Ben Benanke's Incompetent

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www.economist.com/blogs/freeexchange/2011/10/monetary-policy-3

....The fed funds rate stayed at 2% from April until October of 2008. The Fed didn't ramp up its initial asset purchase programme above $1 trillion until March of 2009, at which point the economy had already lost some 6m jobs. Why the delay? One data point worth noting: the monthly core inflation rate was positive throughout 2008 and 2009. NGDP growth, by contrast, was already negative in the third quarter of 2008, and was sharply negative in the fourth quarter of that year, when total spending in the economy shrank at an 8.4% annual pace. A central bank with an explicit NGDP level target would have faced (appropriately) intense pressure to do much more much sooner than one with the Fed's present, vague focus on an inflation target as a means to broader macroeconomic stability."

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The independent senator from Vermont is taking aim at the make-up of the Federal Reserve's board of directors, arguing it has too many bankers.

finance.fortune.cnn.com/2011/10/26/bernie-sanders-federal-reserve/?section=magazines_fortune

Bernie Sanders
FORTUNE -- At a time when the rally against Wall Street and corporate greed gains momentum, a U.S. government report released last week raises a question few protesters probably think about: Are too many members of the U.S. Federal Reserve board of directors from the banking sector? After all, the Fed regulates many of the very same companies that its members run, and so this potentially poses a conflict of interest, according to the Government Accountability Office.

While the report didn't find that these firms directly benefited from the Fed, it confirmed worries that several financial firms and corporations could have gained from their executives' close ties to the Fed. For instance, JP Morgan Chase could have benefited from its chief executive Jamie Dimon's position on the board of the Federal Reserve Bank of New York. According to the GAO, the bank received bailout loans from the Fed while it served as one of the clearing banks that facilitate payments for the Fed's emergency lending program.

Now self-described Democratic socialist Sen. Bernard Sanders of Vermont, who spearheaded the report, has gathered a team of top economists to draft legislation to reform the Fed. Sanders (or "Bernie" as most call him) joins Massachusetts Congressman Barney Frank and others in their call to restructure the Fed as the agency comes under increased scrutiny in recent years. Sanders is one of only two independents in the U.S. Senate. The 70-year-old politico has long slammed the excesses of Wall Street and U.S. businesses. Only recently, as The Guardian points out, has he become less of a political outsider.

Fortune caught up with the senator this week over telephone from his home state of Vermont. He talks about the inequitable influences of Wall Street and how to give the rest of America more say over policies to restart the U.S. economy.

Does anything in the GAO report surprise you?

No. In many ways what the GAO was telling us is what many of us already knew but the significance is that for the first time the GAO is telling it. You have representatives from the largest financial institutions in the country sitting on Fed board of directors ostensibly regulating their own banks. For many of us by definition that's a conflict of interest.

The other point that the GAO made, which I think is significant, is it identified 18 former and current members of the Federal Reserve Board who are affiliated with banks and companies who received emergency loans from the Fed. That included General Electric (GE), JP Morgan Chase (JPM) and Lehman Brothers.

The GAO also found that the firms these board members represented did not receive special treatment. Should we breathe a sigh of relief?

No. I think any objective look at a situation where you have CEOs and representatives of the largest financial institutions in the country sitting on boards, which are ostensibly regulating these same institutions, I think, would tell the average American that there is something very, very wrong that needs to be changed.

I'm not here to say that in every instance there were improprieties, but just by definition you shouldn't have the regulators being the same people who are being regulated.

But some would say having actual bankers on hand to provide their expertise and perspectives on the market would be invaluable in helping the Fed achieve financial stability. What are your thoughts on that?

I think you certainly want the advice and experience of bankers. The function of regulation in terms of a federal agency like the Fed is to protect the interest of the people of America. And if the people who are sitting on the boards are the same people who run the largest financial institutions I think the overwhelming majority of the American people would see that as a conflict.

Some of the largest financial institutions are charging 25% to 30% interest rates on credit cards. Wouldn't you want to hear from consumer representatives sitting on there what that means to the average American? I think you might.

Also, one of the Fed's mandates is to maximize employment. In my view the Fed hasn't responded very strongly on this. Wouldn't you want a representative from organized labor to talk about what it means in this country when you have 16% unemployed or underemployed?

You've gathered a team of top economists to reform the Fed. What would an improved central bank look like?

We can learn from best practices from other central banks. Many other countries have much more stringent rules regarding conflicts of interests – such as who can sit on the board, etc … I think Australia and Canada have something that we can learn from.

Another very important issue is with unemployment so high, how can we strengthen the Fed's full-employment mandate and ensure that it conducts monetary policy to achieve maximum employment? In other words the Fed has a number of mandates and one of them is to control inflation. But one of them also is to pursue policies that lead to full employment. Is the Fed doing that in an adequate way? Well I would argue that by definition when you have 16% of people unemployed and underemployed it really is not.

During the financial crisis the Fed through a revolving loan fund lent out $16 trillion at very low interest rate to every major financial institution in America, central bank around the world and large corporations. They did that in order to prop up Wall Street and make sure there wasn't a financial collapse. Right now 16% of the American people are unemployed or underemployed. Do we see the same sense of urgency on the part of the Fed in addressing that crisis as we did in the Wall Street crisis three years ago?

Another issue: The Fed has the responsibility to ensure the safety and soundness of the nation's banking and financial system. That's one of its mandates. Right now, the six largest financial institutions in this country have assets that are equivalent to 65% of U.S. GDP (over $9 trillion). Three out of the four largest banks are now bigger than they were before we bailed them out because they were too big to fail. Do you think that the Fed has responded effectively to address the too big to fail crisis when three out of the four largest financial institutions are bigger than they were before the bailout? I think probably not.

How do you think implementation of Dodd-Frank Wall Street reform act is going?

I think Wall Street is doing everything that it can to make it as weak as possible. But again now we're talking about the role of the Fed, not Dodd-Frank. In my view I think the proper response on the part of the Fed would be to break up the large financial institutions. Right now their concentration of ownership in the financial industry is much too great. But again these are the kinds of questions that need to be answered.

There's a lot of anger against Wall Street. What are your thoughts on the Occupy Wall Street movement?

I think they're doing a good job in focusing attention on the greed of Wall Street and certainly pinpointing the reality that Wall Street is directly responsible for the terrible recession that we're in right now. And while millions of workers have lost their homes and their jobs and their life savings, many of the CEOs on Wall Street are doing better than they ever have before.

So I think focusing attention on that is correct. And the other issue that they're focusing attention on, which I think is very appropriate, is income and wealth inequality in America. We now have the 400 wealthiest people owning more wealth than the bottom 150 million Americans. This gap between the very rich and everybody else is the widest that it has been since 1928.

Do you plan to run for president and do you see yourself as the next Ralph Nader?

No I think I've answered that question many, many times

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For Reserve Requirements

WASHINGTON -(Dow Jones)- The U.S. Federal Reserve announced new figures Wednesday used to calculate next year's reserve requirements for depository institutions.

For net transaction accounts--mostly checking accounts--the first $11.5 million in deposits will be EXEMPT from reserve requirements in 2012, up from $ 10.7 million in this year.

The Fed will assess a 3% reserve ratio on net transaction accounts from $11.5 million up to $71.0 million, compared with a ceiling of $58.8 million this year.

And the Fed will assess a 10% reserve ratio on net transaction accounts in excess of $71.0 million.

The Fed did not change the reserve ratios in its annual indexing announcement.

Banks must hold a percentage of net transaction accounts as reserves in the form of vault cash, as a deposit in a Federal Reserve Bank or as a deposit in a pass-through account at a correspondent institution, the Fed said.

===========================

The “low reserve tranche” began @ $26.0m on January 14, 1982 (& now stands @ $71.0m)

The “exemption amount” began @ $2.1m on December 23, 1982 (& now stands @ $11.5m)

The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. The Garn-St Germain Act of 1982 exempted the first $2 million of reservable liabilities from reserve requirements. This "exemption amount" is adjusted each year according to a formula specified by the act. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent was set under the Depository Institutions Monetary Control Act of March 31st 1980 at $25 million. This "low-reserve tranche" is also adjusted each year (see table of low-reserve tranche amounts and exemption amounts since 1982). Net transaction accounts in excess of the low-reserve tranche are currently reservable at 10 percent.

