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The Silver Institute

Demand

Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Moz in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011. Jewelry posted a gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world’s improving economic picture. Photography fell by 6.6 Moz, realizing its smallest loss in nine years, as medical centers deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.

Supply

Silver mine production rose by 2.5 percent to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year. Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.

Top 20 Silver Producing Countries in 2010 (millions of ounces)
1. Mexico 128.6
2. Peru 116.1
3. China 99.2
4. Australia 59.9
5. Chile 41.0
6. Bolivia 41.0
7. United States 38.6
8. Poland 37.7
9. Russia 36.8
10. Argentina 20.6
11. Canada 18.0
12. Kazakhstan 17.6
13. Turkey 12.3
14. Morocco 9.7
15. India 9.7
16. Sweden 9.2
17. Indonesia 6.9
18. Guatemala 6.3
19. Iran 3.4
20. South Africa 2.8

Primary silver mine cash costs remained relatively flat year-on-year, falling by less than 1 percent to $5.27/oz. from a revised $5.29/oz. in 2009.

Net silver supply from above-ground stocks increased to 142.9 Moz in 2010, primarily due to higher scrap supply, a shift of net-producer hedging to the supply side, and a considerable rise in net-government stock sales. Regarding scrap supply, 2010 witnessed a 14 percent increase over 2009 as gains in industrial and jewelry recycling exceeded an ongoing decline in recovery from photographic sources.

The swing to net-producer hedging of 61.1 Moz ended a four-year run of de-hedging and is attributed to higher silver prices and was limited to a group of by-product, rather than primary silver producers.

Net government sales of silver rose to 44.8 Moz, primarily the result of increased sales from Russia, with China and India remaining relatively silent for the second consecutive year.

Supply from Above-Ground Stocks (Million ounces)
2009 2010
Bullion
Implied Net Disinvestment (-120.7) (-178.0)
Net Producer Hedging (-22.3) (61.1)
Net Government Sales (15.5) (44.8)
Sub-total Bullion (-127.5) (-72.1)
Old Silver Scrap (188.4) (215.0)
Total (60.9) (142.9)

World Silver Supply and Demand

To document these and other market fundamentals, each year the Silver Institute works with GFMS Limited, of London, a leading research company, to prepare and publish an annual report of worldwide silver supply and demand trends, with special emphasis on key markets and regions. This annual survey also includes current information on prices and leasing rates, mine production, investment and fabrication.

To learn more about the general production and uses of silver, please see our Production and Uses pages. For articles related to supply and demand, see the Silver News archives.

Read the entire article HERE.

by Randy Ilg
May 2011
U.S. Bureau of Labor Statistics

Each month, the Bureau of Labor Statistics (BLS) publishes duration-of-unemployment measures derived from the Current Population Survey (CPS). These measures include the average and median number of weeks that the jobless have been searching for work, as well as the number of unemployed persons by defined categories ranging from less than 5 weeks to 52 weeks or more. Analysts and news reports have frequently associated the mean or median duration measure with the length of time it takes jobseekers to find employment. However, the published data represent the current duration of unemployment and are not measures of completed periods of job search.

This brief report presents estimates of the length of time someone is unemployed before finding a job or before giving up searching for work. These measures were derived from the CPS labor force status flow data, which capture the extent to which the unemployed find jobs, leave the labor force, or stay unemployed from one month to the next.[1]

Recently, researchers at BLS linked unemployment duration for persons jobless in one month with their labor force status in the following month. In this manner, estimates of unemployment duration were created for the unemployed who became employed in the subsequent month, as well as for the unemployed who quit looking for work and left the labor force.

Labor force status in the CPS is determined for one week each month, usually during the survey reference week that contains the 12th; therefore, it is not possible to obtain information on the precise week between survey reference periods that unemployed individuals became employed or left the labor force. For example, if someone had been unemployed for 10 weeks as of the October reference week and reported they were employed in November, their duration of unemployment would be 10 weeks. However, the actual length of any one individual job search could have been as much as an additional 3 weeks—the number of weeks from the October to November survey reference periods.[2] Therefore, estimates of duration in this report are somewhat understated.[3] Data presented in this paper are not seasonally adjusted and, because they can fluctuate from month to month, a 12-month moving average is used in the charts, with the latest data point representing an average for 2010.

By the end of 2010, the median number of weeks jobseekers had been unemployed in the month prior to finding work was a little more than 10 weeks.[4] In contrast, prior to the start of the recent recession in 2007, the median was 5 weeks. Unemployment duration also increased among those who eventually quit looking and left the labor force. Unemployed individuals were jobless for about 20 weeks in 2010 before giving up their job search and leaving the labor force. Whereas in 2007, those who were not successful in their job search had been unemployed for about 8.5 weeks before leaving the labor force.[5] (See chart 1.)

