Posts Tagged ‘Central Bank’
~i am posting this article as i lost [*hands down* this August] a debate on whether one should keep some cash on hand…if they missed out on the metals…i do believe i was in fact called “stupid”… lolll~jude ;)
A little coordination can go a long way.
After the Federal Reserve and five other central banks on Wednesday announced a joint effort to support the global financial system, stock markets around the world zoomed. The Dow Jones Industrial Average jumped 4.2%, its largest one-day spike since March 2009.
History could offer a clue. A Wall Street Journal analysis of market data provided by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School suggests the central-bank intervention might indeed be a turning point for the markets: U.S. and emerging-market stocks may be poised to outperform, while European stocks could be headed for more trouble. There is enough uncertainty to warrant a healthy dollop of Treasurys and cash in investors’ portfolios as well, for safety.
“There are possible positive catalysts that could paint a constructive picture for equities in 2012,” says Lisa Shalett, chief investment officer at Bank of America Merrill Lynch Global Wealth Management. “But at the same time we’re telling people they need to keep some money in cash until there’s better visibility.”
On Wednesday, the Fed joined with the European Central Bank and the central banks of England, Japan, Canada and Switzerland to make it easier and cheaper for banks to swap foreign currencies for dollars. (Separately, Chinese authorities reduced banks’ reserve requirements in a bid to stimulate lending and boost economic growth.)
As government interventions go, the latest foray isn’t nearly as big as the Fed’s recent bond-buying programs or the Treasury Department’s Troubled Asset Relief Program of 2008. But it did signal that central banks are ready to head off the kind of liquidity crisis that could derail the global financial system.
Coordinated moves like the one on Wednesday are rare but not unprecedented. In 2008, the Fed entered into similar agreements with central banks to arrest a frenzied flight out of just about everything and into dollars. Central banks also moved following the terrorist attacks of Sept. 11, 2001, when damage to New York threatened to wreak havoc on the financial system.
Even as far back as 1931, the global banking community, through the Bank for International Settlements, tried to quell a crisis following the collapse of Vienna’s Credit-Anstalt, then that nation’s largest bank, by providing loans to Austria. The attempt was a case of too little, too late; the crisis soon spread to Germany and elsewhere, worsening the Great Depression.
History suggests the latest intervention could be good for certain asset classes. Over the past 80 years, central banks have joined forces at least seven times during financial crises, albeit in different ways and amid different circumstances from today’s.
On average, U.S. stocks had a real return of 9.1% in the three months following a coordinated intervention, 10.6% after a year and 24.5% after two years, according to the Journal’s analysis of the data provided by Profs. Dimson, Marsh and Staunton. The average annual return for stocks from 1900 to 2010 was 6.3%.
Treasurys, too, produced strong returns. They averaged 7%, 8.5% and 15.2% during the three months, one year and two years following an intervention, respectively, compared with an average annual return of 1.8% from 1900 to 2010.
Some major caveats are in order. The “swap agreements” announced on Wednesday and in 2007-08 don’t compare easily with interventions of the past. Central banks frequently have worked together over the years to prop up currencies—but moves designed to provide liquidity to the global financial system have been less common, notes Michael Bordo, an economics professor at Rutgers University.
“What the Fed did in 2008 was something new,” he says.
The closest parallels may be the international cooperation after the 1998 Russian default, the terrorist strikes of 2001 and the 2008 crisis, says Carmen Reinhart, senior fellow at the Peterson Institute for International Economics. In all those cases, the efforts to provide liquidity prevented a collapse of the financial system in the short run but didn’t solve underlying economic problems.
What’s more, while the average returns have been strong, there has been plenty of variation.
While U.S. stocks were higher three months, one year and two years after the 2008 intervention, investors would have lost 15% in the year following the 2001 intervention and 3.2% after two years.
Still, there are lessons to be gleaned from the past.
First, the closer a market is to the epicenter of a crisis, the less likely it is to post positive returns. European stocks, for example, outpaced U.S. stocks by more than 20 percentage points during the year following the October 2008 intervention.