=========================

Law Passed to Pay Interest on Reserves, Effective in 2011
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve banks to pay interest on reserve balances and gave the Board of Governors authority to lower reserve requirements on all transaction deposits (applied to deposits above a certain threshold level) to as low as ZERO PERCENT, from their previous minimum top marginal requirement ratio of eight percent.

==========================

The FED wasn't able to control bank credit during the past housing boom. Once they complete their goal (ZERO PERCENT RESERVE REQUIREMENTS), the next boom-bust is unavoidable.

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By Kelly Evans
Desperate times call for desperate measures. This helps explain why nominal gross domestic product — that is, total GDP without inflation stripped out – has wound up at the center of a debate over how, and whether, the Federal Reserve can do more to stimulate the U.S. economy and lower the nation’s current 9.1% unemployment rate.

The problem boils down to the Fed’s current dual – or in fact, triple – mandate from Congress. Here is the entire wording of the Fed’s mandate, which falls under Section 2A of the Federal Reserve Act.

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

It is this last part which is at the heart of today’s policy debate. In theory, and in the long run, it should be consistent for the Fed to conduct monetary policy in a way that promotes a healthy economy marked by maximum employment, stable prices, and moderate long-term interest rates. But that is little help at a time like now, when the Fed is roughly meeting the latter two objectives but falling well short on the first; that is, on reaching anything close to “maximum” or full employment, typically defined as something like an unemployment rate of 5% (though many think today, for various reasons including demographic ones, this rate is now closer to 7%).

This kind of dual mandate is pretty unique in central banking. Elsewhere, in Europe and Canada, for example, central banks have a single mandate to promote price stability; that is, to keep the consumer-price level growing at about a 1-2% pace per year, as many have interpreted this mandate. This approach is favored by inflation and deficit hawks who fear the Fed would otherwise monetize government deficits and run the risk of hyperinflation.

Until recently the most vocal opponents of the Fed came from this camp, and there are plenty of economists and Fed officials who would prefer this type of single mandate. (Dallas Fed President Richard Fisher, for one, who earlier this year said “it would not break my heart to have a single mandate” focused solely on inflation and suggested it was up to Congress now to change the wording of the Federal Reserve Act as such.)

Lately, though, as the economic recovery continues to disappoint and unemployment remains stubbornly high, a different group has come to the fore. This camp says that if the Fed is falling short on its “maximum employment” mandate, then it ought to be – it is, in fact, required to be – far more aggressive in stimulating the economy to try and get there.

Consider Chicago Fed President Charles Evans, who in a speech earlier this month said “given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run.” He would prefer the Fed to commit to “keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent.”

Trouble is, this essentially leaves the Fed in the same, difficult position as it is in today. Hence calls, which are growing ever louder, for an entirely new, different kind of target: nominal GDP. This is something Scott Sumner, an economist at Bentley University whose views have gained prominence through his blog, TheMoneyIllusion, has been pushing for two decades. His support base among academics lately has been growing. And perhaps most significant, since it suggests the Fed might actually be open to such an idea, is that Goldman Sachs economists have just endorsed the idea as well.

The version which Goldman puts forth, building on the ideas of Sumner and others, is that the Fed ought to aim for a specific level of NGDP which would put the economy back on the trend it was prior to the recession; to close, in other words, the current gap between the economy today and where econometric models suggest the economy should be. This is no small gap; Goldman estimates the shortfall, as of the second quarter, is roughly 10%. To most quickly close this gap, Goldman estimates the Fed would need to roughly double its balance sheet to $5 trillion and keep interest rates at zero through at least 2016.

The beauty of the NGDP target, as proponents see it, is that it doesn’t differentiate between inflation and real GDP. So it doesn’t matter whether the gap is closed by three parts inflation and one part real GDP or one part inflation and three parts real GDP. The point is that the gap gets closed, because the Fed is able to be as aggressive as it needs to be, and the economy avoids a prolonged slump and chronically high unemployment a la the Great Depression. And by targeting NGDP, or a stated goal for the total size of the economy, instead of a 3% or 5% inflation rate, the Fed is better able to avoid the backlash that might otherwise undermine its ability to achieve said objective.

blogs.wsj.com/economics/2011/10/27/what-is-ngdp/?blog_id=8&post_id=15019

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Asking whether or not “policy makers could successfully hit it” or whether NGDP targeting is the right prescription seems very clear cut:

The rate-of-change in nominal gDp peaked in the 2nd qtr of 2006 & fell sharply for 12 successive quarters (3 whole years). This neatly coincides with the fall in monetary flows (our means-of-payment money Xs its rate-of-turnover) over the same period.

For those who need a reminder the equation of exchange is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged, is equal (for the same time period), to the product of the volume, and transactions velocity of money.

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Message deleted by flow5.

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Implementation of the Dodd-Frank Deposit Insurance Provision

1. How long will the full deposit insurance coverage for noninterest-bearing transaction accounts last?
The Dodd-Frank Deposit Insurance Provision is effective from December 31, 2010 through December 31, 2012.

Please note that the FDIC did not extend the Transaction Account Guarantee Program (“TAGP”) beyond its sunset date of December 31, 2010. On the same day that the TAGP expired – December 31, 2010 – the Dodd-Frank Deposit Insurance Provision became effective. There was a one-day overlap of the TAGP and the Dodd-Frank Deposit Insurance Provision.

2. What types of deposit accounts are included in the definition of a “noninterest-bearing transaction account”?
All funds in noninterest-bearing transaction accounts held at FDIC-insured depository institutions (“IDIs”) will be fully insured under the Dodd-Frank Deposit Insurance Provision. A “noninterest-bearing transaction account” is defined as an account (1) with respect to which interest is neither accrued nor paid; (2) on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to third parties or others; and (3) on which the IDI does not reserve the right to require advance notice of an intended withdrawal. The definition of “noninterest-bearing transaction accounts” also includes Interest on Lawyer Trust Accounts (“IOLTAs”) and functionally equivalent accounts. Note: The unlimited coverage for IOLTA accounts only applies to those accounts established by an attorney, containing funds held by the attorney on behalf of one or more clients, where the accrued interest is paid to the state bar association or other organizations to fund legal assistance programs. All other fiduciary accounts maintained by attorneys or other entities (for instance, IORTAs -- Interest on Realtor Trust Accounts) are subject to the standard insurance limits.

The definition of a “noninterest-bearing transaction account” cannot include any interest- bearing accounts, NOW accounts, or money market deposit accounts (“MMDAs”), except as expressly provided in 12 C.F.R. § 330.16(b) with respect to certain swept funds. The exception for swept funds is applicable only in situations where funds are swept from a noninterest-bearing transaction account to a noninterest-bearing savings account, notably a MMDA. Pursuant to 12 C.F.R. § 330.16(b), such noninterest-bearing savings accounts into which funds are swept would be considered noninterest-bearing transaction accounts. Apart from this exception for “reserve sweeps,” MMDAs and noninterest-bearing savings accounts do not qualify as noninterest-bearing transaction accounts.

3. How does the Dodd-Frank Deposit Insurance Provision differ from the expired TAGP?
There are three important differences between the Dodd-Frank Deposit Insurance Provision and the TAGP:

•The Dodd-Frank Deposit Insurance Provision applies to all IDIs with noninterest-bearing transaction accounts.
•The Dodd-Frank Deposit Insurance Provision does not include low-interest NOW accounts within the definition of noninterest-bearing transaction account.
•The FDIC does not charge a separate assessment (or premium) for the insurance of noninterest-bearing transaction accounts under the Dodd-Frank Deposit Insurance Provision.
4. Does the temporary full deposit insurance coverage for noninterest-bearing transaction accounts cover all such accounts in the IDI regardless of ownership? Yes. The temporary deposit insurance coverage provided under the Dodd-Frank Deposit Insurance Provision applies to all noninterest-bearing transaction accounts at all IDIs, regardless of the account owner or ownership capacity.