(Click Image for a Larger View)
Chart 1

The recent recession has had a profound effect on the length of successful job search. The table shows the distribution of transitions from unemployment to employment by duration of unemployment (in weeks). From 1994 through 2008, roughly half of all unemployed jobseekers found jobs within 5 weeks. In 2007, for example, 49 percent of those who were unemployed in the prior month and employed in the subsequent month had been jobless for less than 5 weeks. During the same year, less than 3 percent of the unemployed who found work had been jobless for more than 52 weeks. In stark contrast, 11 percent of transitions from unemployment to employment exceeded a year in 2010, and only 34 percent lasted less than 5 weeks.

The information on unemployment duration from the flow data also provides evidence that the likelihood of becoming employed decreases the longer one is unemployed. For example, the chance that a person who had been unemployed for less than 5 weeks would become employed in a subsequent month was about 30 percent in 2010. For those unemployed 27 weeks or more, that chance in a subsequent month was only 10 percent. (See charts 2 and 3.)

(Click Image for Larger View)
Chart 2

Chart 3

In summary, the length of time it took for the jobless to be successful in their job search increased sharply during the recent recession and in its aftermath. The median number of weeks unemployed doubled—from 5 to 10 weeks—and a far greater share of successful jobseekers spent in excess of a year in their search for employment. At the same time, the median duration for unemployed persons who were unsuccessful in their job search and left the labor force also rose dramatically. Moreover, once unemployed, the likelihood that one would be successful in one’s job search decreased as the length of time spent searching for work increased.

This Issues paper was written by Randy Ilg, an economist in the Division of Labor Force Statistics, Office of Employment and Unemployment Statistics. Email: CPSinfo@bls.gov. Telephone: (202) 691-6378.

Information in this summary will be made available to sensory-impaired individuals upon request. Voice phone: (202) 691-5200. Federal Relay Service: 1 (800) 877-8339. This report is in the public domain and may be reproduced without permission. (Appropriate citation is requested.)

ACKNOWLEDGMENT: The author would like to thank Gregory P. Erkens and Thomas D. Evans in the Office of Employment and Unemployment Statistics at BLS for their input in developing the various duration series and Matthew K. Daigle at Northwood University for his analytical insight.

Read the entire article HERE.

WASHINGTON (MarketWatch)
June 7, 2011, 4:05 p.m. EDT

I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8% at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth–largely reflecting gains in equity values–and lower debt burdens have also increased consumers’ willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers–a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed–fell, remarkably, by nearly 10% from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6.5% below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6%. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment–nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed.

Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday’s jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.

The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.

In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

The Outlook for Inflation

Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3.5%, compared with an average of less than 1% over the preceding two years.

Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product–gasoline–account for the bulk of the recent increase in consumer price inflation. Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily.

Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong.

The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households’ longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable. As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.

Commodity Prices

As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let’s look at these price increases in closer detail.

The basic facts are familiar. Oil prices CL1N
-0.49% have risen significantly, with the spot
price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40% from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist’s first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply.

From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4.5% per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7% per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10% in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.

Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14% from 2000 to 2010; underlying this overall trend, however, was a 40% increase in oil use in emerging market economies and an outright decline of 4.5% in the advanced economies. In particular, U.S. oil consumption was about 2.5% lower in 2010 than in 2000, with net imports of oil down nearly 10%, even though U.S. real GDP rose by nearly 20% over that period.

This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies. Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years.

Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1% per year since 2004, compared with nearly 2% per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC’s production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle.

Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer’s drought in Russia severely reduced that country’s wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices.

Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques. Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions.

In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments.

As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term.

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15%. However, since February 2009, oil prices have risen 160% and nonfuel commodity prices are up by about 80%, implying that the dollar’s DXY
+0.04% decline can explain, at most, only a small part of the rise in oil and other
commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar’s decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment.
Monetary Policy

Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and–notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum–the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.

Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.

Read the entire article HERE.

by Charles Hugh Smith
Of Two Minds
April 25, 2011

What’s behind the disturbance in the financial Force? QE, ZIRP, the dollar peg and inflation, to name a few factors.

There is a great disturbance in the world’s financial Force. Many sense it as a storm on the horizon, something not yet visible but telegraphed by a rising, swirling wind and a new electric scent in the air.

I don’t claim to have a complete narrative that accounts for all the points of friction wearing down the moving parts, nor do I claim a “solution.” But a few observations might help inform our awareness of the disturbance.

As many of you know, readers provide most of the intelligence on this site (“of two minds, yours and mine”). I am the student and skeptic who learns from you and tries to make sense of a few dynamics, and extend them to some sort of coherent end-state. We share the same project of encouraging critical thinking.

1. There is a rising loss of faith in the conventional (i.e. propaganda) account of the U.S. economy. Readers tell me their local coin store has no silver coinage left, as the public has been buying with a vengeance. This is significant. (Silver has long been called “the poor man’s gold.”)

In the conventional view, the “herd” always gets it wrong: the “retail” “small speculator” investing public buy stocks and real estate at the top just as the “smart money” is distributing/selling. This “dumb money” cycle is certainly evident in manias and bubbles.

But there are also examples of “the public” acting well in advance (perhaps a form of “crowdsourcing”) of the “experts.”

