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Dallas Federal Reserve President Richard Fisher warned against “Buy America” provisions in a proposed fiscal stimulus law and said it could lead to devastating trade protectionism. “Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high. It’s addictive and it leads to economic death,” Fisher told C-Span TV. US lawmakers are debating rules that will insist that public money is spent on US made products, although the White House has already said it will review any Buy America provisions. “We just cannot afford to go down that path and I hope our senators, Democrats and Republicans, will be very sensible on that front,” said Fisher, who is not a voting member of the Fed’s policy-setting committee this year. “Our job is to maintain price stability while we engender the growth and employment of the United States … It is a very difficult balancing act, but it can only be done if it is buttressed by sensible fiscal policy,” Fisher said. The Fed has used unorthodox steps to thaw credit markets and encourage borrowing and consumption. It has cut interest rates almost to zero and has pumped hundreds of billions of dollars into the financial system, more than doubling its balance sheet in the process, to almost US$2T. Fisher said he supported the Fed’s aggressive action but stressed it was crucial that the U.S. central bank have an exit strategy to prevent this massive build-up in liquidity from fueling inflation once US growth recovers.” Right now, the pressures are not on the inflationary side; they’re on the other side. Longer term, we have to be aware of the fact that we could have, as a result of all these initiatives we’ve taken … baked-in inflationary pressures.” We’re very mindful of that and our exit strategy has to work with the fact that we cannot allow inflationary pressures to also take root. This is our job,” Fisher said.

Popularity: 9% [?]

US banks now hold over US$1,000B of cash, which is an unprecedented level and more than five times the typical amount held over the past 40 years. The Big Q: Why? The Big A: Because the banks know that they are heavily exposed to bad loans/assets on their balance sheets and, therefore, they are very reluctant to commit capital to new lending. The European and US governments/central banks can expand borrowing/lending/asset guarantee programs and create asset management companies to buy the financial sector’s distressed loans/assets all they like, but these two courses of action augur serious problems, i.e. the calculation of the transfer price of the distressed loans/assets and the accompanying loss-sharing mechanism between bank owners, creditors and the government or taxpayers.

So, governments will have to inject still more huge amounts of new capital into banks, and perhaps the selective nationalization of weak or insolvent banks, and the sooner it happens, the quicker financial stability will return. An analyst at the Financial Times in London believes that the global banks require at least US$675B of new capital, of which half is probably needed yesterday. To date there is no hard evidence in either Europe or the USA that immediate, direct and decisive government action is taking place to resolve the global banking crisis and, therefore, the eventual economic outcome could still slide from a global recession, which is already largely anticipated by global stock markets, to a deflationary depression. Where are today’s Churchhills, Rosevelts and Thatchers?

Popularity: 7% [?]

This is what happened last week…

Last Tuesday began what the world community views as a major event in US history, the inauguration of Barack H. Obama as its 44th President and its 1st Black American President.
Some of President Obama’s executive orders on his 1st day in office:

1. A freeze on salaries for White House staff earning $100,000 or more, about 100 people in all.

2. New Freedom of Information Act rules, making it harder to keep the workings of government secret.

3. Tighter ethics rules governing when administration officials can work on issues on which they previously lobbied governmental agencies, and banning them from lobbying the Obama administration after leaving government service.

The week in the markets, however, continued to be bathed in the glow of uncertainty within the financial sector and coupled with Qs about the timing of the economic recovery.
Couple that with headlines announcing that China’s Y 2008 Q 4 GDP contracted from 9% to 6.8%, the UK reporting a GDP decline of 1.5%, the largest since 1980, US housing starts fell to their lowest level on record, and initial jobless claims returned to Christmas levels, matching the 26 yr. high of 589,000 set in December 2008.
Though Microsoft disappointed, IBM and AAPL rang the bell with GOOG beating too, and coming in better than expected.
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Popularity: 25% [?]

The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy. The FOMC is likely to cut its benchmark rate in half, to 0.5%, according to forecasts in a Bloomberg survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

Popularity: 3% [?]

Financial markets are braced for large interest rate cuts across the eurozone on Thursday amid mounting evidence of a sharp slowdown in the leading global economies. In the eurozone, traders priced in a 0.75 %point reduction by the European Central Bank to 2.5 per cent on Thursday, a move that would be bigger than any it has made in its near 10 year existence. Although economists were a little more cautious, with inflation risks disappearing fast, they nevertheless believed a 0.75% point reduction was a distinct possibility.

Popularity: 3% [?]