5. Must all IDIs make available to depositors noninterest-bearing transaction accounts that are fully insured under the Dodd-Frank Deposit Insurance Provision?
No. IDIs are not required by any statute or regulation to provide noninterest-bearing transaction accounts to depositors. However, if an IDI does offer noninterest-bearing transaction accounts, that IDI cannot opt out of the Dodd-Frank Deposit Insurance Provision and its noninterest-bearing transactions accounts shall be fully insured through December 31, 2012.

6. How will NOW accounts be insured?
The FDIC insures NOW accounts (together with any other interest-bearing deposits held by the depositor at the same IDI) based on the depositor’s ownership capacity.

7. How does the deposit insurance coverage on noninterest-bearing transaction accounts affect a customer’s insurance coverage for other types of accounts? The insurance coverage on noninterest-bearing transaction accounts is separate from, and in addition to, the coverage provided for other accounts maintained at the same IDI. Funds held in noninterest-bearing transaction accounts will not be aggregated for purposes of determining deposit insurance coverage on the depositor’s interest-bearing accounts. For example, if under the single ownership category a customer has $500,000 in a noninterest-bearing transaction account and $250,000 in a certificate of deposit, the FDIC would fully insure the entire $750,000.

8. Are Interest on Realtor Trust Accounts (IORTAs) or similar accounts where an attorney/realtor holds client funds in trust also included within the definition of a noninterest-bearing transaction accounts?
No. IOLTAs -- accounts established by an attorney, containing funds held by the attorney on behalf of one or more clients, with accrued interest paid to the state bar association or other organizations to fund legal assistance programs – are included within the definition of noninterest-bearing transaction accounts, but all other interest-bearing fiduciary accounts maintained by attorneys or other entities (including, IORTAs) are subject to the standard insurance limits.

9. Are official checks included in the definition of a “noninterest-bearing transaction account”?
Official checks issued by IDIs are included in the definition of a noninterest-bearing transaction account. Official checks, such as cashier’s checks and money orders issued by IDIs, are “deposits” as defined under the FDI Act (12 U.S.C. § 1831(l)) and related FDIC regulations. The payee of the official check (the party to whom the check is payable) or, if applicable, the party to whom the payee has negotiated the official check, is the insured party. Because official checks meet the definition of a noninterest-bearing transaction account, the payee (or the party to whom the payee has endorsed the check) would be insured for the full amount of the check if the issuing IDI were to fail on or prior to December 31, 2012.

10. Are interest-bearing accounts that offer zero interest fully insured under the Dodd-Frank Deposit Insurance Provision?
No, only noninterest-bearing transaction accounts are covered. Whether an account is noninterest-bearing is determined by the terms of the account agreement and not whether the interest rate on an account may be zero percent at a particular point in time. If an account agreement provides for the possible payment of interest, then regardless of any conditions or limitations relating to interest accrual or payment, the account will be treated as an interest-bearing account.

Since IDIs no longer are prohibited from paying interest on DDAs as of July 21, 2011, DDAs that allow for the payment of interest will not satisfy the definition of a noninterest-bearing transaction account.

As discussed in more detail in more detail in FAQs 31 through 33, if an IDI modifies the terms of its DDA agreement so that the account may pay interest, the IDI must notify affected customers that the account no longer will be eligible for full deposit insurance coverage as a noninterest-bearing transaction account under the Dodd-Frank Deposit Insurance Provision. Moreover, this notice must be used in any other circumstance that results in deposits no longer being eligible for full temporary coverage of noninterest-bearing transaction accounts.

11. Can an account that now earns interest be converted to a noninterest-bearing checking account and upon such conversion be subject to full deposit insurance coverage as a noninterest-bearing account?
Only if the corresponding deposit agreement is modified to convert an account to a noninterest-bearing transaction account as defined in the Dodd-Frank Deposit Insurance Provision will an account be eligible for full deposit insurance as a noninterest-bearing transaction account through December 31, 2012. If the account agreement in any way allows for the possible accrual of interest, restricts the ability of the depositor to make withdrawals, or requires the depositor to provide the IDI with advance notice of intended withdrawals, then that account will not be insured under the Dodd-Frank Deposit Insurance Provision as a noninterest-bearing transaction account.

12. Are accounts that waive fees or provide fee-reducing credits considered “noninterest-bearing” under the temporary Dodd-Frank Deposit Insurance Provision?
FDIC regulation 12 C.F.R. § 330.1(k) expressly provides that,

. . . A bank’s absorption of expenses incident to providing a normal banking function or its forbearance from charging a fee in connection with such a service is not considered a payment of interest.

Accordingly, neither the waiving of fees nor the provision of fee-reducing credits will be deemed payment of interest under the Dodd-Frank Deposit Insurance Provision; if an IDI waives fees or provides fee-reducing credits for a customer with a noninterest-bearing DDA, such features would not prevent that account from qualifying as a noninterest-bearing transaction account.


13. Will “reward programs” offered by IDIs on noninterest-bearing checking accounts prevent such accounts from meeting the definition of a noninterest-bearing transaction account?
The answer will depend on the specifics of a particular reward program. FDIC regulation
12 C.F.R. § 330.101 describes certain payments to or for the account of a depositor that are not deemed “interest” –

(a) Premiums, whether in the form of merchandise, credit, or cash, given by a bank to the holder of a deposit will not be regarded as ‘‘interest’’ as defined in § 330.1(k) if:

(1) The premium is given to the depositor only at the time of the opening of a new account or an addition to an existing account;
(2) No more than two premiums per deposit are given in any twelve-month interval; and
(3) The value of the premium (in the case of merchandise, the total cost to the bank, including shipping, warehousing, packaging, and handling costs) does not exceed $10 for a deposit of less than $5,000 or $20 for a deposit of $5,000 or more
. . . .

(e) Notwithstanding paragraph (a) of this section, any premium that is not, directly or indirectly, related to or dependent on the balance in a demand deposit account and the duration of the account balance shall not be considered the payment of interest on a demand deposit account . . .

Since the above is substantively identical to provisions in the rescinded FDIC rule
12 C.F.R. § 329.103 and 12 C.F.R. § 217.101 of Regulation Q of the Board of Governors of the Federal Reserve System, the FDIC will look to past interpretations of these former regulations to determine whether a specific reward provided in connection with transaction accounts will be considered interest paid on the account.

For instance, suppose an IDI offers depositors a one-time gift merely for opening a new noninterest-bearing DDA at the IDI. This gift is not directly or indirectly related to or dependent on the account balance or how long the account remains open. In fact, there is no minimum deposit balance and the depositor can keep the gift even if the account is closed on the same day it is opened. Based on 12 C.F.R. § 330.101 and past interpretations of former 12 C.F.R. § 329.102 and 12 C.F.R. § 217.101, such a gift would not be deemed interest and the noninterest-bearing DDA would be fully insured under the Dodd-Frank Deposit Insurance Provision through December 31, 2012.

14. If an IDI offers “relationship pricing” in the form of higher interest rates to depositors with multiple accounts (with an option to set up an internal deposit-to-deposit sweep arrangement), will the noninterest-bearing DDAs of such depositors be fully insured under the Dodd-Frank Deposit Insurance Provision?
Pursuant to 12 C.F.R. § 330.101(e), if the interest rate paid or other premium given by an IDI to a depositor is, directly or indirectly, related to or dependent on the balance or the duration of the balance maintained in the depositor’s DDA, then the DDA will be deemed interest-bearing and, therefore, not subject to unlimited deposit insurance coverage under the Dodd-Frank Deposit Insurance Provision.

For example, if the rate of interest paid on an interest-bearing deposit account is conditioned on the customer maintaining a minimum balance in a noninterest-bearing DDA, the FDIC would attribute part of the interest earned on the interest-bearing account to the DDA. As a result, the DDA would not be deemed a noninterest-bearing transaction account fully insured under the Dodd-Frank Deposit Insurance Provision.

