prebrodili-smo-financijsku-krizu

http://www.seebiz.eu/hr/makroekonomija/hrvatska/rohatinski-dodatna-likvidnost%2c-ali-samo-u-proizvodnju,65193.html

malo će tu biti rellya-treba biti oprezan-nikad neznaš što će u našoj političkoj i društvenoj sceni -izniknuti preko noći-od afera-raskola u političkim strankama -propasti nekih kompanija-uglavnom oprez treba u velikoj mijeri biti prisutan…