Likewise, European stocks fell just 6.2% in the year following the 2001 terrorist attacks, compared with a 15% decline for U.S. stocks.
By contrast, U.S. stocks outpaced European shares by nearly 19 percentage points following the attempts to shore up the global financial system after Russia’s default in 1998.
Another important lesson: Interventions don’t always follow a neat pattern for investors. Following the collapse of Credit-Anstalt in 1931, for example, U.S. stock investors lost 51.5% during the next year.
With that in mind, here’s how investors should approach their stock, bond and cash holdings.
Stocks
U.S. investors often are encouraged to invest more money abroad. They might want to tread carefully now.
The Standard & Poor’s 500-stock index has lost just 1% this year, compared with a 13.5% drop for Europe’s Stoxx 600 index. Meanwhile, the companies in the S&P 500 with the least international exposure have outperformed those with the most exposure by 7.1 percentage points, according to BofA Merrill Lynch.
The U.S. might keep outperforming, says Sam Katzman, chief investment officer at Constellation Wealth Advisors in New York. “If anyone can shelter themselves from what’s going on internationally, it’s the U.S.,” he says. “Money that might have been flowing to Europe might be flowing here.”
The U.S. economy has held up comparatively well thus far. On Friday, the U.S. Labor Department reported the unemployment rate for November fell by 0.4 percentage point from October to 8.6%, the lowest in nearly three years.
Yet with the risks still high, investors should focus their stock purchases on areas that provide relative safety, some strategists say. That means dividend-paying stocks, which have beaten non-dividend-paying stocks by 7.8 percentage points this year.
Growth companies whose earnings are rising steadily might be worth a look as well. “We see value in technology stocks,” says Emily Sanders, chairman and CEO of Sanders Financial Management in Norcross, Ga. “But we’re not jumping in with both feet for clients.”
European stocks might be tempting given this year’s slump. But the economic outlook remains cloudy. The euro zone’s purchasing-managers index, a gauge of manufacturing activity, fell in November to a level consistent with a 1% quarterly drop in gross domestic product, according to research firm Capital Economics.
Emerging markets are another story. Although they have been punished when they have been at the center of market crises, they have performed much better during recent crises.
In the year after the 1997 devaluation of the Thai baht, for example, emerging-market stocks lost almost a quarter of their value. But a decade later, in the year after the 2008 global intervention, they returned 89%.
Many emerging markets, especially those in Asia, may be more insulated from the European crisis than investors think, says Brad Durham, managing director of EPFR Global.
“We believe emerging markets have bottomed,” says Ms. Shalett of BofA Merrill Lynch. She recommends investors target emerging markets stocks in Asia and Latin America, while avoiding markets more exposed to the European crisis, such as those in Hungary, Poland and the Czech Republic.
Cash and Bonds
Even though the central bank intervention has eased short-term concerns, the European common currency’s long-term picture remains cloudy, says Gary Richardson, an economics professor at the University of California, Irvine.
“Central banks around the world don’t have many arrows left in the quiver,” he says. “It looks like they hit the bull’s-eye for now, but what happens if that optimism fades?”
Aaron Schindler, a financial planner at Wealth Advisory Group in New York, recommends keeping as much as 30% of your portfolio in cash or a safe short-term bond fund, such as Vanguard Short-Term Bond Index.
Keeping some dry powder also gives you room to buy once the economic outlook becomes clearer, says Ms. Shalett.
For the bond segment of your portfolio, history shows that U.S. Treasurys have tended to pay off nicely following a central-bank intervention, no matter how stocks performed.
In the two years after September 1936, for example, when the country was in the depths of the Depression, U.S. stocks fell 16.6% in real terms, while Treasury bonds rose 5.6%.
The biggest potential for gains in fixed income could be in bonds of emerging-market countries, says Mr. Durham. The iShares JPMorgan USD Emerging Markets Bond ETF dropped 1.3% in November, but in the last week it has gained nearly 2%, and is up 5.7% this year. Mr. Durham says investor flows into emerging-market funds, which his firm tracks, suggest that trend could continue.