The same result would apply if the account agreements include a sweep arrangement where funds are swept daily from an interest-bearing account to a noninterest-bearing DDA, so that the depositor maintains a required minimum balance in the noninterest-bearing DDA.

In contrast, if the rate paid on an interest-bearing account remains the same regardless of the balance maintained in the noninterest-bearing DDA, then no portion of the interest earned will be attributed to the noninterest-bearing DDA.

15. If an IDI offered a sweep-account product providing for an overnight sweep of funds from an interest-bearing account to a noninterest-bearing transaction account, would the noninterest-bearing transaction account qualify for unlimited deposit insurance coverage under the Dodd-Frank Deposit Insurance Provision?
No. The Dodd-Frank Deposit Insurance Provision provides unlimited deposit insurance coverage (through December 31, 2012) only with respect to accounts for which interest is neither accrued nor paid. Deposit products involving the overnight transfer of funds from an interest-bearing account (for which interest is credited to the account before the funds are transferred to the noninterest-bearing account) to a noninterest-bearing transaction account are, in substance, one deposit product on which the IDI pays interest. As such, viewed as a whole, the funds involved would not qualify for coverage under the Dodd-Frank Deposit Insurance Provision.

16. While the Dodd-Frank Deposit Insurance Provision is in effect, how will the FDIC determine the amount of deposit insurance coverage available for revocable trust accounts, where some of the revocable trust accounts are noninterest-bearing transaction accounts and others are not?
Coverage for revocable trust accounts, in general, is based on the number of “eligible” beneficiaries named in the account. The specific question is how the FDIC will “count up” the number of eligible beneficiaries to determine revocable trust account coverage for an account owner who has multiple revocable trust accounts, including one or more such accounts that qualify as noninterest-bearing transaction accounts under the Dodd-Frank Deposit Insurance Provision.

For example, if a depositor has an interest-bearing account with a balance of $400,000 payable on death to a niece, and a qualifying noninterest-bearing transaction account with a balance of $200,000 payable on death to a friend, how much coverage would be available for the accounts?

To make this deposit insurance calculation, the FDIC would first determine the total number of different beneficiaries the account owner has named in all revocable trust accounts (both interest-bearing and noninterest-bearing) at the same IDI. In this example, there is one owner and two beneficiaries (the niece and the friend). The FDIC would multiply the number of owners times the number of beneficiaries times the SMDIA of $250,000 to determine the maximum coverage available on the account owner’s revocable trust accounts. In this example, the amount is $500,000. We then would apply that amount to the total balance of the account owner’s interest-bearing revocable trust accounts. Because that amount is $400,000, the interest-bearing payable on death account would be fully covered. The balance in the noninterest-bearing transaction account (in this case, $200,000) would be separately and fully covered under the Dodd-Frank Deposit Insurance Provision.

17. How will IDIs be assessed for the cost of the temporary full deposit insurance coverage for noninterest-bearing transaction accounts?
Because the Dodd-Frank Deposit Insurance Provision establishes a new, although temporary, form of deposit insurance coverage rather than a separate program for these accounts, there will be no separate assessment (or premium) for this insurance.

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"Historically, corporations have not been comfortable holding so much cash. However, changes such as unlimited federal deposit insurance for noninterest bearing accounts are making treasurers much more comfortable holding onto large sums of cash -- particularly when placed in the U.S. banking system. (emphasis added)"

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Money growth excessive?

Deleveraging out of very low yielding institutuional MMMF accounts, to the "safety" FDIC insured accounts increased M2. However, according to FED officials the MMMFs don't have significant Eurozone exposure.

Reduction in RETAIL sweeps to MMDAs (prior reserve avoidance), & reduction in COMMERCIAL sweeps to money market instruments (T-Bills, Euro-Dollars, & institutional MMMFs), also contribute to the higher figures.

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..............................................................................M1.............M2

3 Months from June 2011 TO Sep. 2011..........38.9..........21.1
6 Months from Mar. 2011 TO Sep. 2011..........26.0..........14.6
12 Months from Sep. 2010 TO Sep. 2011.........20.6..........10.1

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2007-01-01 13056.1
2007-04-01 13173.6
2007-07-01 13269.8
2007-10-01 13326.0
2008-01-01 13266.8
2008-04-01 13310.5
2008-07-01 13186.9
2008-10-01 12883.5
2009-01-01 12663.2
2009-04-01 12641.3
2009-07-01 12694.5
2009-10-01 12813.5
2010-01-01 12937.7
2010-04-01 13058.5
2010-07-01 13139.6
2010-10-01 13216.1
2011-01-01 13227.9
2011-04-01 13271.8
2011-07-01 13352.8


Real-gDp has finally exceeded the high back in 2007.

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Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

10/03/11 0.01 0.02 0.06 0.12 0.24 0.39 0.87 1.33 1.80 2.51 2.76
10/04/11 0.01 0.01 0.04 0.11 0.25 0.40 0.90 1.35 1.81 2.53 2.77
10/05/11 0.00 0.00 0.03 0.10 0.25 0.43 0.96 1.45 1.92 2.62 2.87
10/06/11 0.01 0.01 0.03 0.09 0.29 0.46 1.01 1.52 2.01 2.71 2.96
10/07/11 0.01 0.01 0.04 0.11 0.30 0.50 1.08 1.61 2.10 2.78 3.02
10/11/11 0.01 0.02 0.05 0.12 0.32 0.54 1.14 1.68 2.18 2.87 3.11
10/12/11 0.01 0.02 0.06 0.09 0.29 0.54 1.17 1.72 2.24 2.94 3.19
10/13/11 0.02 0.02 0.05 0.11 0.29 0.51 1.11 1.67 2.19 2.90 3.15
10/14/11 0.02 0.02 0.06 0.11 0.28 0.50 1.12 1.71 2.26 2.97 3.22
10/17/11 0.02 0.04 0.06 0.12 0.28 0.48 1.08 1.65 2.18 2.88 3.13
10/18/11 0.02 0.04 0.07 0.12 0.28 0.47 1.07 1.64 2.19 2.91 3.17
10/19/11 0.01 0.03 0.06 0.11 0.28 0.46 1.05 1.62 2.18 2.90 3.17
10/20/11 0.02 0.03 0.06 0.12 0.28 0.46 1.07 1.64 2.20 2.92 3.19
10/21/11 0.01 0.02 0.05 0.12 0.30 0.46 1.08 1.66 2.23 2.98 3.26
10/24/11 0.01 0.02 0.06 0.11 0.30 0.47 1.10 1.70 2.25 3.00 3.27
10/25/11 0.01 0.01 0.06 0.11 0.26 0.43 1.01 1.60 2.14 2.86 3.13
10/26/11 0.01 0.02 0.06 0.13 0.28 0.48 1.09 1.68 2.23 2.95 3.22
10/27/11 0.02 0.02 0.07 0.14 0.31 0.53 1.20 1.83 2.42 3.18 3.45

==================

Rate rise accelerating 2 years & out.

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Faber: Stocks Will Beat Bonds Over Next 10 Years
Thursday, 27 Oct 2011
By Forrest Jones


Stocks will beat out bonds over the next 10 years thanks to loose monetary policies that tend to pump u riskier assets, says Marc Faber, author of the Gloom, Boom & Doom newsletter.

"When you print money everything goes up at different times, different asset classes," Faber tells CNBC.

"I think that stocks may still continue to go up, and I would rather own equities than government bonds for the next 10 years."

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FEDERAL RESERVE
For release at 4:30 P.M. EDT
October 27, 2011 SPECIAL NOTICE

Data on reserves and the monetary base have been revised to reflect the result of annual reviews of seasonal factors and break factors. Revisions to seasonal factors start in January 1999, while revisions to break factors begin in January 2010.

Break factors remove discontinuities (or "breaks") associated with regulatory changes in reserve requirements, such as the annual indexations of the low-reserve tranche and the reserve requirement exemption.

The maximum revision to total reserves, nonborrowed reserves, required reserves, and the monetary base in any maintenance period was $2.0 billion; most revisions were less than $700 million.