One of the most remarkable trends of the past decade is the steady rise of the classic hedges against inflation and financial disorder: precious metals.

While the Federal government and a veritable army of conventional economists have repeatedly assured us over the past 10 years that the economy and the dollar are both sound, gold has quintupled from under $300 an ounce to over $1,500 an ounce.

Given that official inflation measured 26% for the decade 2001 – 2011, then clearly the public isn’t “buying” the “sound dollar, sound economy” story.

They’re also not buying the “you can’t afford not to own stocks in the New Bull market” story: the public has sold some $350 billion of domestic mutual funds in the past two years.

These are unmistakable signs that the public has lost faith in the Federal Reserve’s account of the dollar, U.S. stocks and the economy.

2. The idea that quantitative easing is benign has lost credibility. Even the MSM is reporting the dismal real-world results of QE2, for example, Stimulus by Fed Is Disappointing (understatement of the year?).

Another conventional view of QE–that it isn’t “injecting liquidity” because it’s simply an asset swap– The end of QE and what it means for the market–misses the point, which is that boosting bank reserves (what QE accomplishes) enables additional leveraged 20-to-1 (or more) lending. QE also keeps U.S. interest rates near-zero, which encourages a carry-trade of dollars flowing around the globe seeking higher returns and offsets to global inflation, which is certainly higher than officially recognized. It’s this flow of cash that’s driving up commodity costs.

A T-Bill sits there earning interest but cash is mobile–it can go anywhere to seek a return. A T-bill cannot. So QE is not just some benign asset swap–it has the pernicious effect of feeding a vast risk trade in stocks, emerging markets and commodities.

If that flow of new cash ceases (QE ends), then the risk trade (and Treasury bonds) both lose a key support.

3. Much of the analysis of U.S. policy is narrowly U.S.-centric. The U.S. has often ignored the international consequence of its parochial concern with domestic politics. Indeed, the U.S. has dropped 5 million tons of bombs and killed 500,000 people (as well as cost its own citizens their lives) overseas in pursuit of domestic policy (“we can’t ‘afford’ to lose Vietnam to the Commies because that would cost me the election.”)

This blindness to the consequences of domestic policy is most striking when it comes to China.

The key dynamic is the linkage of the renminbi (yuan) and the U.S. dollar. When the dollar tanks, oil rises when priced in dollars–and thus it also rises when priced in yuan. Thus the decline of the dollar and the consequent rise in commodities has directly fueled inflation in China, which is more dependent on a per capita basis on materials than the U.S.

Yes, the yuan peg has declined from the 8.5 range down to 6.5 to the USD, but it is still firmly pegged. As the cost of materials priced in dollars soars, it feeds higher input costs in China.

China’s policy-makers have exacerbated inflation by excessive money creation and lending by their own banks, but that alone is not sufficient cause for gasoline/petrol to cost as much in China as it does in the U.S. Oil is the foundation for petrochemicals, fertilizers, transport, plastics, etc., so the rise of oil driven by dollar depreciation is a driver of inflation throughout the Chinese economy.

No wonder the Chinese leadership is unhappy with the Fed’s crush-the-dollar strategy.

Though the cost of soy beans imported from the U.S. remains fixed in terms of currency, the relentless rise in oil is also raising the cost of China’s imports which are heavily dependent on oil, such as soy beans from the U.S.

4. China appears to be in the grip of a classic wage-price spiral inflation. Minimum wages are leaping by 25%, prices of many food items are doubling–this self-reinforcing dynamic is clearly visible in China. That is not the case in the U.S., which is being throttled by stagflation (rising prices and stagnant wages except for the top tier).

As I have noted before, price inflation in essentials hurts the lower income citizenry much harder than the top tier, as essentials make up a much larger percentage of the household expenses. A 30% jump in the cost of gasoline means little to a household in which gasoline accounts for 2% of total net income, but it certainly hurts a household in which gas accounts for 10% of total net income.

As noted in Your Pick, Ben, But One Goes Off the Cliff, the Fed’s ZIRP and QE policies have pared future policy down to a stark fork in the road: end ZIRP and QE, and send the risk trade (stocks and commodities) off the cliff, or keep pushing the dollar down and the rising cost of oil will shove the U.S. economy over the cliff.

That would also feed inflation in China, which already threatens to destabilize its economy. Correspondents within China recall that rising inflation was an important (if conveniently forgotten) dynamic in the 1989 era of dissent and disruption. The heavy-handed repression of domestic dissent and foreign reporting is evidence that the leadership in China has a keen appreciation of the connection between instability and rampant inflation.

So why is the Fed carpet-bombing the global economy? To protect the domestic economy? That makes no sense, for the Fed’s policies are pushing oil up to the point where there is no way to keep the U.S. economy from tipping into recession. It isn’t acting on behalf of the domestic economy, of course; it’s acting on behalf of domestic banking and Wall Street.

The Fed is busily destroying the village, suposedly to save it–only it’s the global village. But the Fed isn’t the only player with a stake in its game, and the other players, notably China, are tipping their hand that they will have to act, and soon, to protect their own domestic economies from the Fed’s destructive policies.