“[This year's performance] is a sign that they’re seen as a safe haven from what’s happening in Europe and other developed markets,” he says.
http://online.wsj.com/article/SB10001424052970204397704577074121282629882.html
http://www.bbc.co.uk/news/business-13922857
The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.
The BIS warned low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies.
Central banks across the globe have cut interest rates in an attempt to boost growth after the 2008 financial crisis.
However, BIS warned that the policy may prove to be counterproductive.
“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis,” the bank said.
While lose monetary policies and availability of easy credit have triggered growth, there has been a flip side to it as well.
Emerging economies, especially in Asia, have had to deal with rising prices for food and other essential commodities.
This has pushed up the cost of living and has threatened to derail growth in many developing nations.
The BIS warned that the central banks needed to change their policies in order to deal with the situation.
“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” it said.
“It is also crucial if central banks are to preserve their hard-won inflation fighting credibility,” the bank added.
———-
this is absolute crap..the BIS is working on the premise of a huge recovery hitting the world in the next 2 years..yeah..fairies at the bottom of the garden stuff..but when the BIS speak governments act..cant have the plebs with money due to low interest rates..lets screw them over..uh huh..
“low interest rates across the globe are a threat to world financial stability.”
401
Related articles
Image via Wikipedia
Business Insider’s Courtney Comstock has a great summary of former IMF chief economist Simon Johnson’s evisceration of the giant banks’ arguments regarding capital requirements:
[Johnson's] argument in a nutshell: bankers from the big 6 are outright lying so that they can continue to take on risk and keep their profitable trading operations running.
The issue: BASEL III regulations (originated in Switzerland, written by all of the world’s Central Banks) require banks to have a capital requirement of 7% of equity, which is high enough as far as banks are concerned, but not high enough as far as U.S. regulators are concerned. U.S. regulators want to tack on an extra 3%. (Or maybe just 2% to 2.5%, according to a rumor on CNBC last week.)
Bankers do not want capital requirements to be too high for many reasons, a couple of which are laid out by a banker who emailed us here, and 4 others which Reuters detailed last week:
- “Holding capital hostage” will hurt the struggling economy because it will mean fewer loans at a time when lending is already depressed.
- Establishing huge capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk.
- If banks hold onto more capital and make fewer loans, borrowers will turn to the “shadow banking sector” – hedge funds, for example — which has little or no oversight.
- Tough standards in the United States would create a competitive disadvantage vis à vis other countries.
All of these are wrong, according to Simon Johnson, who blasted each of them using the following arguments:
- Capital requirements are a restriction on the liability side of the balance sheet — they have nothing to do with the asset side (in what you invest or to whom you lend).
- During the Dodd-Frank debates last year, [everyone] said it would be a bad idea for Congress to legislate capital requirements and should leave them to be set by regulators after Basel III… Now the banks want to say that this is not his job as authorized by Dodd-Frank. This argument will impress only lawmakers looking for any excuse to help the big banks.
- The “shadow banking sector” — hedge funds, for example — grew rapidly in large part because it was a popular way for very big banks to evade existing capital requirements before 2008, even though those standards were very low… It would be a disaster if this were to happen again.
- [Just because your friend says it's a good idea to jump off a bridge...] If China, India or any other country wants to produce electricity using a technology that severely damages local health, why would the United States want to do the same?
As I’ve repeatedly noted, the government’s policies discourage lending to Main Street and the little guy.
And Comstock goes on to note:
Making all of this more interesting is an op-ed written by a regional bank CEO a couple of days ago. Right now, regional banks are subject to the same regulations as the big 6, but they are totally different beasts.
Bob Wilmers, M&T Bank CEO, writes that the Big 6 should be subject to stricter regulations like higher capital requirements because they trade so much, and it’s risky, but smaller banks, like his, should not be subject to such high capital requirements because they actually use the free capital on their balance sheets to lend to entrepreneurs, etc.
http://www.globalresearch.ca/index.php?context=va&aid=25297
Related articles
by Andrew Gavin Marshall – Global Research
The following is a sample from an forthcoming book by Andrew Gavin Marshall on ‘Global Government’, Global Research Publishers, Montreal. For more by this author on the issue of the economic crisis and global governance, see the recently-released book by Global Research “The Global Economic Crisis: The Great Depression of the XXI Century,” Michel Chossudovsky and Andrew Gavin Marshall, (Editors), in which the author contributed three chapters on the history of central banking, the rise of a global currency and global central bank, and the political economy of global government.