A more detailed description of the methods for constructing break factors and seasonal factors is available under "Annual review of break and seasonal factors" on the Federal Reserve's website (http://www.federalreserve.gov/releases/h3/hist/). Historical data, updated each week, are available there as well.

================

1. The Monetary Control Act of 1980 established a reserve ratio of 3 percent against the first $25 million in net transaction deposits (low-reserve tranche) at each depository institution. Since 1982, the low-reserve tranche has been indexed each January by 80 percent of the previous year's (June 30 to June 30) growth rate of net transaction deposits at all depository institutions.

For all reserve maintenance periods ending in 2011, the low-reserve tranche is $58.8 million, rising to $71.0 million for maintenance periods ending in 2012.

Under the Garn-St Germain Depository Institutions Act of 1982, the first $2 million of reservable liabilities of each depository institution was exempted from reserve requirements.

Since 1983, this exemption amount has been indexed each year by 80 percent of the rate of increase of the reservable liabilities at all depository institutions over the preceding year (June 30 to June 30).

For all reserve maintenance periods ending in 2011, the reserve requirement exemption is $10.7 million, rising to $11.5 million for maintenance periods ending in 2012.

============================

Reserve requirements are based upon reservable liabilities. The maintenance period is 30 days after the start of the computation period. So my question is how can the FED revise the reported figures (the actual figures that were in reality maintained by the commercial banks)? CBs only get one chance (in the FED's reserve computation and maintence period), to use applied vault cash & or the inter-bank demand deposits owned by the member commercial banks which are held at the District Reserve banks.

What was explained to me by the Board of Governors is that the volume of reservable liabilities changed, so the FED recalculated required reserves. But that makes absolutely no sense because the new figures were never set aside for that purpose. Thus, the theoretical figures actual overwrite the old figures (eliminating the time series history/audit trail).

It was the actual figures in existence at that time in the commercial banking system which were utilized by the FOMC as a credit control device (i.e., fractional reserve banking).

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Should you go with the mo'? JIM JUBAK

You know, the momentum. The tendency of stocks that have been going up to keep going up (until they don't, of course). The successful investment strategy built on the observation that stocks are the only things that people want to buy more of as they get more expensive.

From the Oct. 3 low through Oct. 26, the Standard & Poor's 500 Index ($INX +0.04%) was up 13%. That's enough to put thoughts of 2009 in anyone's head. From the March low that year the S&P 500 rocketed ahead 13% in just about two weeks -- and from there it had almost an additional 1,000 points to go before it topped out in April 28, 2011.

On the other hand, going with the mo' is one thing, but nobody wants to be Curly or Shemp. The rally from the Aug. 19 bottom to the Aug. 30 high took the S&P 500 up 10% -- but it wasn't followed by two years of roaring rally. Instead, stocks reversed, and by Oct. 3 they had tumbled to a level below where they were on Aug. 19.

If you'd bought on Aug. 30 after that 10% move up, you would have been left looking at a 9% loss by Oct. 3.

So should you go with the mo'? Should you hold positions that have rallied 13% or more in a little more than three weeks because momentum will take them higher? Should you buy in now if you've been sitting on the sidelines? Should you be taking profits and trimming positions to protect your gains from a potential downturn?

Let's try to figure all that out.

I'd love to be able to offer you some magic formula -- "The inverse Mondavi function says this rally is going to 1,364.3 on Nov. 8" -- or an astounding piece of fundamental wisdom -- "Comparing the multiples of the current market to all markets stretching back to 1843 shows that stocks will climb an additional 17%."

But I think the current market is best described as poised. The news flow can break either way, depending on the debt-deal details that come out of Europe in the next two weeks. Fundamentals can go either way; with growth in Europe certain to slow but growth in the U.S. and Chinese economies set to come in either above or below the expectations built into stock prices right now.

Is this a suckers' rally?

Technically, the charts show a market testing some tough ceiling levels, with it uncertain whether the trend will push through that resistance or fall back from those levels.

So what's an investor to do? My advice boils down to this: Wait

I know you probably feel like you should be doing something right now -- gobbling up momentum plays or selling everything in sight or, well, something.

Right now I think this market is so poised between alternatives that the return on waiting is very high. A few days -- maybe two weeks at the outside -- should turn some of these points of indecision into actual trends that might run for a few weeks. Waiting may cost you a few of the bucks that you might have made if you guessed right on which way the market is about to break. But it will also save you the money you would have lost if you guessed wrong.

Most importantly, though, waiting will diminish the amount of guessing that you have to do.

Let me sketch out for you how I'm making sense of the market's risks and rewards right now, and why I think waiting is a good investment. It will be up to you to figure out how my risk/reward calculus fits your own portfolio. But I'll throw in specific suggestions for what you might buy or sell so that you can actually act on these calculations.

Poised on news flow. News flow these days means the eurozone. The more closely you've been following events, the more likely that your head is spinning. For example, on Wednesday at 1 p.m. I was reading an online headline that said "Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal." By 3 p.m. the headlines were about rumors that China would invest in a European debt special investment vehicle. At 5 p.m. the headline was "U.S. Stocks Advance on EU Bank Agreement." By 6:30 the headline was back to "Euro Weakens Against Dollar After Banks Say No EU Deal Yet on Debt Losses." And by the next morning, the story was headlined "EU Sets 50% Greek Writedown, $1.4 trillion in Rescue Fund."

Latest on the European debt talks
.
Well, maybe. The deal, which is still evolving, is a bit light on details. Yes, the banks' negotiators have agreed to a "voluntary" 50% write-down, but no one knows what will be offered to individual banks to get them to accept that deal. Yes, the leaders of the eurozone have agreed to increase the firepower of the European Financial Stability Facility, but the details of how that leverage will be created are still to come. It almost certainly involves some combination of an insurance guarantee and a special-purpose vehicle to entice investors from outside Europe, but in what combination is still being negotiated. And until we see the details, no one can be certain how shaky this house of cards might be.

You may think you understand what this all means. I may think I understand what it all means. But I also know I could be totally wrong.

What I am sure of, however, is that the next few days will bring more details and some relative closure to these discussions -- if not to the crisis itself. We will get, probably, a deeply flawed, frustratingly vague agreement that will put off most of the tough decisions until later -- again.

And, as important as having the agreement itself, we'll know what the market reaction will be. That's all worth waiting for.

How long to wait? The meeting of the Group of 20 leaders is set to start Nov. 3; European leaders will have to flesh out their deal -- as much as they can -- by then.

====================

Best to be separated from such confusion. BUY BUY BUY

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In the first qtr 2011 real-gDp grew @ 0.4%.

In the second qtr 2011 real-gDp grew @ 1.3%.

In the third qtr 2011 real-gDp grew @ 2.5%.

================

For those who need a reminder the equation of exchange is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged, is equal (for the same time period), to the product of the volume, and transactions velocity of money.

I.e., the rate-of-change in the proxy for real-output has steadily increased thoughout the year. However the rate-of-change in the proxy for inflation is increasing faster.

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By Joseph Lazzaro, U.S. Editor | October 28, 2011

Is it time to make banking boring again?

Well, given the infancy of Occupy Wall Street -- it's too soon to tell if the coalition that seeks economic and fiscal reform will gain critical-mass support from the American people -- the initial analysis suggests the United States may be ripe for modest, but not epoch-altering changes in the bank sector.

The Occupy Wall Street movement is seeking economic and fiscal reform: should bank reform that leads to federal deposit insurance only for community-basd, basic-needs banks be one of the reforms?

Modest Change vs Big Change

Modest change would involve tighter regulation of banks regarding their use of derivatives, trading practices, and the type of mortgages banks offer, among other changes.

Epoch-altering change would be "big change" -- known as non-incremental change in political science circles.

The latter would involve "making banking boring again" -- as in putting tight control on Federal Deposit Insurance Corporation (FDIC)-insured bank functions.

Example: limiting the type of mortgage investments, then limiting the amount of interest the bank could charge to attract money to fund those investments.