Read the entire blog post HERE.

By Michael Pento
EuroPacific Capital
Monday, April 4, 2011

For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.

If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are rising.

If you talk about the grand sweep of Fed policy, it’s fairly easy to fix the onset of our current monetary period with the onset of the dot.com recession of 2000. To prevent the economy from going further into recession at that time, the Fed began cutting interest rates farther and faster than at any other time in our history. During the ensuing 11 years, interest rates have been held consistently below the rate of inflation. Even when the economy was seemingly robust in the mid years of the last decade, monetary policy was widely considered accommodative.

Over that time annual headline Consumer Price Index (CPI) data has been higher than the Core CPI 9 out of 11 years, or 81% of the time. Looking at the data another way, over that time frame, the U.S. dollar has lost 20% of its purchasing power if depreciated year by year using core inflation, and 24% if depreciated annually with headline inflation. The same pattern held during the inflationary period between 1977 thru 1980, when the Fed’s massive money printing sent the headline inflation rate well above the core reading. The empirical evidence is abundantly clear. When the Fed is debasing the dollar, headline inflation rises faster than core. The reason for this is clear. Food and energy prices are closely exposed to commodity prices which have a strong negative correlation to the falling dollar that is created by expansionary policies.

Data we have seen thus far in 2011 underscores the need to focus on headline inflation and to avoid the trap of relying on the relatively benign core. The difference between the core rate and headline rate of inflation was .6 percent in January and a full percentage point in February. If annualized those relatively small monthly disparities will become enormous.

It is shocking how few Americans, even those with economic degrees and press credentials, fully appreciate the Fed’s vested interest in reporting low inflation. With benign data in hand, Fed policy makers are given a free hand in adopting stimulative policies. Central bankers who shower liquidity on the economy earn the gratitude of their peers and the thanks of their political patrons. But once a central bank goes down the expansionary path to fight recession it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power.

The sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items. Bernanke is focusing on the core just as we need him to focus on the headline. It’s time for the Fed to stop hiding behind flimsy statistical juggling and to start protecting the value of our dollar, which unfortunately is in free fall no matter what statistics one chooses to use.

Read the original article HERE.

Submitted by Tyler Durden
ZeroHedge
03/18/2011 11:11 -0400

Following the clusterflock of black swans that has hit world markets in the past month, the Fed has realized it needs to act quick to distribute money to undercapitalized bank shareholders ahead of the upcoming bank sector bail out, which will naturally be funded by taxpayers all over again. According to the Fed, the 19 worst banks in America (in other words those that are allowed to issue dividends) are: Ally Financial Inc. (no, really, f/k/a GMAC is healthy), American Express Company, Bank of America Corporation, The Bank of New York Mellon Corporation, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Fifth Third Bancorp, The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Keycorp, MetLife, Inc., Morgan Stanley, The PNC Financial Services Group, Inc., Regions Financial Corporation, State Street Corporation, SunTrust Banks, Inc., U.S. Bancorp, and Wells Fargo & Company. The surge in share prices of the mentioned banks confirms that this is nothing but the latest round of Fed-endorsed taxpayer rape, which nobody can do anything against as the Fed is an “unsupervised” entity, DC is owned by Wall Street, and the peasantry is downloading porn on their iPad.

Full Fed press release:

The Federal Reserve on Friday announced it has completed the Comprehensive Capital Analysis and Review (CCAR), its cross- institution study of the capital plans of the 19 largest U.S. bank holding companies.

As a result of the CCAR, some firms are expected to increase or restart dividend payments, buy back shares, or repay government capital. The Federal Reserve on Friday will discuss the reviews and its decisions with firms that requested a capital action.

All 19 firms will receive more detailed assessments of their capital planning processes next month.

In February 2009, the Federal Reserve advised bank holding companies that safety and soundness considerations required that dividends be substantially reduced or eliminated. Since that time, the Federal Reserve has indicated that increased capital distributions would generally not be considered prudent in the absence of a well-developed capital plan and a capital position that would remain strong even under adverse conditions.

The Federal Reserve’s actions on capital distributions come after significant improvement in both economic conditions and the capital positions of financial institutions. From the end of
2008 through 2010, common equity increased by more than $300 billion at the 19 largest U.S. bank holding companies. Moreover, conclusion of the Basel III agreement to increase capital requirements and passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act have substantially clarified the regulatory environment in which these firms will be operating.
The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital. Such access will support lending to consumers and businesses. The capital plan reviews foster appropriate capital distributions in a measured fashion while still helping to ensure continued increases in firms’ capital bases.

These supervisory reviews by the Federal Reserve come in the context of a significant change in supervisors’ expectations for firms’ substantive capital policies and capital planning processes. Among other things:

Firms are expected to demonstrate their ability to remain viable financial intermediaries as they make the planned capital distributions, even under stressed conditions;

Firms are expected to continue to increase their capital base; In 2011, firms generally are expected to limit dividends to 30 percent or less of anticipated earnings;

Planned share repurchases will be reviewed if there are material adverse deviations from the revenue and loss assumptions in a firm’s capital plan such that capital is not increasing as anticipated; and in the event of a sharp deterioration in economic conditions that could have negative implications for safety and soundness, the Federal Reserve may require modification of previously submitted capital plans.

