Tuesday, October 28, 2008
More On European Banks and Eastern Europe
Already retrenching as they try to cover $221.8 billion in losses and writedowns, European banks also stand to be hurt more than most if emerging markets goes sour, said Stephen Jen, chief currency strategist at Morgan Stanley in London.The really dicey debt is a much smaller number than that 3.5T. There is also some exposure to the central asian republics. Indian corporate debt is becoming a worry, but my biggest immediate concerns are the cross country lending chains to some of the eastern European banks and companies, and to PE groups that invested heavily in these areas. And it's a lot - probably 500 billion or so of this debt is quite questionable, which is the reason for:
European banks lent $3.5 trillion to these economies, compared with $500 billion from the U.S. and $200 billion from Japan, according to his estimates. Those in Austria and Spain were particularly exposed, he said. Three quarters of loans to China and India originate in Europe.
At the same time, U.K. Prime Minister Gordon Brown said today the IMF is running out of cash and China and Persian Gulf oil-producing nations should pay into a new fund to help eastern Europe.This is the decision point. Related to this:
``The IMF has $250 billion available,'' Brown said. ``This may not be enough. We need a multilateral solution. The big surplus countries are in a position to help the most.''
Citigroup Inc., HSBC Holdings Plc and seven other banks are still seeking buyers for $6 billion of loans to Investment Corp. of Dubai, more than two months after underwriting the debt for the state-owned holding company.Sorry for the light blogging. I'm finally feeling better and I'm trying to get a bunch of stuff done!
Demand for Dubai loans has dried up on investor concern that the worldwide credit crunch will hurt the Persian Gulf state's ability to finance itself. Dubai's government-controlled companies owe at least $47 billion, more than the emirate's 2006 gross domestic product, according to Moody's Investors Service.
If you are interested, I strongly recommend that you download the BIS September statistical supplement (100 pages or so in pdf). If you go to table 9b, you will see external bank exposures to the various countries. The countries having claims run across the top, and the table extends across several pages and down a lot more pages. The last two columns in the table are US bank exposures and European bank exposures. Go to page 69, where you see that the US has 57,795 million in exposure to the developing European countries, whereas European banks have 1,502,080 million in exposure to these same countries.
Monday, October 27, 2008
I Don't Think This Will End Until ECB Cuts
What's going on now is the Japanese collapse I've been so worried about. There are a number of reasons for it, but the collapse of the yen carry trade is pushing up the yen, which is going to cut exports, and the Nikkei is collapsing. To make matters worse, Kaupthing just defaulted on some samurai bonds (yen denominated). Obviously Lehman was the first defaulter. Worries over another round of Japanese real estate deflation are growing. Nothing's really going Japan's way; the collapse in the Baltic Dry means that their major shipping lines are impacted even more than their export market. Back in 2007 I wrote about seeing increasing problems on the horizon for shipping. Well, now it's here. One would expect some of the Japanese banks to be sliding into capital trouble at this rate. The Japanese government is working on a domestic stimulus package.
Canada remains one of the healthier world economies, but Bank of Canada is forecasting extremely slow growth and their government is experiencing a sharp decline in corporate tax revenues.
India also is in relatively good shape. However their growth is slowing sharply and their corporate debt and banks are beginning to show the strain. The major devaluation of the rupee is going to make their exporters more competitive in world markets, but it will slow the decline of inflation in India. Right now their export growth is slowing sharply, and the Indian government is rapidly dropping restrictions on exports (usually implemented in an effort to drive down domestic costs for manufacturers). India will probably end up guaranteeing bank debt for a time. No better symbol of what is happening in India exists than the buy-a-home-get-a-free-car deals now popping up:
Your "dream house" now comes with a free Mercedes or BMW, or at least a few gold coins. In some cases, even a small flat is being thrown into the deal for those eying premium segment bungalows.To US readers of The Housing Bubble Blog, this will all sound very familiar! I recommend reading the comments on the above article. Here's one:
The promoter of Ashiana Housing, Rohit Modi, said they had started an apartment project at Rs 2,100/sq ft on NH 58 in Ghaziabad. Till six months back, apartments at these places were quoting at upwards of Rs 3,000/sq ft.
Not only this, many developers are reducing the floor size of the flats from 2000 sq ft to around 1,200 to 1,500 sq ft. This translates to a fall in the price of a three-bedroom apartment from Rs 60 lakh to around Rs 30 lakh.
geeta, chennai, says: Re:Value of Real Estate in India. Whilst landed property is a good investment bet, the global recession has not been factored by the industry. It is possible that black money investments is keeping the hopes of the industry alive. The average salary of a 35-year old person in the non-IT sector is about Rs10 lakhs pa. His net savings is about 2 lakhs pa. If he has to buy a house for Rs 1 Crore, it is equivalent to 50 years savings for him. How can he service a 20 year loan? What sort of economics is that? The real estate in India can expect to see a 50% drop in their prices, not withstanding the laundered funds that pour into the sector.All bubbles end in buyer's exhaustion. Even in China, buyers' exhaustion and affordability problems are dominating. At this point going back to this link and reading Carney's comments on the global financial tinderbox might be worthwhile.
There's something of a run on Gulf Bank (Kuwait). The problems in Dubai, UAE and Kuwait aren't ending. Pakistan's position is pitiful. I wrote this summer about the Dubai apartment boom, noting that the major consumers of housing were immigrants. Check out this Arab News article about the move to force multiple occupants out of Dubai housing. More. Mover Mike had written years ago about his worries over currency speculation in the new ME exchanges. I think he may have been prophetic.
So much of what we are seeing is the reaction and interaction of fundamentals rather than simply a credit crunch. The sharp rise in shipping rates, oil and commodities this year inevitably was going to draw down working capital and produce a contraction in the movement of goods because it created a sharp increase in the amount of working credit needed.