A Return to "3-6-3 Banking"

This would be a return to the old "3-6-3" banking system. As in, "Pay 3 percent on deposits, charge 6 percent interest on mortgages, golf at 3 p.m."

Yes, banking would become boring again, some will complain. But ma be that's what at least a portion of the banking sector should have always been. The phrase "portion of the banking sector" is used because one difference regarding the new 3-6-3 banking compared to the old 3-6-3 banking is that there still would be investment banks.

Underscoring: investment banks and other private sector banks would still exist, with one, big condition: they would not be insured by the FDIC.

The new 3-6-3 banks would have a limited product line and mission -- but their deposits would be FDIC-insured.

And the reason is obvious enough: it's perfectly acceptable for a bank to leverage at a high rate, deploy complex trading systems, loan to risky hedge funds...just as long as they jeopardize investors' money -- not U.S. taxpayers.'

A Return to Boring Banking -- The Only Prudent Option for Nation?

In other worlds, via making banking boring again, the new 3-6-3 banking -- the era of, "Heads the banks win and make huge profits, tails the banks lose and the taxpayer pays" would be over.

The 3-6-3 banks will help return banking to its original mission: providing capital for companies in the real economy (manufacturing and services, except financial services), funding start-up companies/small businesses, and issue prudent, transparent residential mortgages.

Also, bank employee salaries would be modest -- and there would be no $1 million bank executives or other layers of bank excess and waste at the 3-6-3 banks.

In a nutshell, the 3-6-3 banks would serve the banking needs of the people and communities, not shareholders, executives or big-money clients, as the uninsured banks would continue to do.

Further, those clients/customers who want sophisticated exotic bank services, prime brokerage and/or higher returns on their deposits can deposit money in a non-insured, private sector bank.

Boring banking will never be as sexy as investment banking, but it will ensure that we'll still have a functioning banking system

=====================

Banks started buying their liquidity instead of storing their liqudity (i.e., the negotiable cd). And on the other side of the balance sheet started acquiring riskier assets (i.e., brokered mortgage loans).

The money supply is not self regulatory. If private profit institutions are to be allowed the "sovereign right" to create money, they must be severely regulated in the management of both their assets and their liabilities .

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Another reason the Fed might buy MBS
Posted by Cardiff Garcia on Oct 28

If you’ve been following reports of what might happen at next week’s FOMC’s meeting, you probably know that the Fed is contemplating further purchases of agency mortgage-backed securities.

And there are least two, somewhat obvious justifications for it:

1) Housing market activity continues to languish, and buying MBS will further shrink the spread of mortgage rates over US Treasuries. Hopefully more homeowners that currently pay above-market rates will refinance.

2) Buying MBS is a complement both to the earlier Operation Twist and to the Administration’s latest housing proposal, which is meant to help previously ineligible homeowners refinance and therefore could produce higher mortgage rates as prepayments lead MBS investors to drive them up. The Fed’s buying more agency MBS could act as an offset.

(It’s also just a straightforward way for the Fed to expand its balance sheet.)

Fine, and although we don’t know how effective this would be as economic stimulus, at least it’s a coherent rationale. But if the committee does proceed with QE3, here, from Credit Suisse economists, is an additional explanation for it that the Fed probably won’t mention (our emphasis):

The financial system is in a fragile state. Some institution, market or instrument seems always at the edge of breaking down – or just over that edge. Very low interest rates throughout the developed world pose a significant challenge to the profitability oftraditional financial business models by reducing the rewards of maturity transformation. New regulatory initiatives, including especially higher capital-to-asset ratio requirements on ever more strictly construed asset classifications, inhibit the volume and profitability of credit transformation. (No surprise there – that’s what deleveraging the developed economies is all about.)

Ultra-low interest rates tend to be more persistent than ultra-high ones. This partly reflects the asymmetry in the efficiency of monetary policy in stimulating versus restrainingeconomic activity. It also partly reflects the arithmetic of fiscal sustainability: low interest rates suppress the debt service cost entry for debtor governments while high interest rates contribute to explosive debt-to-GDP dynamics. Finally, the exit from ultra-low interest ratesis higher interest rates, that is, a bear market in bonds. Since bear markets tend to expose and magnify financial fragilities, human nature tends to incline the monetary authorities toa more cautious pace of raising interest rates. …

While ultra-low interest rates are still performing their corrosive role on the profitability ofthe financial sector business model, the sector is also trying to accommodate to an emergent regulatory environment.

One dimension of that regime is clear enough in outline. Banks and other financial intermediaries will be required to hold more capital per unit of assets, that is, to deleverage.There are two ways to raise a capital-asset ratio: add capital or subtract assets. Raising capital has the potentially undesirable feature of diluting existing shareholders. So banks will seek to accomplish at least some of their deleveraging by shedding assets.

But when all (or a large subset of all) financial intermediaries are seeking to disgorge assets, market prices will tend to weaken, bid-ask spreads to widen, liquidity to evaporate, perceived counter-party risk to rise, term funding to run for the hills – in sum, the syndrome that has manifested repeatedly since the summer of 2007. When this syndrome of financial fragility presents, the only balance sheet adequate to absorb the orphaned assets is the central bank’s. Hence, QE.

Such deleveraging, via the shedding of risk-weighted assets, is one of the lessons from bank recapitalisation history that FT Alphaville has been discussing in recent weeks, though normally in reference to European banks.

In his speech two weeks ago, Bernanke explained the evolving intellectual framework of central banking after the crisis, and specifically explained the increasing importance of monitoring financial stability along with its traditional responsibility for monetary policy. The details remain to be worked out, obviously, but buying MBS would seem a way to address both goals.

And speaking of those European banks….

Separately, anecdotes of European banks deleveraging dollar-denominated assets – such as mortgage securities – have proliferated. Should this trend continue, it would be most convenient to have the Federal Reserve positioned as a ready buyer of MBS, as well as Treasuries.

ftalphaville.ft.com/blog/2011/10/28/715566/another-reason-the-fed-might-buy-mbs/

==================

The banks & economies problems stem from the same place: "too much money chasing too few goods". Speculation is just a by-product.

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GDP is a False Prophet

Nobel Laureate Robert Mundell long ago observed that the only closed economy is the world economy. As such, U.S. production (think the globalized manufacture of Apple's iPad, or Boeing's 787 Dreamliner) is a function of it ties to economic activity occurring around the world. GDP presumes a countries economy in isolation as well as uniformity between economies.

Worse, what often drives GDP up is far from something that would be considered economically stimulative. Indeed, government measures of inflation are notoriously slow to pick up on the horrors of dollar devaluation. Yet when devaluation leads to higher prices, GDP increases.

Government spending - which has no resources that it hasn't first extracted from the private sector - also boosts GDP, and then if imports to the U.S. decline (a flashing negative economic signal if there ever was one), this actually registers as growth in the calculation of this most worthless of measures of our economic health.

It's time to abolish GDP because its existence as the accepted measure of economic activity means that we cannot achieve the necessary reforms that would really allow our economy to grow. With so much of our economy directed towards work of little to no economic value, but which ultimately factors into the GDP calculation, we're restrained from doing what we need to do to truly advance ourselves.

First up is regulation. As even President Obama acknowledges, regulation frequently serves as a barrier to productivity. We'll see if he's ever willing to back up his rhetoric with action (signing the REINs Act would be a big step), but for now regulations serve as a massive hurdle to businesses seeking profits for their shareholders by virtue of giving their customers what they want, along with things they didn't know they want, but now can't live without - think Google, Facebook and just about anything Apple produces.

Of course if there occurs a massive regulatory overhaul based on the correct kind of analysis which will show regulations merely inhibit profitable activity at best, and frequently miss corrupt actions at worst (Madoff), many in the U.S. whose livelihood is dependent on either regulating what they cannot, or helping businesses deal with regulators, will find themselves out of work. Their unemployment will in the near-term show up in reduced GDP, but the end result will be undeniably positive.