The CCAR involves a forward-looking, detailed evaluation of capital planning and stress scenario analysis at the 19 large bank holding companies. Although it was not standardized to the degree the Supervisory Capital Assessment Program (SCAP) was in early 2009, it builds on the experience gained during that exercise. In the CCAR, the Federal Reserve assessed the firm’s ability, after taking into account the proposed capital actions, to maintain sufficient capital levels to continue lending in stressed economic environments, including under an adverse scenario specified by the Federal Reserve. The adverse scenario was intended to represent developments in a typical recession, with a decline in economic growth, a rise in unemployment, and a sharp drop in risky asset prices (for details, please see Comprehensive Capital Analysis and Review: Objectives and Overview, attached). Federal Reserve supervisors carefully analyzed and adjusted as appropriate projections of stressed revenues and losses provided by the firms in the CCAR.

It is important to note that there are a number of reasons why firms participating in the CCAR may not be making capital distributions this quarter. For example, a firm may not have requested approval of any such action, Federal Reserve supervisors may have believed a requested distribution was too high at this time and could weaken the firm’s ability to weather adverse economic conditions, or supervisors may not have been comfortable with the capital planning process underlying the request. Firms may resubmit capital proposals each quarter, with their prospects for an answer of no objection dependent on their responses to any concerns raised during the CCAR.

Read the entire article HERE.

Comprehensive Capital Analysis and Review: Objectives and Overview (230 KB PDF)

Mises Daily Index
Tuesday, March 01, 2011
by Robert Blumen

The end is near. The end, that is, of the current monetary system. But inflation or deflation? Dow 1,000 or wheelbarrow money? While the arguments on the deflation side are not entirely without merit, they rely on conceptual errors that result in exaggerating the magnitude of a possible deflation.

The primary error of the deflation camp is the conflation of money and credit. There are plenty of examples, but Robert Prechter is typical.[1]

When the volume of money and credit rises relative to the volume of goods available, the relative value of each unit of money falls, making prices for goods generally rise. When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall.

I prefer to define inflation and deflation in terms of changes in the volume of money only. While definitions can be chosen as a matter of preference, the laws of cause and effect do not depend on the choice of definitions. It is the volume of money alone, not the volume of money and credit, that is the primary determinant of prices generally. By focusing on money I do not deny that a credit contraction has important macroeconomic consequences, nor do I deny that fractional-reserve banking makes money and credit interdependent.

The key point is that prices are formed with money because money is the final means of payment for goods, while credit is not. The value of each unit of money rises only when there is less money or more demand for existing money. A change in the volume of credit will affect relative prices but it will not affect the overall value of each money unit in a systematic way.

Lumping together money and credit as if they were the same thing leads Prechter to deeply confused and crankish writings, such as here, in The Fed’s Presumed Inflation — Mostly a Mirage. In this piece, he makes a spurious distinction between the monetization of new government debt and the monetization of existing government debt. To summarize Prechter’s point, when the public’s holding of Treasury debt is replaced by holdings of dollars (which, to further confuse matters, he calls “IOU Dollars”), no net inflation has occurred because the volume of money plus credit has not changed.

This is plain wrong. As noted above, Prechter is free to define inflation as a growth in money plus credit, but the economics of the money supply and the credit supply are not the same. Aggregating money and credit obscures the difference. Credit is not money. Money can be spent, debt cannot. Debt investors hold a claim on future money flows, while money holders hold money. The total of money-plus-credit has not changed in Prechter’s scenario, but the supply of money has increased, while the supply of debt has decreased by the same amount. Whether or not the bank multiplies more loans on top of the new deposits, the supply of spendable media has increased.
Furthermore — contra Prechter — from a monetary standpoint there is no difference between the monetization of new or existing debt. In either case, money is created out of nothing by the central bank. In the former case, a corresponding amount of Treasuries is removed from the banks’ balance sheets and in the latter case it is not. But the quantity of money, which is the primary determinant of the value of each unit, increases in the same way in either case.

A similar misunderstanding is demonstrated in an article by the pseudonymous Pragmatic Capitalist, “A Deep Dive into the Mechanics of a QE Transaction.” The article begins,

Some people want you to believe that the Fed just injected the economy and stock market full of money that will now result in an economic boom and much higher prices in most assets. That’s simply not true.

Mr. Capitalist makes the same error as Prechter:

Before we begin, it’s important that investors understand exactly what “cash” is. “Cash” is simply a very liquid liability of the U.S. government. You can call it “cash,” Federal Reserve notes, whatever. But it is a liability of the U.S. government. Just like a 13 week treasury bill. What is the major distinction between “cash” and bills? Just the duration and amount of interest the two pay. Think of one like a checking account and the other like a savings account.