Of course the crunch accentuates the crisis, as in the alarming slide of the eastern European currencies. It is clear that boosting demand in the oil and natural resource economies is going to be extremely difficult and China will be struggling to support its own growth by internal investment. Therefore, the only way is to make consumer incomes in the developed economies stretch further. The Eurozone can cut rates and generate real consumer buying power because a lot of consumer and mortgage debt is variable indexed in some of the faster-growing areas, and the Eurozone will be aided by the decline in inflation induced by the commodity bust.
Growth in Europe should help to support the Asian economies somewhat - but world leaders have to be realistic about what is occurring. This downturn is a needed development controlled by world fundamentals.
The impact of foreign currency loans in the eastern European countries (see this 2007 paper), and the inevitable default on many of these loans on the European banks, has yet to be fully felt. It's time to panic and hit the down button on EU interest rates. Iceland's foreign currency loans were a huge factor in its currency collapse. This has to be stopped ASAP. (For those who wouldn't read an economic paper if their lives depended on it, the bottom line is that growth in the eastern European countries accelerated rapidly, and their currencies appreciated. Inflation accelerated. When and if their central banks tried to control inflation by raising rates, the availability of foreign currency loans, which were then cheap because of the appreciation of the local currency against the Euro, generated even more growth and more inflation. The backlash now is vicious.)
Friday, October 24, 2008
Off To The Races
Oil falls again, even though OPEC announces an emergency production cut. Dated Brent Spot moved this morning below $60. US NYMEX futures fell below $64 and then $63.
US index futures were halted in European trading due to their massive fall. Trading will pick up again when the US exchanges open.
UK GDP for Q3 was reported -0.5, causing BNP Paribas boys to predict 150 basis points in cuts by the UK central bank (BoE) through December. The pound fell further. The European manufacturing and services survey for Europe was reported to have contracted sharply in October. Light truck sales in Europe are trending down, and Volvo cut its sales projections again. The Euro and pound both fell sharply against the USD, and the USD fell sharply against the yen. These are huge moves. So where does this leave Japanese manufacturers?
The zloty (Poland), the forint (Hungary) and the rand (South Africa) have all fallen sharply this week, even though Hungary raised its main bank lending rate by 300 basis points. Denmark's krone is also weakening, and Denmark raised its main rate 50 basis points to 5.5%. Ukraine's credit rating was downgraded again.
Asia was pretty much whacked. India's rupee and its main companies are sliding again. Car sales have weakened sharply and some major companies are reporting sliding profits.
Toyota reported a 4% drop in global sales in the third quarter. Japan's situation is rougher than most people are willing to conceive:
The country's huge trade surplus plunged 94% in September from the same month in 2007 as exports continued to lose ground and imports again surged.When you're facing that, a massively strengthening currency is really not good news for your manufacturers. In August, Japan clocked a trade deficit far greater than September's measly surplus. The theory is that Japanese bond yields are due to rise given projected stimulus. Japan has by far the highest public debt of the major developed nations.
Growth did contract in the June quarter, but the flagging export performance and weakening industrial production figures are suggesting even more strongly that the economy contracted in the September quarter.
The Lehman credit swaps were supposed to settle this week, and according to the NY Times, they did. I wanted to close out with something positive!
Thursday, October 23, 2008
I apologize for my sparse blogging. I'm tired. Unbelievably tired. I think I'm going back to bed, and I'll just let others work on the bogosity problem for a bit. Here's what's driving Kasriel nearly nuts. I am pleased to see that I have companions in my wrath.
I'll tell you what's so insane about this election. First, neither candidate is addressing the real US problem, which are policies that have driven the bottom 60% of the US income pyramid into financial difficulty. The 80-90% segment of the pyramid is a derivative of the bottom 60%. The 90-95% segment is a derivative of the 80-90%. The 60-80% plus the 95-100% wedges are too little to carry the rest. What we need to do is subsidize the bottom 5-15%, take some of the tax load off the 15-30%, and increase taxation on the 80% - 100%. The best way to stimulate the middle is to spark corporate growth, which can best be done by going to a moderate flat tax on corporations. I'd suggest 18%.
Those destructive policies are policies of energy starvation, which destroys economies, and industrial starvation, which destroys economies, and a regressive taxation policy which increases the relative load on the bottom of the pyramid. Second, neither candidate is willing to really address the future compounding of our current problems, which is the coming retirement boom. Third, neither candidate is willing to address the nearly global changes in the business climate, which have combined to decrease US ability to compete. Fourth, both candidates advocate a carbon cap and trade policy which would be economic suicide if applied mainly to the US, and global economic suicide if applied fairly.
The bozo election will not end well. It is true that Obama is worse, because McCain's energy policy is a lot more realistic.
I strongly recommend reading Kasriel's daily global commentaries for the 14th through the 22nd. On top of all this, eastern Europe is now folding, and consumers in South America are collapsing. This forecasts an Asian export crisis. I now have overcapacity in the following sectors:
Almost all metals and alloys,
Almost all building supplies,
Knick-knackery (consumer thingies such as ceramic figures, ribbons, candles, etc)
The problem here is an oversupply of debt. China is now trying to stoke a Greenspanish bubble, and it will almost certainly fail. The eastern European/Central Asia collapse is going to take another huge whack out of European banks. Japan's situation is extremely serious - the collapse of the yen carry is forcing its currency up, which is going to destroy its export capacity. Yikes!
It's time to get serious.
I would like to add a link to this post at Chicago Boyz about some of the economic problems posed by recent policy suggestions. I received an email from a commenter calling himself a "libtard", saying that his politics and my politics are polar opposites, but that he is pleased to see my identification of the problem. Well, I do vote for a lot of Dems, if they are serious about the problems. Right now, I wish I didn't have to vote for McCain. I don't see that this election is getting us closer to solve our problems - it appears to be getting us further away. But the problems exist. They are real. They will not go away by themselves. We cannot save the world by starving poorer people, in our own country or elsewhere. The very idea that we don't have to worry about the economic welfare of most of our
I have brooded about this a lot, and I fear that when both parties combined to exclude third-party candidates from the presidential debates they created a situation in which millions upon millions of Americans can find their legitimate needs absolutely excluded from public mention. This is toxic.