Looking at the estate tax alone, it discourages the very saving that authors our economic advancement, but its existence is a windfall for the myriad estate planners and attorneys in possession of the skills necessary to help those with estates to avoid the tax. Abolishing the death tax would be a major boon for economic growth for it releasing those reliant on it into worthwhile professions, but for a time their adjustment would detract from GDP "growth."

Considering the floating dollar itself, the utter chaos caused by the latter has created whole industries meant to soften the blow of a dollar without definition. The currency market alone is a $3 trillion per day exchange as myriad great minds are forced into facilitator roles as traders of needless uncertainty, as opposed to producers. We'd have to invent hedge funds if they didn't exist, but their growing footprint can to a high degree be laid at the door of President Nixon's fateful 1971 decision to sever the dollar's link to gold.

Banks and investment banks on their own have growing compliance staffs in place to deal with all of the rules foisted on them. Abolishment of what won't work in the form of Dodd-Frank, not to mention the stabilization of the dollar such that it becomes the proverbial foot would release countless agile minds from facilitator roles, some who will cure cancer, some who will create the next Microsoft, and some who will render the hell that is commercial air travel to the dustbin of history through making private travel as common as cellphones.

But to achieve the above, there would have to be a "recession" that would drive down GDP early on, but boost it in staggering ways long-term. In a nation brimming with talent, too many of our best and brightest are serving as facilitators to the detriment of real economic growth.

Lastly, a powerful reduction in government spending would surely bring down GDP substantially. Governments can only create jobs and economic activity to the extent that they take from the private sector, so major spending cuts at first would bring great pain to sectors of the economy in and out of government, but wholly reliant on government largesse.

All of the above is true, but then it's also true that government spending is almost tautologically about capital destruction, as opposed to wealth creation. If this is doubted, ask yourself if any company in the private sector could ever remain in business if it had lost money for decades, with decades more of losses ahead?

But assuming serious downsizing of the government, workers and the capital destroyed to keep them employed would quickly find other, market-driven uses in the private sector. Government spending presently looms large when it comes to boosting GDP, true austerity would as a result reduce nominal GDP substantially up front such that dim economists would scream "recession", but the long-term and economy-soaring result of such a move would be profoundly good for us all.

The problem now is that so worshipful and fearful of GDP are economists and politicians that reducing regulations in a credible way, stabilizing the dollar and slashing the burden that is government is a distant object to many. It is at least partially because GDP remains the benchmark for our economic health. Let's abolish it so that we can start growing again

www.equitymaster.com/outsideview/detail.asp?date=10/29/2011&story=3

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online.barrons.com/article/SB50001424052748703608404576655173683907028.html?mod=BOL_twm_ls#articleTabs_panel_article%3D1

"In the face of such extreme volatility, the 121 portfolio managers responding to Barron's biannual Big Money Poll have tempered their expectations for the coming year but are optimistic, nonetheless. Roughly 52% of managers describe themselves as very bullish or bullish on the market through next June"

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Dear Ben: It’s Time for Your Volcker MomentBy CHRISTINA D. ROMER
Published: October 29, 2011

IN October 1979, inflation was running at more than 10 percent a year, and the Federal Reserve’s gradual interest rate increases weren’t solving the problem. So Paul Volcker, the Fed chairman, dramatically changed how monetary policy was conducted. Today, an equally intractable unemployment crisis demands that Ben S. Bernanke, the current Fed chairman, stage a quiet revolution of his own.

What did Mr. Volcker do? He reasoned that because inflation depends on growth in the money supply, inflation would fall if he brought that growth down. And he believed that by backing up his commitment to lower inflation with a new policy framework, he would break people’s inflationary expectations. So the Fed began to explicitly target the rate of money growth.

Hitting that target required pushing interest rates to unprecedented levels. Unemployment rose past 10 percent, and Mr. Volcker was pilloried. At one point, farmers on tractors blockaded Fed headquarters to protest the high rates.

But the policy worked. Inflation fell from 11 percent in 1979 to 3 percent in 1983, and unemployment returned to normal levels. Even my father, who lost his job as a chemical plant manager in the 1981 recession, views Mr. Volcker as a hero. His bold moves ushered in an era of low inflation and steady output growth.

Today, inflation is still low, but unemployment is stuck at a painfully high level. And, as in 1979, the methods the Fed has used so far aren’t solving the problem.

Mr. Bernanke needs to steal a page from the Volcker playbook. To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.

Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.

More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.

Economic research showed years ago that targeting nominal G.D.P. has important advantages. But in the 1990s, many central banks adopted inflation targeting, a simpler alternative. As distress over the dismal state of the economy has grown, however, many economists have returned to the logic of targeting nominal G.D.P.

It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.

HOW would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.

Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.

Another possible effect is a temporary climb in inflation expectations. Ordinarily, this would be undesirable. But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment.

Even if we went through a time of slightly elevated inflation, the Fed shouldn’t lose credibility as a guardian of price stability. That’s because once the economy returned to the target path, Fed policy — a commitment to ensuring nominal G.D.P. growth of 4 1/2 percent — would restrain inflation. Assuming normal real growth, the implied inflation target would be 2 percent — just what it is today.

Though announcing the new framework would help, it probably wouldn’t be enough to close the nominal G.D.P. gap anytime soon. The Fed would need to take additional steps. These might include further quantitative easing, more forceful promises about short-term interest rates, and perhaps moves to lower the exchange rate. Such actions wouldn’t just affect expectations; they would also be directly helpful. For example, a weaker dollar would stimulate exports.

Nominal G.D.P. targeting would make it more likely that the Fed would take these aggressive actions. Today, each Fed move generates controversy and substantial internal dissension. As a result, even though the central bank has taken some expansionary steps, they’ve often been smaller than needed and deliberately limited in duration.

Mr. Volcker faced a similar problem in October 1979. Each small rise in interest rates was a major battle. Committing to an overarching goal yielded more forceful action and less dissension within the Fed. Agreeing to a nominal G.D.P. target would do much the same today.

For evidence that adopting the new target could help fix the economy, look at the 1930s. Though President Franklin D. Roosevelt didn’t talk in terms of targeting nominal G.D.P., he spoke of getting prices and incomes back to their pre-Depression levels. Academic studies suggest that this commitment played an important role in bringing about recovery.

President Roosevelt backed up his statements. He suspended the gold standard and let the dollar depreciate. He got Congress to pass New Deal spending legislation and had the Treasury monetize a large gold inflow. The result was an end to deflationary expectations , leading to the most impressive swing the country has ever seen from horrible contraction to rapid growth.

Would nominal G.D.P. targeting work as well today? There would likely be unexpected developments, just as there were in the Volcker period. But the new target would have a better chance of meaningfully reducing unemployment than any other monetary policy under discussion.

Because it directly reflects the Fed’s two central concerns — price stability and real economic performance — nominal G.D.P. is a simple and sensible target for long after the economy recovers. This is very different from Mr. Volcker’s money target, which was abandoned after only a few years because of instability in the relationship between money growth and the Fed’s ultimate objectives.

Desperate times call for bold measures. Paul Volcker understood this in 1979. Franklin D. Roosevelt understood it in 1933. This is Ben Bernanke’s moment. He needs to seize it.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html?_r=1

======================

How can anyone ever learn about economics. This author rewrites history.

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ACTION: Final rule.

SUMMARY: The Board is amending Regulation D, Reserve Requirements of Depository Institutions, to reflect the annual indexing of the reserve requirement exemption amount and the low reserve tranche for 2012

www.federalreserve.gov/newsevents/press/bcreg/bcreg20111026a1.pdf

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KRUGMAN:

Christina Romer calls on Ben Bernanke to adopt a nominal GDP target, and suggests that he consider himself in a position comparable to that of Paul Volcker — where Volcker took drastic action to fight inflation, Bernanke should do likewise to fight unemployment.

I’m good with that. At the risk of reading the stage instructions, however, let me add that the Volcker parallel may run deeper than most people appreciate.

You see, the early Volcker years were the period when the Fed at least claimed to have become monetarist, to be setting targets for monetary aggregates like M1 and M2 rather than interest rates. It didn’t last long; by the summer of 1982 the Fed had more or less thrown out the monetarist playbook.