Problem, Reaction, Solution: “Crisis is an Opportunity”
In May of 2010, Dominique Strauss-Kahn, Managing Director of the IMF, stated that, “crisis is an opportunity,” and called for “a new global currency issued by a global central bank, with robust governance and institutional features,” and that the “global central bank could also serve as a lender of last resort.” However, he stated, “I fear we are still very far from that level of global collaboration.”[1] Well, perhaps not so far as it might seem.
The notion of global governance has taken an evolutionary path to the present day, with the principle global political and economic actors and institutions incrementally constructing the apparatus of a global government. In the modern world, global governance is an inter-lapping, intersecting, and intertwined web of international organizations, think tanks, multinational corporations, nations, NGOs, philanthropic foundations, military alliances, intelligence agencies, banks and interest groups. Globalization – a term which was popularized in the late 1980s to refer to the global spread of multinational corporations – has laid the principle ideological and institutional foundations for this process. Global social, economic and political integration do not occur at an equal pace; rather, economic integration and governance on a global level has and will continue to be ahead of the other sectors of human social interaction, in both the pace and degree of integration. In short, global economic governance will set the pace for social and political global governance to follow.
Drowning Liquidity Flood
By Mike Endres / FinancialSense.com
Excerpt:
Something is going on behind the scenes in the normally secretive back vaults of the Washington based funny farm called the “Federal Reserve”.
Thanks to the St. Louis Fed’s economic research unit, we have various data, graphs and information published from daily to monthly, depending upon the data being displayed. By perusing this data farm, one can get a fair (perhaps not good – but fair) idea of the actual actions of the Federal Reserve which, in all cases, is far better than relying on what the Federal Reserve Chairman says. The two rarely match.
Let’s take a look at the chart (BASE) of the base money supply in the USA, calculated bi-weekly, I believe. First we see what happened during the financial meltdown of 2008.
This chart – shaded to indicate all the action taking place during an “official” recession – shows the absolutely horrifying money pumping that flooded the banks with liquidity (i.e. bailout) to prevent the free market from punishing those TBTF banks for their admittedly criminal acts of fraud through the creation, sale and short sales of MBS, CDOs, and ABCs of all kinds and types.
The Federal Reserve just dumped money on the fire to put it out. Or delay it.
Cover of Jim Carrey
By Barry Ferguson ~ FinancialSense.com
Jim Carrey starred in the movie ‘Dumb and Dumber’ in 1994. The movie told the story of the two stupidest humans on earth – Lloyd Christmas and Harry Dunne. They were ‘dumb’ and ‘dumber’. But, even this over the top portrayal of these two stupid characters could not possibly equal the stupidity of the real characters that run our world today. They can only be described as ‘dumberer’. Even worse, our ‘leaders’ must think of the rest of us as ‘dumbererest’.
While I must admit that government has the general citizenry pretty well characterized (readers of articles such as this excluded), there are times when those of us who know better must speak out. It seems that every calamity in modern times gives the central banks an excuse to plunder treasuries and enrich the banking cartel. The big banks get rich and the rest of us pay for it. We willingly allow for such pilfering as long as the stock market goes up. Every move from the central banks is targeted to do just such a thing. An earthquake/tsunami struck Japan on March 11, 2011. The yen immediately appreciated and their stock market fell. The central banks of the G-7 immediately intervened to sell trillions in yen to stem the market plunge. The insanity is this: Why can’t the ‘market’ decide where the yen or the market should be priced? The people of Japan needed help. A nuclear power facility threatened to ‘melt down’. Yet, the BOJ’s could only think of supporting the stock market. The US central bank is no different. Every disaster is a license to manipulate. Central banks intervene in market price discovery. For instance, our Fed is currently busy with QE2 intervention.