Tuesday, October 21, 2008
China's government will pump $19 billion into Agricultural Bank of China and remove most of its $120 billion of bad loans, paving the way for the lender to restructure and sell shares to the public.Banking in China is exceptionally odd. There are government-controlled banks and a bunch of underground banks.
The cash injection will be announced today, a bank official with knowledge of the matter said, declining to be identified before the announcement at 3:30 p.m. A unit of China's sovereign wealth fund will take a 50 percent stake in the bank and China's finance ministry will hold the rest, the person said.
The appreciation of the yuan is causing a lot of problems for Chinese low-value retail producers. China's attempting to help some of them with this measure:
China will raise export rebates on a range of products including textiles, toys and medicines next month to support the world's fourth-largest economy as the deepening global slowdown hurts demand for Chinese goods.The collapse of the Indian rupee is painful (currently around 49 to the dollar), but it's good for some manufacturers. India is considering subsidizing ship builders to try to build up that segment, and it has taken several steps to shore up textiles and other similar sectors, including ag.
Tax rebates on some shipments of textiles, garments and toys will be increased to 14 percent and those on some plastics exports will be lifted to 9 percent, the Ministry of Finance said today on its Web site. The adjustment, which starts on Nov. 1, will apply to 3,486 items which account for a quarter of taxable exports, the statement said.
Half of the country's toy exporters went out of business in the first seven months of the year because of rising production costs and the increase in the value of the yuan, the customs bureau said last week. A quarter of Hong Kong-owned businesses in the Pearl River Delta manufacturing hub in southern Guangdong province may go bankrupt because of the global financial crisis, the Federation of Hong Kong Industries said yesterday.
In the meantime, the Indian commercial debt plus inadequate power infrastructure are major problems; ordinarily I would expect Indian exports to gain in this situation, but the power problems and funding problems are real. Tata gets no buyers, and stocks don't sell. RBI (central bank of India) cut its repo (overnight bank lending) rate yesterday by 1% in a surprise move.
The drama goes on in eastern Europe, and the big South American news today is Argentina. The government is supposed to announce a new pension plan, and the markets collapsed on speculation that the government is essentially going to seize pension funds:
President Cristina Fernandez de Kirchner will unveil a new pension fund plan at 4 p.m. New York time today, the country's social security administration said in a statement. Fernandez will nationalize the system, giving the government control of $29 billion in retirement accounts, La Nacion reported, citing government officials it didn't identify.Brazil is having a bad day as well. Goodbye carry trades, hello pain.
Fernandez has struggled to raise cash to cover growing financing needs as the global financial crisis drives down prices on the country's commodity exports and erodes demand for higher- yielding, developing-nation debt. The government's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2007, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said in a report today.
Venezuela, Russia and Iran are all tongue-kissing on aircraft carriers.
Monday, October 20, 2008
Chinese Q3 GDP 9%
China's economy expanded 9% in the third quarter after growing 10.1% in the second, according to data released Monday by the National Bureau of Statistics.Bloomberg:
Citi Investment Research analyst Lan Xue forecast further declines in Chinese stocks, saying there was as a greater than 50% chance China would tip into deflation, excluding food prices, next year.
Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, according to the official Xinhua News Agency. The State Council said that it would increase the supply of low-cost housing and reduce property transaction fees.Other measures include an attempt to set up margin trading, rate cuts, some lowering of export barriers, and accelerated government spending on infrastructure.
The economic relationship between Japan and China is becoming ever more important in this global downturn, and should help to further reduce tensions between the two countries. In the short term, however, Japan's weakening fundamentals will continue to hurt some Chinese exporters.
If I look at shipping stats and trends, the slowdown in China appears far worse than most financial analysts are indicating.
Friday, October 17, 2008
Obama Is A Dangerous Economic Bufffoon
You had better read this post and think hard before you vote for him!
Obama has announced that he will move as president to designate CO2 as a pollutant. This would set the framework for an EPA plan that will halt most coal plants, and even affect FARMS! Anthony Watts has the bleeping story. Read the flippin' comments.
If Obama had more experience in actually governing, he would understand the epic scope and disruption of what he proposes to do.
McCain is barely better, but at least he's not stupid enough to get on this bandwagon (from the comments):
The only surprise here is that Obama’s advisers announced this now. Having EPA regulation GHGs under the Clean Air Act means dramatically higher costs for energy (85% of our energy comes from coal, petroleum, and natural gas). Obama would require over 1.2 million medium to large buildings to get permits because they emit GHGs.This is the EPA's Advanced Notice of Proposed Rulemaking (ANPR). At this page you can read the proposed
* 1 million mid-sized to large buildings–this includes 10% of all churches, 1/5 of all food service businesses, half of the buildings in the lodging industry, and 92,000 health care facilities.
* 200,000 manufacturing operations
* 20,000 large farms
This plan also means that a lot of farms will need permits from EPA to stay in business. According to the Department of Agriculture:
According to the Department of Agriculture the following will need permits:
* Dairy facilities with over 25 cows
* Beef operations with over 50 cattle
* Swine operations with more than 200 hogs
* Farms with more than 500 acres of corn
This is just a taste of how far reaching this plan is
rules (as far as they've gotten) and comment on them. The two pdf links (huge pdfs) I have given you are "scope" documents and together these overviews are over 1,000 pages. From page 4 of the first link:
EPA is also faced with the broader ramifications of any regulation of motor vehicle GHG emissions under the CAA in response to the Supreme Court’s decision. Over the past several months, EPA has received seven petitions from states, localities, and environmental groups to set emission standards under Title II of Act for other types of mobile sources, including nonroad vehicles such as construction and farm equipment, ships and aircraft. The Agency has also received public comments seeking the addition of GHGs to the pollutants covered by the new source performance standard (NSPS) for several industrial sectors under section 111 of the CAA. In addition, legal challenges have been brought seeking controls for GHG emissions in preconstruction permits for several coal-fired power plants.Over the last few months, at least three new coal plants have been halted already by federal courts due to legal challenges over carbon emissions. Obama's action would give every single environmental extremist in the country very powerful legal standing to block most non-nuclear projects, excepting wind and solar. Many of the big solar plants proposed are already being blocked by the EPA because of the extremely high land usage they would require. Nor do we even have the transmission lines in place to cycle the energy around the country, or the storage facilities to balance out the load. If you try wind, the picture is even worse.