This is a common way of thinking and one that I found very confusing when I first started reading investment literature. Portfolio managers usually think of cash as money proper plus liquid assets that can easily be sold for money proper at their par value.

While it makes some sense to think this way from an operational standpoint when running a portfolio, the two assets are not the same thing. Cash is not a form of credit nor is credit a form of cash. Financial securities such as money-market mutual funds and short-term Treasury debt are not money. They are credit instruments that provide a stream of money payments and can be sold in the market for money. A change in the total quantity of these securities issued does not represent a change in the money supply. When new securities are issued, the buyer purchases them from the government with money.

The appearance that liquid debt securities are no different than actual money depends on the willingness of buyers to pay par value for their debt. The liquidity of these cash-like assets is not a constant, but is a variable. During periods of financial crisis, some formerly liquid assets may become quite illiquid.

Portfolio managers and others who think about the world mostly in terms of financial securities may not see the difference between cash and highly liquid securities. But once we move outside of finance, the difference becomes more clear: when the owner of the portfolio wishes to liquidate some financial assets in order to purchase nonfinancial goods (e.g., a ham sandwich), the assets must be sold for money proper. Treasury bills are not accepted by grocery stores or other retail businesses in exchange for goods.

Reading along with Mr. Capitalist, he identifies the major distinction between money and debt as the duration and the amount of interest:

This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash” is its own unique asset class. But that’s not really true. “Cash” as it sits in your bank account is really just a very very liquid government liability.

What is the difference between your checking and savings account? Do you classify them both as “cash”? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?

What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note? What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration.

Duration and interest are different for cash and treasuries, but they are not the fundamental differences. The fundamental difference between them is that money is accepted as a final means of payment for goods and Treasuries are not. This is why Treasuries are not cash.

Government debt is a liability that requires the payment of money proper as interest and upon maturity. Actual money is not a liability in the same sense. Fractional-reserve banking makes this more complicated because the money supply consists of currency and bank liabilities that are backed by bank assets. But these bank liabilities have the unique property that they are accepted as payment for goods and services — while other financial liabilities such as Treasuries are not.

The error in Mr. Capitalist’s reasoning is that he focuses on similarity in an accidental property while ignoring the difference in a definitional property. Treasuries and fractional-reserve money are both liabilities; but even comparing Treasury debt to fractional-reserve bank deposits, the latter is accepted in exchange for goods and services while the former is not. The acceptability in exchange is the definitional property of money, while the liability nature is not.

Read the entire article HERE.

Published: Friday, 3 Sep 2010 | 3:00 AM ET
By: Patrick Allen
CNBC Senior News Editor

Even if the US and European economies manage to avoid a double dip, it will still feel like a recession, while more than half of the 800-plus US banks on the “critical list” are likely to go bust, according to renowned economist Nouriel Roubini of Roubini Global Economics.

The second half of the year will remain weak as tailwinds become headwinds, Roubini told CNBC on the shores of Lake Como, Italy at the Ambrosetti Forum economics conference.

“In the second half, fiscal policy becomes a headwind, no more cash for clunkers,” Roubini said. “The positive scenario is that growth will be below par.”

Roubini recently said the chance of a double-dip recession in the US was now more than 40 percent.

“The big risk is that there will be a downturn in markets that could impact the bond, the equity and the credit markets,” he said.

“Job losses have been higher, the US jobs number will show that. There is no private sector jobs growth,” he said. “Consumption is weak, exports are weak and housing is weak.”

“If there is no final sales and no final demand, companies will not invest,” he added.

New Normal Coming and More Banks Will Fail

Roubini said he believes hopes of decoupling will be dashed as the slowdown in the US impacts China, Japan and the euro zone.

“In Europe, Germany is strong but the rest of the continent is pretty dismal,” he said. “The rest of the world cannot cope without the prop of the US consumer. Chinese growth in the second half will be 7 percent.”

“Get used to it,” Roubini said. “Deleveraging has to continue as governments and consumers deleverage in the developed world.”

“We have to expect the new normal,” he added. “We do not need a double dip for it to feel like recession.”

“The biggest banks have been backstopped, but 800-plus small- and medium-sized banks in the US remain on the critical list and half of those will go bust,” Roubini said.

Roubini said corporate and consumer debt problems will get worse and that there are more problems ahead in the commercial and residential property market.

Read the entire article HERE.

Part 1

Part 2

“The Senate passed a financial “reform” bill today by a 59-39 vote which won’t fix any of the core problems in the financial system, and won’t prevent the next financial crisis.

The bill doesn’t include the Volcker Rule (it wasn’t even debated), doesn’t break up or even substantially rein in the too big to fails, doesn’t stop prop trading, and doesn’t force transparency in the derivatives market.

