At this point, the federal reserve may raise short term interest rates three times in 2018, and the lunch crowd of economists, policy offices, and bus


Only Fed Agencies Can Save Us!!

Posted by Sam - 2019-09-01 07:55:26


At this point, the Federal Reserve may raise short-term interest rates three times in 2018, and the lunch crowd of economists, policy offices, and business journalists were looking for any sign that he had done it again.

The Fed presidents rarely make explicit policy changes, but they were clear from Mr. Powell's comments that he was pushing the brakes.

"Interest rates are still low by historical standards, "Powell said," and they are still under a wide range of expectations from a level that would be neutral for the economy - meaning not to speed up or slow down the growth.His use of the word "neutral" at that moment was the key. Speaking of which, the Dow Jones Industrial Average went up 618 points, the biggest one-day gain in months.

But although the feeling of euphoria spread throughout the room, as well as through debt and equity markets, have been overcome with a sense of fear. A decade of historically low interest rates has begun to confuse our economy. We learn of the terror during the 2008 financial crisis, a period of continued low interest rates forces investors to search for higher returns, inflated asset prices and the risk of owning all forms of credit and debt.

Instead of continuing the smooth ship slowly raising interest rates, Mr. Powell seems to be caving to political pressure from the president to Wall Street bankers and traders — to keep interest rates low. On 31 July, short-term interest rates were lowered for the first time in more than a decade.

That was a mistake. Mr. Powell and his colleagues on the Fed should address Mr. Trump and do the right thing for the economy. If they don't, the only question left is when does it go off? When that happens-and this day will soon be-we will look at another case of financial panic.

We are now more than a decade in the age of very low interest rates. The Fed's decision to maintain the capital cheap and plentiful after the financial crisis logically. After the recession stifled capital markets, companies and consumers were allowed to access the money they needed to accelerate the economy.

But years of low interest rates also caused the debt to investors who didn't returns low return on Treasury bonds to start chasing higher returns. As a result, they take a lot of risks, for very low returns, for a very long time.

And don't hide all this danger from the budgets of the Wall Street banks and Main, as was the case during the 2008 financial crisis. But it doesn't just disappear into thin air. We breathe, but the oxygen around us like we don't see hedge funds and private equity firms and pension funds to invest in the risky debt of the university, donations, corporate bonds and other securities in the form of trillions of dollars.

What do these securities look like? Above all, there is a proliferation of dodgy bank loan without contracts designed to protect the lender in case of default. Like Wall Street, these loans are securitized and sold to investors around the world. (Japanese banks " so-called Secured Loan Obligations are among the largest investors in these securities.") the current version of the mortage-based securities phenomenon that help sink the economy in 2008.

There is also an impressive amount of risk spread by some of the biggest names in American businesses. BBB-rated bonds to a notch above "junk" bonds issued by large companies such as AT&T, Verizon, General Electric, General Motors and Ford, accounted for more than half of the investment grade corporate bond market. This raises the specter of" the abyss troika " the ugly, the losses to be incurred bond holders when the down economy and some of those companies unable to repay their debts.

Anne Walsh of guggenheim partners, at an investor conference in April, said that the risk in the bbb market reminded her of 2008. "Overworked American companies," he said. He said, "this is where we feel the danger is, and right now you're not being paid to take that risk.”

And disturbing this religion is not news-not even the Fed or the Treasury. "Commercial debt clearly reached a level which should give companies and investors a reason to pause and reflect," said Powell in a statement on May 20. He said: "if financial and economic conditions deteriorate heavily indebted companies may face great pressure.Mr. Powell said: "the similarity to the real estate boom that led to the global financial crisis is not completely convincing. He said: "but without capital, the inevitable layoffs and the recession, which may lead to a sudden end a decade of prosperity.

Ten days after Powell made those comments, Treasury Secretary Stephen monoshin held an executive session of the Financial Stability Control Board, which focused on "corporate lending and subsidized lending."”

No one knows exactly how dangerous it is to default on trillions of debts. Since 2008, we know that the amount of US dollar corporate bonds rose from $ 5 trillion to over 9 trillion dollars. Companies, universities, municipalities and governments the world has never been more indebtedness to a record level of $ 237 trillion at the end of 2017, 40 percent of the debt of a decade ago.

In large part, the lending boom was driven by central bank policy to keep interest rates at historically low levels, which is a bonus asset lending more. Interest payments on corporate debt are deductible in most jurisdictions.

We live in a world of debt.

But this is the risk that we can see in the undisclosed liabilities of the companies of the private sector and "shadow banking system" that emerged during the past decade, there is a risk that the Federal Reserve is hiding in the non-banking financial institutions which carry the risk that Wall Street insisted after the financial crisis in 2008.Blocked.

What if interest rates go up a bit, or if the economy goes into recession, and some of these companies that over-transfer power can no longer pay interest? That's not good.

We got a taste last December, when interest rates rise a little, and suddenly there was no joint debt high yield. No high-return debt deal was made that month. When companies with poorer loans fail to secure financing, they emit a response in credit markets, but they also mean that employment slows down, factories are not built and innovation stops.

These fears are easily ignored and then frozen in December, the Fed moved back to keep interest rates low. The party is back. many other economic indicators seem stable. D. P. Growth, unemployment and wages-Dow, while volatile, it remains only 1000 points less than the high reached in July.

But looking at the stock market as a measure of our economic health, it's increasingly less important. In the late 1990s, the number of publicly traded companies peaked at about 7300; today is about 3,600. With more companies in the hands of the private sector, and growing private financial market, we know a lot about the hidden risks these companies pose a threat to the economy.

In order to return to the capital markets quiet, we have to blow up the debt bubble, the sooner the better.

Mr. Powell could return to a position of raising short-term interest rates. He's trying too hard to fool around. the Fed has openly advocated intervention by the president, who has continued to pressure Mr. Powell into falling interest rates.
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