Of course, Obama's current position on nuclear power is that it can't be done unless storage is provided, and he's against storage and reprocessing, so no nukes. That leaves wind and solar, and see the end of this post for those options.
If this guy is voted into office, the country is going to get exactly what it deserves - poverty. Of course, the real sufferers will be the lower income people, who will not be able to pay the additional costs. The extremist environmentalists have declared war on the poor. This is what we get for letting a bunch of rich people stroke their egos at the expense of the welfare of the common citizen.
CAA is the Clean Air Act. The story states that Obama will direct the EPA to name carbon dioxide (which you emit with each breath) a HAP (Hazardous Air Pollutant). That would bring carbon dioxide emissions under Section 112 of the CAA, and section 112 would require that the EPA set standards for any emitter of 10 tons per year of CO2 or any emitter of 25 tons of any combination of HAPs. Section 112 leaves little latitude for the EPA. Those sources would include farms, quite a few private heating plants, etc.
I now quote from the DOE letter found on page 39 of this ANPR release:
It is entirely unclear at this point what sort of MACT standard would be placed on which sources for purposes of controlling GHG emissions, what such controls would cost, and whether such controls would be effective. However, complying with MACT standards with respect to GHG emission controls likely would place a significant burden on States and localities, manufacturing and industrial facilities, businesses, power plants, and potentially thousands of other sources throughout the United States. As the draft explains, section 112 “appears to allow EPA little flexibility regarding either the source categories to be regulated or the size of sources to regulate…. EPA would be required to regulate a very large number of new and existing stationary sources, including smaller sources…we believe that small commercial or institutional establishments and facilities with natural gas fired furnaces would exceed this major source threshold; indeed, a large single family residence could exceed this threshold if all appliances consumed natural gas.”In order to escape the permitting process (and the EPA could not process these permits - it would require more than doubling or tripling the staff), businesses and some homes would be forced to turn to electricity.
Compliance with the standards under section 112 is required to be immediate for most new sources and within 3-4 years for existing sources. Such a strict timeline would leave little to no time for emission capture and reduction technologies to emerge, develop, and become cost-effective.
But you know what? We can't produce enough electricity. We can't. We don't have the bleeping power plants to do it! Read this 36 page outline of the challenges facing the US electricity grid, which include:
- U.S. baseload generation capacity reserve margins have declined precipitously to 17 percent in 2007, from 30-40 percent in the early 1990s. A 12-15 percent capacity reserve margin is the minimum required to ensure reliability and stability of the nation’s electricity system.
- Investments in new generation and transmission required by 2016 will be a minimum of $300 billion dollars. This may be a conservative estimate, and actual costs could be much higher.
- The latest estimates from the U.S. Energy Information Administration (EIA) on installed capital costs are as follows: natural gas combined cycle (NGCC) costs about $750 per installed kilowatt (kW); coal costs about $1,600/kW; nuclear costs nearly $2,600/ kW; solar thermal costs nearly $3,900/kW; and photovoltaics cost more than $5,800/ kW.
Thursday, October 16, 2008
Industrial production fell for September, but that month is not comparable. However August industrial production was revised down to -1.0, and that is very significant. What seems to have happened is that cooler temperatures, more cautious consumption, and slowing manufacturing across the US dropped utility demand, which has been a large factor in the headline industrial production slump over the summer. In May, July and August utilities were down over 2% each month.
According to the FUT numbers earlier, this was going to happen. FUT is a very, very strong indicator for domestic economic activity. Interestingly, over the last couple of months FUT has stabilized a bit, which is one of the factors that supports my theory that the US domestic economy is going to hit trough in second quarter 2009. We'll see! If the credit situation isn't managed properly, the whole thing could head down very sharply.
Recent claims activity:
The highest insured unemployment rates in the week ending Sept. 27 were in Puerto Rico (5.3 percent), California (3.2), Michigan (3.2), Nevada (3.2), Oregon (3.2), New Jersey (3.1), South Carolina (3.0), Pennsylvania (2.9), the Virgin Islands (2.8), Arkansas (2.7), North Carolina (2.7), and Rhode Island (2.7).Look at the states with increases of more than 1,000 as of October 4th:
The largest increases in initial claims for the week ending Oct. 4 were in Ohio (+7,217), California (+6,003), Michigan (+5,661), Florida (+4,253), and Alabama (+3,471), while the largest decreases were in Texas (-21,249), Louisiana (-5,461), Mississippi (-1,108), Washington (-809), and Kentucky (-525).
|State||Change||State Supplied Comment|
|MA||+1,353||Layoffs in the public administration, finance, insurance, trade, and service industries.|
|VA||+1,474||Layoffs in the automobile and manufacturing industries.|
|IL||+1,494||Layoffs in the trade, service, and manufacturing industries.|
|NJ||+1,844||Layoffs in the trade, service, transportation, and manufacturing industries.|
|IN||+1,848||Layoffs in the automobile and manufacturing industries.|
|AR||+2,275||Layoffs in the manufacturing industry.|
|TN||+2,336||Layoffs in the service and transportation equipment industries.|
|NY||+2,410||Layoffs in the construction, service, and manufacturing industries.|
|WI||+2,617||Layoffs in the construction, transportation, warehousing, and manufacturing industries.|
|PA||+2,734||Layoffs in the food, mining, petroleum, and electrical equipment industries.|
|GA||+2,853||Layoffs in the transportation equipment and textile industries.|
|AL||+3,471||Layoffs in the rubber/plastics industry.|
|FL||+4,253||Layoffs in the construction, trade, service, and manufacturing industries, and agriculture.|
|MI||+5,661||Layoffs in the automobile industry.|
|CA||+6,003||Layoffs in the service industry.|
|OH||+7,217||Layoffs in the automobile industry.|
So far so good on commercial credit. It's the blue line here that you care about:
Non-financial totals over the last few months have grown a bit.