Yet the monetarist interval served a purpose: it gave the Fed a usefully euphemistic way to talk about its inflation-fighting strategy. Officials didn’t have to say, “We’re going to push the economy into a deep recession, and keep it there until inflation cries uncle.” Instead, they could talk in terms of M1 growth rates and credible long-run strategies and whatever, while in fact what they were basically doing was pushing the economy into a deep recession and keeping it there until inflation cried uncle.

Nominal GDP targeting is quite a lot like that. To be sure, NGDP is a much better target than M1, which (it turns out) is subject to wide swings in velocity. And the Fed’s goals, if frankly stated, wouldn’t be nearly as politically explosive as what it was doing in 1979-82. Still, NGDP is arguably mainly a relatively palatable way to state a strategy that’s ultimately about something else.

As I see it — and as I suspect many people at the Fed see it — the basic point is that to gain traction in a liquidity trap you must either engage in huge quantitative easing, raise the expected rate of inflation, or both. Yet saying this is very hard; people treat expansion of the Fed’s balance sheet as horrible money-printing, and as for the virtues of inflation, well, wear your body armor.

But say that we need to reverse the obvious shortfall in nominal GDP, and you’ve found a more acceptable way to justify huge quantitative easing and a de facto higher inflation target.

Don’t call it a deception, call it a communications strategy. And as I said, I’m for it.

.http://krugman.blogs.nytimes.com/2011/10/30/a-volcker-moment-indeed-slightly-wonkish/

=======================

Krugman shows his colors. Volcker never followed a monetarist's prescription. He targeted non-borrowed reserves & not total reserves.

[flow5]

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

10/03/11 0.01 0.02 0.06 0.12 0.24 0.39 0.87 1.33 1.80 2.51 2.76
10/04/11 0.01 0.01 0.04 0.11 0.25 0.40 0.90 1.35 1.81 2.53 2.77
10/05/11 0.00 0.00 0.03 0.10 0.25 0.43 0.96 1.45 1.92 2.62 2.87
10/06/11 0.01 0.01 0.03 0.09 0.29 0.46 1.01 1.52 2.01 2.71 2.96
10/07/11 0.01 0.01 0.04 0.11 0.30 0.50 1.08 1.61 2.10 2.78 3.02
10/11/11 0.01 0.02 0.05 0.12 0.32 0.54 1.14 1.68 2.18 2.87 3.11
10/12/11 0.01 0.02 0.06 0.09 0.29 0.54 1.17 1.72 2.24 2.94 3.19
10/13/11 0.02 0.02 0.05 0.11 0.29 0.51 1.11 1.67 2.19 2.90 3.15
10/14/11 0.02 0.02 0.06 0.11 0.28 0.50 1.12 1.71 2.26 2.97 3.22
10/17/11 0.02 0.04 0.06 0.12 0.28 0.48 1.08 1.65 2.18 2.88 3.13
10/18/11 0.02 0.04 0.07 0.12 0.28 0.47 1.07 1.64 2.19 2.91 3.17
10/19/11 0.01 0.03 0.06 0.11 0.28 0.46 1.05 1.62 2.18 2.90 3.17
10/20/11 0.02 0.03 0.06 0.12 0.28 0.46 1.07 1.64 2.20 2.92 3.19
10/21/11 0.01 0.02 0.05 0.12 0.30 0.46 1.08 1.66 2.23 2.98 3.26
10/24/11 0.01 0.02 0.06 0.11 0.30 0.47 1.10 1.70 2.25 3.00 3.27
10/25/11 0.01 0.01 0.06 0.11 0.26 0.43 1.01 1.60 2.14 2.86 3.13
10/26/11 0.01 0.02 0.06 0.13 0.28 0.48 1.09 1.68 2.23 2.95 3.22
10/27/11 0.02 0.02 0.07 0.14 0.31 0.53 1.20 1.83 2.42 3.18 3.45
10/28/11 0.02 0.01 0.06 0.13 0.28 0.50 1.13 1.74 2.34 3.09 3.36

====================

Daily Treasury Yield Curve. Rates have recently risen fast enough to be worrisome.

TREASURY AUCTIONS:

www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011_cmb.htm

[usaone]

Rates are on the move.

Stocks through the roof!!

[flow5]

"Imagine home values being stuck for 30 years or even falling behind the overall rate of inflation. Does this seem outlandish? Something similar happened to U.S. real estate between 1917 and 1945, the generation before the baby boomers. Much of the stagnation that occurred during this time was due to the painful economic damage caused by the Great Depression. But even before the Great Depression real estate had been losing its luster. It was a gripping time for the nation. I was digging through pages of data looking at long rate information from that period and found interest rates at that time were also extremely low."

www.doctorhousingbubble.com/protracted-winter-imminent-for-housing-from-1917-to-1945-home-prices-lagged-the-overall-inflation-trend-30-year-real-estate-winter/?

[jarhead1976]

Buying your way into freedom.

A new bill proposed by the US Senate would offer residential visas to immigrants purchasing eligible property in the US.

Latest news28 October 2011 US Increases Number of H-1B Visas Issued to Indians
27 October 2011 H1B Visas remain available - October 2011 Update
26 October 2011 US Green Card Lottery: less than two weeks left
The bill would require foreign nationals to purchase real estate for $500,000USD or more. At least $250,000 of that total must be used to purchase a primary residence; the remainder of the money could be spent on investment properties.

Authors of the bill, Senator Charles Schumer of New York and Senator Mike Lee of Utah, believe the bill will increase foreign investments in the US.

"Our housing market will never begin a true recovery as long as our housing stock so greatly exceeds demand. This is not a cure-all, but it could be part of the solution," said Senator Schumer.

The legislation would create a new homeowner visa that could be renewed every three years for as long as the individual owned the house in the US. If you wish to work in the US you will need to apply for a work visa.

The bill holds several stipulations for future foreign homeowners. The purchase would have to be in cash, with no mortgage or home equity loan allowed. The property would have to be bought for more than it's most recent appraised value, and the owner would have to live in the house for at least 180 days per year, which means they would also need to pay US income taxes on their foreign income.

"This bill supports a free market method for increasing demand for housing at a time when so many working-class Americans are underwater on their homes, are desperate for prices to rise again, and big-government programs have failed to work," said Senator Lee.

International purchases accounted for over $82 billion in U.S. residential real-estate sales last year, according to data from the National Association of Realtors.

[flow5]

"History is littered with busted frameworks. M1 targeting was one; Mr Volcker abandoned it after just three years, later complaining about those “damned monetarists who kept criticizing us and expecting some control of the money supply that was beyond our TECHNICAL capacity. Nothing could ever satisfy Allan Meltzer.” The abandonment of M1 targeting had few consequences; the same could not be said if the euro, another flawed framework, were to fail"

This is a gem:

Back then Volcker advised the congressmen to watch the non-borrowed reserves — “Watch what we do on our own initiative.” The Chairman further added — “Relatively large borrowing (by the banks from the Fed) exerts a lot of restraint.”

This was of course, economic nonsense. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves was indicated by the fact that at times nearly 10% of all legal reserves were borrowed. Also, discount window funds were provided not at a penalty but at a discount to other market rates (giving banker's the necessary arbitrage to use their borrowings for profit).

[bubblyandblue]

I am a working class American and, I have no want of house prices going up again. I have even less want of foreign homeowners driving up costs for housing. In a country where millions are out of a house and millions of houses are empty - it is no stretch to think that housing prices are too high to support an equitable market. I have not seen them fall enough. Also, I would think that creative residency issues could be lawfully made that would again encourage speculation in the real estate market - the worst of all worlds.

[wyouser]

finance.yahoo.com/news/Uglt-Truth-for-the-fed-cnbc-1270321636.html?x=0 Perhaps interesting times coming for the fed? Article puts M1 up 21% for the year, M2 up 10% for the year. Core cpi @ 2.4% (inclusive inflation at 3.9%) Fed owners equivalent rent up 2.4% with actual rent up 3.5%. Pento is advising investors to disregard pronouncements from the Fed that they have inflation under control.