The entire world struggles to determine the fallout effects of the Japanese earthquake and tsunami, along with the ensuing problems. The effects are so pervasive, so profound, so critical, that it is no wonder the news networks focus on two things only. They have switched emphasis to the Libyan civil war, a pitched battle to retain a tyrant and his larcenous rule. But the news stories out of Japan focus 98% on their Fukushima nuclear complex, with hardly a peep about the long list of other economic and financial effects. This article will focus on what they leave out, dutifully reporting amidst the purposeful new vacuum in a grand distraction. The Japanese factor in early 2011 will turn out to be the most important factor to influence major global economies and the financial markets since the death of the US banking system in September 2008. Gold investors should not expect a similar commodity price meltdown like in 2008 after the Wall Street death event. Gold & Silver each sold off sharply during the ensuing months after the collapse of the US banking system, as a liquidity drain was joined by a Wall Street attack of hedge funds. This time is totally opposite. Back in 2008 no Quantitative Easing program was in place, as hyper-inflation engines had not been turned on like now. QE will be global next. The central banker pact not only endorses the monetary hyper-inflation by the USFed, it extends it globally with a loud ring. What comes next is a global inflationary recession with gusto and power. The path had already been clearly entered, but now it is fully engaged with a jet assist. Great confusion comes, equal to the harmful momentum from numerous fronts.
Excerpt from “The Global Economic Crisis: The Great Depression of the XXI Century”
by Ellen Brown
By acting together to fulfill these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future. We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector. We have agreed to support a general SDR allocation which will inject $250bn into the world economy and increase global liquidity.– G20 Communiqué,London, April 2, 2009
Towards a New Global Currency?
Is the Group of Twenty Countries (G20) envisaging the creation of a Global Central bank? Who or what would serve as this global central bank, cloaked with the power to issue the global currency and police monetary policy for all humanity? When the world’s central bankers met in Washington in September 2008 at the height of the financial meltdown, they discussed what body might be in a position to serve in that awesome and fearful role. A former governor of the Bank of England stated:
The answer might already be staring us in the face, in the form of the Bank for International Settlements (BIS)… The IMF tends to couch its warnings about economic problems in very diplomatic language, but the BIS is more independent and much better placed to deal with this if it is given the power to do so.[1]
And if the vision of a global currency outside government control was not enough to set off conspiracy theorists, putting the BIS in charge of it surely would be. The BIS has been scandal-ridden ever since it was branded with pro-Nazi leanings in the 1930s. Founded in Basel, Switzerland, in 1930, the BIS has been called “the most exclusive, secretive, and powerful supranational club in the world.” Charles Higham wrote in his book Trading with the Enemy that by the late 1930s, the BIS had assumed an openly pro-Nazi bias, a theme that was expanded on in a BBC Timewatch film titled “Banking with Hitler” broadcast in 1998.[2] In 1944, the American government backed a resolution at the Bretton Woods Conference calling for the liquidation of the BIS, following Czech accusations that it was laundering gold stolen by the Nazis from occupied Europe; but the central bankers succeeded in quietly snuffing out the American resolution.[3]
In Tragedy and Hope: A History of the World in Our Time (1966), Dr. Carroll Quigley revealed the key role played in global finance by the BIS behind the scenes. Dr. Quigley was Professor of History at Georgetown University, where he was President Bill Clinton’s mentor. He was also an insider, groomed by the powerful clique he called “the international bankers.” His credibility is heightened by the fact that he actually espoused their goals. Quigley wrote:
I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960’s, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments… In general my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known…
By Andrew Gavin Marshall
The following is an excerpt of a chapter by Andrew Gavin Marshall from the new book by Global Research Publishers, “The Global Economic Crisis: The Great Depression of the XXI Century.”
Introduction
To understand the historical context of the current crisis, it is pivotal to address the nature of the most vital and powerful force within the capitalist global political economy: the central banking system. One of the least understood, most widely ignored, and mysteries of capitalism, the central banking system, is also the source of the greatest wealth and power, essentially managing capitalism – controlling the credit and debt of both government and industry.