I think Roubini is wrong, unless we screw up horribly, or ROW does. And as for ROW, India's wholesale inflation is beginning to creep down, and lower energy prices are helping somewhat.
The big ROW issue is Europe. Do the eastern European loans start defaulting at high rates? There is a load of trouble coming down the pike having to do with credit default swaps on commercial credit in Europe, commercial loans defaulting, and property value drops in some boom areas. How well that can be managed is the biggest question.
Wednesday, October 15, 2008
A Mole In The Ceiling
This is a completely non-political, non-economic post.
I fear that some Obamabot (they do seem obsessed) may think that somehow I am telling a parable designed to justify racist oligarchy, so in case anyone is confused about the true nature of this post, I drew the picture. The foreshortening is making the mole appear larger than it is in real life.
Since yesterday I kept hearing these little crunchy-crunchy noises that are the dread of all householders. I could not figure out where they were coming from, because they seemed to be inside the walls.
I was making coffee a bit ago, and a mole chewed a hole through the kitchen ceiling and kept poking its little head out at me. I was so astounded that first I simply stood and stared. Then I went closer.
The mole appeared to be curious about the action in the kitchen, and it disappeared and reappeared several times. I got a very good look at its tiny, recessed eyes, cylindrical nose and upper body, and puzzled demeanor. Maybe it wanted coffee, or maybe it just wanted to know what was making those funny bubbling sounds that are disturbing to every mole householder.
It was a mole, without question. A rather pretty silvery one, as moles go. It looked large and healthy, but perhaps a bit confused or irritated by finding a squatter making bubbling noises in its new dwelling.
The mole is in the attics, and it seems to be getting from one to another. In plaintive astonishment I ask:
- How does a mole get into the attics?
- How does one get rid of it once it's in there?
- Do mousetraps work?
- Should I try bacon as a bait?
- Are there likely to be more?
Yes, It's Crappy, But
In the US, September retail sales racked up a YoY decrease in nominal dollars ( 375,473 for 08 compared to 379,370 for 07), and producer prices for finished goods fell for the second month in a row. Nor is this surprising, because SA consumer credit outstanding fell in August, which rarely happens, and is the result of a recession. See summer of 2001. Further, the business inventory/sales ratios show the same indication:
Note the big run up in 2006, which was the beginning of the production recession. That was slowly overwhelmed by a pickup in manufacturing, and now the consumer side of the economy has weakened enough to conquer manufacturing strength.
BUT, although we are in a recession, and it looks to be an 80ish recession in many areas, the factors which produced the recession are rapidly heading the other way, and will inject purchasing power back into the economy. Just take a look at crude oil spot prices - Brent below $71, and WTI Cushing below $77. We could very likely see Brent spot in the $60s next week. There is no appetite for buying crude up with current fundamentals.
This is a very needed correction. Whatever economic theory it was that justified crude prices as high as last summer's appeared to have been constructed by the same folks who claimed home prices had little relation to incomes. The "paying for it" step was left out of the equation.
From a community banker standpoint, Wall Street looks about the way it does to Main Street. Nonetheless, the various monetary support measures should function well enough to prevent too much collateral damage to the economy. Now it's a question of clearing some debt whether that happens from paying it down or writing it off.
I am convinced that much current economic bad news is wrongly attributed to the "credit crunch". In fact, it's the result of the combination of extending too much bad credit and the huge run up in energy prices.
The next crucial point is eastern Europe. If that falls too far, European financials will take another hammer blow which they cannot afford. Poland now wants to accelerate its move to the Euro. We'll see. Even the Czech numbers are beginning to come down.
Tuesday, October 14, 2008
Obama's Real Tax Plan Is Bogus
The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation's Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.We've got tough choices to make and we are going to have to make them, but this particular choice isn't available in the list of possible options.
The total annual expenditures on refundable "tax credits" would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as "tax credits," the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.
The political left defends "refundability" on grounds that these payments help to offset the payroll tax. And that was at least plausible when the only major refundable credit was the earned-income tax credit. Taken together, however, these tax credit payments would exceed payroll levies for most low-income workers.
To understand how difficult it would be to pay for this, consider the following household income split (the data here is derived from the 2007 American Community Survey, and the table is available here):
|No of Households||Low Income||High Income||% of All Households||Cum % Of All|
Keep in mind that incomes will be trending lower for the next couple of years, due to that little thingamabobble I call a "recession". Median income is still around $50,000. American households earning less than $30,000 are about 29% of the total. Your subsidies and credits should be mostly aimed at this group. If you want to give 95% of Americans a tax break, that means you are going to be taxing the remaining 5% monumentally more, beginning with household incomes at around $175,000.
For all intents and purposes, raising taxes that much on this group is impossible. Let's round that group to about 4.5 million, and say that's equivalent to 9 million individuals. That 9 million individuals would collectively have to pay over 500 billion more in taxes to pay for the refundable portion to the lower brackets. A billion has 3 more zeros than a million, so (500 billion/9 million = 500,000,000,000/9,000,000 = $55,556 per such taxpayer. Needless to say, you are not going to be taxing a person making $175,000 an ADDITIONAL $55,000 if you expect this person to keep working, much less tax a household making $200,000 an ADDITIONAL $110,000, so you are going to have to shift most of that onto much higher income persons.
How many such persons are there? The best source for this is the IRS data on tax returns, which can be found here. The last year of data available was 2006, and in 2006, only 0.7% of households reported AGI of $500,000 or more, and that bracket and up paid 35.9% of total income taxes. 2.9% of all returns reported AGI of $200,000 or more, and that bracket and up paid 53.9% of all income taxes. There were less than a million returns in the $500,000 or more category, and less than 140,000 returns in the $2,000,000 and or more category.
