Foreigners mixed on US debt as Fed & Treasury worsen it
Even if any bailout works, what does ‘works’ mean?
| There anything better than throwing good money after bad? We trim, blend, and append three 2009 articles from: (1) Reuters, Mar 16, on demand for debt by Lucia Mutikani; (2) BBC, Mar 19, on the dollar slide; and (3) Huffington Post, Mar 21, on Treasury’s plan by Hale "Bonddad" Stewart, former bond broker, tax lawyer, and financial blogger. |
by Lucia Mutikani, by BBC, and by Hale Stewart
- Most foreigners sell, but major ones buy US debt
Demand for long-maturity securities like bonds, notes, and equities shifted from an inflow in December to a record outflow in January of $148.9 billion. Foreigners were net sellers of US securities in January. However China and Japan -- the largest holders of US securities -- increased their Treasury holdings.
Government bond prices fell, due also to recent gains in equities.
JJS: If investors won’t buy US debt, guess who will?
- Dollar slides after US Fed plan
The US Federal Reserve announced a plan to buy $1.2 trillion of debt. The Fed's decision means it is effectively creating new money. That worries investors about the over-supply of dollars.
Hence the dollar fell against all major currencies -- by 3.8% against the euro and by 3.6% against the pound. The dollar traded at $1.449 against the pound and $1.3633 versus the Euro.
The US currency also declined against the yen, the Norwegian krone, the Australian dollar, and even the Brazilian real.
The decline in the dollar ended its rally so far this year, which has seen the US dollar rise by more than 2% against most major currencies.
The yields payable to holders of government bonds fell sharply, too. The yield on the benchmark 10-year Treasury note fell to 2.5% from 3.01% -- its biggest one-day slide since the Wall Street crash of 1987.
BBC economics editor Stephanie Flanders said, "Why have this new (Fed) spending spree at all?"
The Bank of England is also buying government debt to expand money supply -- known as quantitative easing -- while Japan said it too would step up its purchases of government debt.
- The Treasury's Bail-Out Plan Explained
From the WSJ: The Treasury's bank strategy is twofold. One, get enough capital into the 19 biggest banks so everyone believes each can withstand a really bad recession. Two, get toxic assets off their books so banks will pick up the pace of new lending, and savvy big-money investors will put money into the banks and help achieve the first objective.
The unfortunately named "stress test" -- which conjured up images of Citigroup collapsing on a treadmill -- was meant to be a confidence builder, though announcing it seems instead to have magnified doubts and uncertainty about the banks. The notion is to figure out by the end of April how much capital cushion each of the 19 big banks needs to survive a bad recession (that's the "stress test") and then give those that need more capital six months, until Oct. 31. The Federal Deposit Insurance Corp. will guarantee bank debt to encourage the rich to lend to them. None of the 19 banks will flunk the test; the only question is which will need taxpayer capital in the fall.
From Bonddad: Let's think this through.
Who would invest in these banks? While their stock prices are incredibly low, they are not worth that much. I think the quietly implied option of this plan is mergers between weak and strong banks.
The last piece of the Geithner plan: buying toxic loans and securities, mostly linked to real estate. The Paulson Treasury spent months trying to fashion auctions in which the government would buy these assets. It never bought any. What's more, the Treasury hasn't enough money to buy enough of the assets to make a difference.
So the plan is to form public/private joint ventures between the Fed/Treasury/FDIC and money managers to buy the kaput loans. Taxpayers and the investors would share the profits, if any.
Yet there is no guarantee anyone will sell or buy. I think this plan has an OK chance of working, but that is hardly a ringing endorsement. The earlier TARP plan -- with its increasing number of politically motivated bailouts -- indicates fears the process will be politicized are well founded.
I think the best idea is to make one big bank out of the remaining taxpayer funds to buy bargains from desperate banks. The creation of one entity should be easier to monitor.
The recent $10.7 billion loss from the sale of IndyMac indicates nationalization is hardly an option free from trouble. While mine is not the best plan, we're left with a question of, "what else can be done?"
JJS: With a treasury, Fed, FDIC, Fannie Mae, Freddie Mac, etc, why a national bank? What we need are local banks. So stop bailing out the biggies. While some will fail, our deposits are already guaranteed. We could even lose the FDIC and let people open accounts in public treasuries for total safety but no interest. To get credit flowing, let community currency and consensual currency become competing legal tender. Also, pay people a dividend from the commonwealth, from society’s surplus, from the worth of Earth -- a la Alaska’s oil dividend -- so people don’t need to borrow so much in the first place.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: This bear market is one for the history books
Much of high finance lately has not been legal
Bankers' bonuses equal one-tenth the bailout |
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