Any notion of a “free market” must be dispelled in its true meaning, for as long as the central banking system has been dominant, central bankers have managed and controlled capitalism for the benefit of the few and at the expense of the many. Comprehending the nature of central banking is necessary in order to understand the nature of the current economic crisis.
The Origins of Central Banking
Central banking has its origins in the development of bank-issued money, which falls under three categories: (1) Deposit money subject to written check or oral transfer; (2) Bank-issued paper money (bank notes); and (3) Bank-issued legal tender paper money. In 1609, the Bank of Amsterdam was founded “as a bank of deposit slipping secretly into the practice of monetary issue towards the middle of the 17th century.” At the same time, “the goldsmiths of England are generally supposed to have introduced both deposit money and the earliest English unofficial bank note.” And importantly, “In Sweden we find what are widely regarded as the first true bank notes in Europe being issued in 1661 by a private bank founded by Johan Palmstruch.”[1]
As early as 1656, “the Bank of Amsterdam violated the one-hundred per cent reserve principle and, thus, created money,” while “the goldsmiths in England became active as lenders in 1640.” Further, the State Bank of Sweden “was founded November 30, 1656, and to Palmstruch, its founder, is attributed the first use of bank bills as credit money, not fully covered by the coin reserve.”[2]
As economist John Kenneth Galbraith explained in Money, “The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent. The deposits of the Bank of Amsterdam just mentioned were, according to the instruction of the owner, subject to transfer to others in settlement of accounts,” and thus “the coin on deposit served less as money by being in a bank and being subject to transfer by the stroke of a primitive pen.” Further, “another stroke of the pen would give a borrower from the bank, as distinct from a creditor of the original depositor, a loan from the original and idle deposit.” Galbraith elaborated:
The original deposit still stood to the credit of the original depositor. But there was now also a new deposit from the proceeds of the loan. Both deposits could be used to make payments, be used as money. Money had thus been created. The discovery that banks could so create money came very early in the development of banking. There was that interest to be earned.[3]
Expanding on this notion of money-creation, economist Rupert J. Ederer explained, in regards to the Bank of Amsterdam, that both the depositor “and a borrower could affect a purchase with the same money at the same time, [thus] we had here some increase in the quantity of money.” However, “the more serious infractions followed when the Bank began to lend money to the government of Amsterdam and eventually succumbed to the temptations offered by the [Dutch] East India Company.” As Ederer articulated, “What this bank did surreptitiously was soon to be institutionalized and to form the essence of a new monetary technique.” Thus, this bank established a “new monetary era”:
A marvelous new power probably equal to the potentialities of the discovery of coinage had evolved. The Bank had created money literally for over a hundred years without being discovered. Even after it was discovered, the Bank could have continued in operation in this new way except for public prejudice. The public was not yet ready to accept a money with no guarantee save the word of public authorities. It had been too seriously and too frequently misled in the past, and, paradoxically enough, it had fled to the banks for a more efficient money. Out of this flight grew the private money creation which is the essence of modern commercial banking.[4]
joel@dailyreckoning.com
En garde, Fellow Reckoner! We’re under attack!
Jean-Claude Trichet, head of the European Central Bank, has sounded the alarm.
“All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects” on domestic prices, Mr. Trichet told The Wall Street Journalfrom his office overlooking Frankfurt’s financial district.
Can you believe it, Dear Comrade? If we are reading Mr. Trichet’s comments correctly, it would seem that the world’s food and energy communities are consciously rallying against us. Long thought to be soulless, mindless vegetables and minerals, commodities have apparently taken it upon themselves to “become” more expensive, to raise their own prices. We can almost hear the battle cries coming from the fields: Ears of corn unite!
Farmers are warned to sleep with one eye open lest an overzealous head of lettuce break ranks and attack under cover of darkness.
Mr. Trichet is busy marshalling the euro zone’s 17 member countries ahead of this weekend’s World Economic Forum in Davos, Switzerland. He’s encouraging them to strengthen “surveillance” of each other’s fiscal policies.
« Older Entries