There were 354,093 returns in the $1,000,000 and up category. Let's suppose I want those 354,093 return filers to pay for 400 billion of those income tax refundable credits (IRS pays person whether they paid taxes or not), which leaves about 100 billion for those between $500,000 and $1,000,000, and another 100 billion for those making over $200,000 but less than $500,000. .
The liability per return is almost $1,130,000, or 1.13 million per return. Needless to say some of that will be shifted to the 140,000 returns in the $2,000,000 or more category, but still, it's not doable. At those rates all but the extremely rich will be forced to shift income to shelter it; you can never collect this from taxpayers.
In short, this guy is numerically illiterate or deliberately dishonest. I happen to believe that he is numerically illiterate.
Don't forget that the real plan to save Social Security entails removing all income limits on Social Security contributions, which adds another 3.65% to the income tax for higher wage earners anyway. There is also the alternative minimum tax, which removes the tax exclusions for higher income persons to force their real minimum tax brackets sharply higher. Somewhere around 50-60% of marginal tax causes all sorts of interesting things to happen, and at that point your net taxes collected start going down.
One thing that high income Americans can do, and do do, is invest in no AMT municipal bonds. The tax savings are so high that they really don't care if they lose a percentage of their capital, although they certainly don't want to lose it.
You'd collect more income tax from the top group, and get better investments, by imposing a flat tax of 25% on this group. Seriously!!!
Monday, October 13, 2008
The Face Of Reality
``We have had crazy days for a week now,'' said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik's main shopping center. ``Sales have doubled.''Iceland has to import almost everything else than meat - food, clothing, hardware, machinery, drugs, lighting, oil, etc. The IMF is going in because Iceland's big banks and currency have just about collapsed.
Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.
Iceland's foreign currency market has seized up after the three largest banks collapsed and the government abandoned an attempt to peg the exchange rate. Many banks won't trade the krona and suppliers from abroad are demanding payment in advance. The government has asked banks to prioritize foreign currency transactions for essentials such as food, drugs and oil.
Europe has not developed a regional solution, exacerbating the quiet worries that had always existed about the durability and viability of the union when stressed.
This WaPo article gives more background and context, and explains some of the implications:
The ramifications of Iceland's misery are probably more serious than people realize. The country's bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.US exchanges are closed today (oops, no, they're not), but the European exchanges have so far stabilized a bit. The UK is buying into some of their largest banks to support them, and the Bank of England and the European Central Bank are going to offer banks unlimited funding in dollars.
But there's a broader concern. With European governments turning down his appeals for assistance, Iceland's prime minister, Geir Haarde, warned last week that it was now "every country for itself." This smacks of the financial autarchy that characterized defaulters in the financial crisis in Asia in the late 1990s. Similarly, when Argentina defaulted on its debt in 2001-'02, politicians there faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia after the crises of 1998, local enterprises and banks took the opportunity of the confusion to grab property, then found ways to ensure that courts sided with them.
In addition, we're now likely to see substantially more defaults and credit panics in smaller countries and emerging markets. After Iceland's fall, every creditor to other nations with large deficits and substantial external debt must be looking for ways to reduce its exposure. The obvious risks include much of Eastern Europe, Turkey and parts of Latin America. Russia's difficulties show that seemingly solvent countries can be high-risk: While the Russian central bank has gold and foreign exchange reserves of $556 billion, the private sector has recently built up an estimated $450 billion of debt. Creditors don't want to roll over the debt, so the government is using its reserves to do it. It has already ordered $200 billion channeled through state banks to companies repaying debt. If oil prices fall, a seemingly highly solvent country could quickly look nearly insolvent. Some other rising stars, such as Brazil and even India, may have similar problems.
This is genuine global crisis, with the shortage of dollars playing the part that the shortage of gold did in the run-up to the Great Depression.
In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.The World Bank met Sunday to discuss the plight of the poorer countries.
The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.
Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.
Federal Reserve Actions
To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.
These arrangements have been authorized through April 30, 2009.
Throwing any sort of trade impediments, such as biofuel subsidies or carbon cap trade schemes into this witches brew is the recipe for an explosion.
Sunday, October 12, 2008
Teri's Husband Isn't Going To Make It
Update: He is gone.
Saturday, October 11, 2008
Why You Shouldn't Trust The Experts
For your amusement, FRB Atlanta's 2003 working paper, entitled "Playing The Field: Geomagnetic Storms And The Stock Market". The sun, as you may have read in the press, has been exceptionally quiet of recent. The solar scientists are staging performance after performance of "Waiting for Godot". Somehow, Cycle 24 just doesn't seem to want to step on the stage.
The abstract of the article:
Abstract: Explaining movements in daily stock prices is one of the most difficult tasks in modern finance. This paper contributes to the existing literature by documenting the impact of geomagnetic storms on daily stock market returns. A large body of psychological research has shown that geomagnetic storms have a profound effect on people's moods, and, in turn, people's moods have been found to be related to human behavior, judgments and decisions about risk. An important finding of this literature is that people often attribute their feelings and emotions to the wrong source, leading to incorrect judgments. Specifically, people affected by geomagnetic storms may be more inclined to sell stocks on stormy days because they incorrectly attribute their bad mood to negative economic prospects rather than bad environmental conditions. Misattribution of mood and pessimistic choices can translate into a relatively higher demand for riskless assets, causing the price of risky assets to fall or to rise less quickly than otherwise. The authors find strong empirical support in favor of a geomagnetic-storm effect in stock returns after controlling for market seasonals and other environmental and behavioral factors. Unusually high levels of geomagnetic activity have a negative, statistically and economically significant effect on the following week's stock returns for all U.S. stock market indices. Finally, this paper provides evidence of substantially higher returns around the world during periods of quiet geomagnetic activity.If you find the paper's conclusion credible, you may wonder why we're not all elated and sending the stock markets to the moon, since we are in a period abnormally lacking geomagnetic storms. Alternatively, you could argue that the delay in recognizing the risk and lurking losses was caused by the sun's quiet state and postulate that the crash is the sun's fault, because we were all lulled into ignoring the EPDs.