Senator Feingold said:

The bill does not eliminate the risk to our economy posed by “too big to fail” financial firms, nor does it restore the proven safeguards established after the Great Depression, which separated Main Street banks from big Wall Street firms and are essential to preventing another economic meltdown. The recent financial crisis triggered the nation’s worst recession since the Great Depression. The bill should have included reforms to prevent another such crisis. Regrettably, it did not.
Senator Cantwell agreed, saying:

While this bill takes much needed steps to help prevent a crisis of this magnitude from ever happening again, it fails to close the very same loopholes in derivatives trading that led to the biggest economic implosion since the Great Depression…. Throughout this debate I have fought hard against efforts to weaken this legislation as well as to pass language to strengthen it further. But the fact of the matter is, without key reforms in derivatives trading, this bill does not safeguard America’s economy from a repeat of this crisis.

It sets up a process for responding the next time we have a financial crisis, but it doesn’t prevent this kind of thing from ever happening again. We have to stop these kinds of dangerous activities. We need stronger bans on banks gambling with depositors’ money. We need bright lines – like Glass-Steagall – that separate risky activities from the traditional banking system. We need to refocus our financial system away from synthetic bets and get more capital into the hands of job creators and Main Street businesses. There are good, strong provisions in this bill, and I’m proud of the work we did to get them in there, but I fear that without closing the loopholes primarily responsible for this economic meltdown, we are missing the entire heart of the matter.
Nouriel Roubini said the bill is “cosmetic”, and won’t stop the next crisis.

And as I pointed out last month:

In a letter to Senate majority leader Harry Reid and minority leader Mitch McConnell, luminaries including former SEC Chief Accountant Lynn Turner, former Labor Secretary Robert Reich, hedge fund owner Jim Chanos, former Lehman Brothers Vice Chair Peter Solomon, former S&L investigator Bill Black, former Senate Banking Committee Chief Economist Rob Johnson, economists Dean Baker, Barry Eichengreen and others pointed out that Dodd’s proposed financial reform legislation wouldn’t have prevented the current crisis … and won’t prevent the next crisis.
Dodd himself has admitted that his bill “will not stop the next crisis from coming”.

In fact, the bill is wholly ineffective, failing to address the core things which need to be done to stabilize the economy. See this, this and this.

As I wrote last month:

Senator Dodd is trying to push through a financial “reform” which bill won’t do anything to break up the too big to fails, or do much of anything at all …

For example, Dodd’s bill:

Won’t break up or reduce the size of too big to fail banks
Won’t remove the massive government guarantees to the giant banks

And won’t even increase liquidity requirements to prevent future meltdowns

As Senator Ted Kaufman points out:

What walls will this bill erect? None.

***

Just this week, a Moody’s report stated: “…the proposed regulatory framework doesn’t appear to be significantly different from what exists today.”

***

In sum, little in these reforms is really new and nothing in these reforms will change the size of these mega-banks.

Moreover – as Simon Johnson notes – the bill intentionally doesn’t have much in the way of specifics, but just pushes off on regulators the ability to crack down on Wall Street in the future. As Johnson notes, this is a recipe for continued failure to rein in Wall Street:

If legislation can only empower regulators then, given regulators are only as strong a newly elected president wants them to be, the approach in the Dodd bill simply will not work.
Indeed, Democratic Congressman Brad Sherman – a senior member of the House Financial Services Committee and a certified public accountant – said recently:

The Dodd bill has unlimited executive bailout authority. That’s something Wall Street desperately wants but doesn’t dare ask for. The bill contains permanent, unlimited bailout authority.”

Read the entire article HERE.