Personally, I doubt the conclusion, but the paper is only 53 pages. See what you think! To whet your whistle, a brief excerpt:
In this paper, we suggest a plausible and economically reasonable story that relates geomagnetic storms to stock market returns, and provide empirical evidence which is consistent with this story.Update: You can find a treasure trove of FRB research at this link. Following the finance and economics topic link and going to 2003, I offer another paper which examined the question of whether housing prices were linked to incomes and concluded:
Many housing market observers have become concerned that house prices have grown too quickly of late, and that prices are now too high relative to per capita incomes. Prices will likely stagnate or fall, the argument goes, until they are better aligned with income. This idea is often formalized in the housing literature by asserting a long-run equilibrium relationship between house prices and fundamentals such as income, population, and user cost. The validity of this assumption has important implications for how we model house price dynamics. If the assumption is accurate|so that house prices and fundamentals are cointegrated then the error-correction specifcations of Abraham and Hendershott (1996), Malpezzi (1999), and Capozza et al. (2002) are appropriate.You may also find a 2003 paper on conflicts of interest at bond-ratings agencies (the NRSROs I have written about) extremely interesting. The abstract:
In this paper I have used standard tests to show that there is little evidence for cointegration of house prices and various fundamentals at the national level. I have also shown that bootstrapped versions of more powerful panel-data tests, applied to a panel of 95 U.S. metropolitan areas over 23 years, also do not find evidence for cointegration. This does not mean that fundamentals do not affect house prices, but it does mean that the level of house prices does not appear to be tied to the level of fundamentals. Thus, the levels regressions found in the literature are likely spurious, and the associated error-correction models may be inappropriate.
This paper presents the first comprehensive test of whether well-known conflicts of interest at bond rating agencies importantly influence their actions. This hypothesis is tested against the alternative that rating agency actions are primarily influenced by a countervailing incentive to protect their reputations as delegated monitors. These two hypotheses generate a number of testable predictions regarding the anticipation of credit-rating downgrades by the bond market, which we investigate using a new data set of about 2,000 credit rating migrations from Moody’s and Standard & Poor’s, and matching issuer-level bond prices. The findings strongly indicate that rating changes do not appear to be importantly influenced by rating agency conflicts of interest but, rather, suggest that rating agencies are motivated primarily by reputation-related incentives.Note the tone of confidence in the conclusion.
Friday, October 10, 2008
Don't Cry For Berlusconi Or Yourselves, Folks
I wouldn't worry too much about the real economy, either. Sit and watch oil prices drop and giggle instead. This is going to do more to support the real economy than all the wild proposals being offered.
A while back, I was getting heat from rightish folks who claimed that all the talk about a risky economy was hate speech by Dems. At the time I said (fairly enough) that maybe I was a gloomy cuss for the moment, but a time would come when I was about the only optimistic person out there.
For the first time, I feel some optimism. Cautious optimism, but optimism. My buying fingers are twitching and my stomach's settling, my toes are wiggling, and I'm grinning ear from ear.
Casey Serins and some investment bankers (the types that consult astrologists and spend a lot of time worrying about health fads) are about to get really poor, but the Rob Dawgs and Melissa Clouthiers of the world are going to get a chance at a very comfortable future. Manhattan has contracted a case of the shivers, but a bunch of small-town bankers are beginning to emerge from their bunkers.
I know it seems counter-intuitive, but for once the cards are being stacked on the side of the realists and future wealth. Yeah, yeah, if you look at your portfolio you look poorer, but that was always funny money and was never really there. We're very close to the ability to earn real money, the type that's there for you in the future.
Dated Brent Spot below $75, no, below $74. Wholesale heating oil $2.26, wholesale gas $1.86.
If you're not feeling the sparks of optimism, just ask yourself "In which world are the sales clerk, the waitress, the plumber, the truck driver, the secretary, the mechanic, store owner, small businessman, the car salesman and the computer tech going to do better?"
- World A: Crude oil going to $200 a barrel a la Goldman Sachs.
- World B: Crude oil going to well below $80 a barrel.
Nymex crude futures below $80. Any moment now Nancy Pelosi is going to figure out that natural gas is a fossil fuel, and then the face of American politics will be changed.
Another Big Leg Down On Bovespa
Check out the Bovespa 3 year chart. (You'll have to click on the 3 year tab.) Brazil is selling US dollars to try to stem the fall of the Real, and Mexico is trying to sell USD to shore up their peso. India has been fighting a losing battle to shore up the rupee using similar tactics.
For American manufacturers, all this is not exactly good news. First, the economic conditions indicate a slowdown of precisely the segment in which many of our manufacturers compete well. Second, the USD is appreciating against a lot of currencies, making them less competitive.
Thursday, October 09, 2008
Russia's throwing over 180 billion in cash at their banks. Italy has moved. The Italian government is guaranteeing no losses to depositors and no bank failures because although the government believes the banks are very strong, it's going to give them money if needed. It will cost them, but, you know, whatever. France appears to be insisting that there is no problem but if there were they would prevent it from ever causing anyone any problem whatsoever. Belgium, France and Luxembourg are guaranteeing Dexia, so that other lenders will lend to Dexia.
Some analysts say the UK may end up owning 30% of their biggest banks after their buy-in is fully executed.
Real life examples of why everyone is bailing as fast as they can:
Here's an estimate that one-third of funding for ship building will be cut this year. Not all of this is due to credit woes - in part it is because cargo rates are falling. Russian farmers may not be able to repay their loans and some may not have the cash to plant in the spring. The Czech Republic is finally feeling it - industrial production dropped very significantly and new orders have dropped even more. No doubt this is related to the delays in iron ore shipments to China, FerroChina's default, which is effectively a bankruptcy, and Japan's 14.5% capital equipment order drop. Japan's government is now going to start an economic stimulus package. This is one reason I am leery of the yen; Japan's likely to go negative current balance for a while and will increase government spending. On top of its preexisting mountain of debt! OPEC is of course threatening an emergency meeting to stem oil price slides, but the economic fundamentals are not with them. If they cut production enough to jack the price up, the world economy will slide more, and anyway, a lot of countries need the money.
Wednesday, October 08, 2008
Please Keep Praying For Teri And Her Husband
On The Comments And Other Matters
Who Struck John
Lipstick On A Pig
Fake Jimmy J
Toddler seems to have realized that people can pretty easily tell the fake comments apart from the real, so is now posting a pastiche of stuff copied from long ago comments by normal humans on different posts. I am sure Toddler considers this a brilliant strategy, but then, some people don't understand the difference between a strategy and a tactic. I found today less entertaining than the previous day, so I am deepsixing most of these comments. End Evening Update.
The spectacle grows funnier and funnier. I have banned several IPs producing all these duplicated comments (see the end of this post for an explanation), but of course the towering populous forces of Obama (an army of ONE) come back under another IP.
I would strongly recommend to everyone that you sit back and enjoy the hilarity of this. I particularly like the part when one person fakes comment fights. I will post an update of the duped names by IP tonight.
What kind of a mind wastes this kind of time? Clearly not a gainfully employed one and not living in the land of what I would call sane. The effective IQ is extremely low, so this should give the rest of us a chance to study an early hominid in action. Maybe we could make it into a TV series?
I am extremely busy this week and will attend to matters as I can, but I won't neglect the real commenters. I can tell who the real commenters are and who the Obama ARMY of ONE commenters are by IPs. I will pull out some of the real comments and questions to comment on in a post later.
On the debate, the best summary I read was Betsy Newmark's:
I'm with Alex Castellanos on CNN who said that we just learned that McCain wants to buy everyone a house and Obama wants to provide everyone health care. And we're a country that's broke.Yes, well, the economic beatings will continue until the American population beats some sense into Congress. The president has little to do with it; Congress is the key. Congress doesn't want to deal with the real problems, so should we really be surprised that two senators are BSing us?
We're in deep trouble.
In the meantime, a growing number of state governments want the federal government to step in and bail THEM out. CA has already contacted the feds, and Massachusetts had to withdraw another bond offering and is next in line. New Hampshire's got a problem.... Wait until NJ encounters what is left of its tax base.
My hunch is that this is the end of big-spending state governments too, and the next step up the ladder of destruction of big-spending governments (conservative and liberal). If they have to turn to banks for loans, the effective subsidy offered via tax exemptions is gone and borrowing will be much more costly.
Think about this - with the ability of state governments to borrow impaired, and the ability of local governments to borrow impaired, what ability does Congress have to pass all these federal initiatives that require local matching efforts?
See, this is what our teeny-bopper ARMY of ONE, most the press, and our presidential candidates don't grasp - the game-changer is here, the game-changer is reality, and it doesn't matter who you elect - abruptly financial gravity has returned and will constrain all players. The rhetoric no longer matters.
It is for this reason that I think this recession will be worse than CR thinks it will be. I agree with him on a lot, but normally government spending (especially state and local) grows significantly as a proportion of GDP during downturns. This time the downturn coincides with the demographic draw-down of state resources (pensions and retiree medical benefits) and a credit crunch resulting from a bubble.
August Consumer Borrowing Falls
The release yesterday can be found here.
2003 2004 2005 2006 2007 Q1 r Q2 r Jun r Jul r Aug p
Percent change at annual rate 2
Total 5.3 5.5 4.3 4.5 5.6 5.2 4.1 4.1 2.4 -3.7
Revolving 2.9 3.8 3.1 6.1 7.4 7.6 3.5 3.4 5.0 -0.8
Nonrevolving 3 6.7 6.4 4.9 3.6 4.5 3.7 4.4 4.6 0.9 -5.4
A good article giving context.
As the wave of borrowings recedes, actual spending power will also recede. I don't think that borrowing can return to previous levels, so US consumer spending will reset to lower levels until debt is worked off, written down or discharged. The same is true for the UK and a number of other countries.
Federal Reserve (US), European Central Bank (ECB), Bank of England, Bank of Canada, Swiss National Bank and Riksbank (Sweden) cut 50 basis points. The Swiss target for 3 month Libor went from 3-2.5% to 3-2%. Bank of Japan really cannot cut much, because its overnight rate is 0.5% already, but it expressed its moral support and notes that it has been and will be baking nice batches of financial cookies to support the action.
A basis point is a .01%, so that's .5%. China works a little differently, and lowered its one-year lending rate by 0.27%. China had cut just recently, but this was the first cut by the ECB. Their main rate is now 3.75%. The US Fed Funds rate goes to 1.5% and the discount rate goes to 1.75%. The discount rate is the rate charged to banks and now broker dealers going to the discount window for money.
Fed statement. At the bottom of the statement you can access the statements of other banks.
The Governing Council of the ECB, by means of teleconferencing, has taken the following monetary policy decisions:
- The minimum bid rate on the main refinancing operations of the Eurosystem will be reduced by 50 basis points to 3.75 %, with effect from the main refinancing operation to be settled on 15 October 2008.
- The interest rate on the marginal lending facility will be reduced by 50 basis points to 4.75 %, with immediate effect.
- The interest rate on the deposit facility will be reduced by 50 basis points to 2.75 %, with immediate effect.
It is hard to tell how much effect these decisions will have, because in the short term, the problem is distrust between financial companies, including banks. Thus Euribor and Libor, to which many mortgage loans are indexed, have been zooming up.
Libor is the London Interbank Offered Rate, and Euribor is the EU equivalent.
Yesterday, the Fed opened a commercial paper lending facility which is likely to do more than rate cuts:
The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.Commercial lending is the lifeblood of the economy, and preventing that from locking up completely is absolutely necessary. Having to go to these lengths to accomplish that is an indication of a severe problem.
By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.