Article by New York Times: Financial Reform

Original Financial Reform Bill S.3217

Summary of Financial Reform Bill S.3217

4/15/2010–Introduced.Restoring American Financial Stability Act of 2010 – Financial Stability Act of 2010 – Establishes the Financial Stability Oversight Council to:
(1) identify risks to the financial stability of the United States;
(2) promote market discipline; and
(3) respond to emerging threats to the stability of the United States financial markets. Establishes within the Department of the Treasury:
(1) the Office of Financial Research (Office) to support the Financial Stability Oversight Council; and
(2) the Financial Research Fund to fund the Office. Grants the Board of Governors of the Federal Reserve System (Board) additional authority to require reports and conduct examinations of certain nonbank financial companies and bank holding companies. Revises supervision and prudential standards for nonbank financial companies supervised by the Board and for certain bank holding companies. Establishes in the U.S. Bankruptcy Court for the District of Delaware an Orderly Liquidation Authority Panel to authorize the Secretary of the Treasury (Secretary), under specified circumstances, to appoint the Federal Deposit Insurance Corporation (FDIC) as receiver of a financial company in default or in danger of default whose failure would have serious adverse effects on financial stability in the United States. Enhancing Financial Institution Safety and Soundness Act of 2010 – Transfers all functions of the Office of Thrift Supervision (OTS) and the OTS Director to the Board, to the Office of the Comptroller of the Currency, and to the FDIC. Abolishes OTS. Prohibits the issuance of charters for federal savings associations. Private Fund Investment Advisers Registration Act of 2010 – Amends the Investment Advisers Act of 1940 with respect to:
(1) the regulation of advisers to hedge funds;
(2) collection of systemic risk data; and
(3) the asset threshold for federal registration of investment advisers. Office of National Insurance Act of 2010 – Establishes within the Department of the Treasury the Office of National Insurance to monitor all aspects of the insurance industry, including identification of issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system. Nonadmitted and Reinsurance Reform Act of 2010 – Sets forth procedures for:
(1) reporting, payment, and allocation of nonadmitted insurance premium taxes; and
(2) regulation of credit for reinsurance and reinsurance agreements. Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010 – Imposes a moratorium upon FDIC provision of federal deposit insurance for credit card banks, industrial loan companies, and certain other companies under the Bank Holding Company Act of 1956. Amends the Bank Holding Company Act of 1956 to revise requirements for reports, examinations, and regulation of functionally regulated subsidiaries, including concentration limits on large financial institutions. Over-the-Counter Derivatives Markets Act of 2010 – Amends the Commodity Exchange Act to:
(1) extend joint rulemaking and regulatory authority of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to over-the-counter derivatives markets; and
(2) require large swap trader reporting. Amends the Gramm-Leach-Bliley Act to repeal the prohibition against the regulation of security-based swaps. Amends the Securities Exchange Act of 1934 to set forth:
(1) clearing requirements for security-based swaps;
(2) registration and regulation procedures governing security-based swap dealers and major security-based swap participants; and
(3) position limits and position accountability for security-based swaps. Directs the SEC, the CFTC, the Financial Stability Oversight Council, and the Treasury Department, individually and collectively, to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation of certain SWAPS. Payment, Clearing, and Settlement Supervision Act of 2010 – Directs the Financial Stability Oversight Council to designate those financial market utilities or payment, clearing, or settlement activities which it determines are, or are likely to become, systemically important. Sets forth procedures governing examination of and enforcement actions against financial institutions subject to standards for designated activities, including:
(1) financial and operational risks such activities may pose to other financial institutions, critical markets, or the broader financial system; and
(2) information to assess systemic importance of financial institutions engaged in payment, clearing, or settlement activities. Amends the Securities Exchange Act of 1934 to:
(1) establish the Investor Advisory Committee and the Office of the Investor Advocate;
(2) authorize the SEC to restrict mandatory predispute arbitration;
(3) prescribe securities whistleblower incentives and protection; and
(4) revise regulation, accountability, and transparency of nationally recognized statistical rating organizations (NRSROs). Amends the Securities Investor Protection Act of 1970 to increase the borrowing limit on Treasury loans. Amends the Securities Exchange Act of 1934 to:
(1) direct the federal banking agencies and the SEC to prescribe joint regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party;
(2) require procedures for annual shareholder approval of executive compensation; and
(3) require disclosures regarding employee and director hedging. Requires the SEC to report to certain congressional committees regarding:
(1) its conduct of examinations of registered entities, enforcement investigations, and review of corporate financial securities filings; and
(2) its oversight of national securities associations. Prescribes standards for:
(1) corporate governance; and
(2) regulation of municipal securities and changes to the Municipal Securities Rulemaking Board. Establishes in the SEC the Office of Municipal Securities. Amends the Sarbanes-Oxley Act of 2002 to authorize the Public Company Accounting Oversight Board to share certain information with foreign authorities. Amends the FDIA to direct the Inspector General of each federal banking agency to report to Congress semiannually on certain losses to the Deposit Insurance Fund. Instructs the Comptroller General to study and report to Congress on the risks and conflicts associated with proprietary trading by and within specified entities. Directs the Office of Financial Literacy of the Bureau to establish a program to make grants to states for enhanced protection of seniors from being misled by false designations. Consumer Financial Protection Act of 2010 – Establishes:
(1) in the Federal Reserve System the Bureau of Consumer Financial Protection (Bureau) to regulate the offering and provision of consumer financial products or services under the federal consumer financial laws;
(2) the Office of Fair Lending and Equal Opportunity;
(3) the Office of Financial Literacy; and
(4) the Consumer Advisory Board. Grants the Bureau supervisory powers and enforcement authority over certain large-sized insured depository institutions and insured credit unions. Excludes from Bureau oversight certain merchants, retailers and other sellers of nonfinancial goods or services. Grants the Bureau specific authorities, including prohibiting unfair, deceptive, or abusive acts or practices. Transfers to the Bureau specified consumer financial protection functions. Prescribes requirements for collection of deposit account data. Amends the Equal Credit Opportunity Act regarding small business loan data collection. Amends the Truth in Lending Act to prohibit certain prepayment penalties. Amends the Federal Reserve Act with respect to emergency lending authority. Authorizes the Comptroller General, under specified circumstances, to conduct reviews of the Federal Reserve Board, a federal reserve bank, or a credit facility. Improving Access to Mainstream Financial Institutions Act of 2010 – Authorizes the Secretary to establish a multiyear program of grants, cooperative agreements, financial agency agreements, and similar contracts or undertakings to promote initiatives to enable low- and moderate-income individuals to:
(1) to establish one or more accounts in a federally insured depository institution that are appropriate to meet their financial needs; and
(2) gain improved access to the provision of accounts on reasonable terms.