Prieur’s readings (May 6, 2010)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Stephen Gandel (Time): Business lending: Finally on the comeback? May 5, 2010.

• Daniel Gross (Slate): The $2.3 trillion garage sale, May 4, 2010. Having waged a battle against financial mayhem for the last two years, the Federal Reserve is tentatively declaring victory. As it guaranteed debt and swapped cash for all sorts of assets, the Fed’s balance sheet grew – from about $850 billion in assets before the crisis to about $2.3 trillion this spring. The binge included the purchase of $1.25 trillion of mortgage-backed securities issued by Fannie Mae and Freddie Mac. But in testimony to Congress in March, Federal Reserve Chairman Ben Bernanke said the purchases were coming to a close and that the Fed was now seeking to lessen its burden. The Fed is now discussing how to sell off these new assets.

• Nouriel Roubini and Stephen Mihm (Telegraph): Forget sub-prime mortgages. It’s the sub-prime financial system we need to fix, May 4, 2010. For the past half century, academic economists, Wall Street traders, and everyone in between have been led astray by fairy tales about the wonders of unregulated markets and the limitless benefits of financial innovation. The crisis dealt a body blow to that belief system, but nothing has replaced it. That’s all too evident in the timid reform proposals currently being considered in the United States and other advanced economies. Even though they have suffered the worst financial crisis in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.

• Spiegel Online: Huge national debts could push euro zone into bankruptcy, May 3, 2010. Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.

• Josh Ward (Spiegel Online): Politicians have rolled right over Europe’s central bankers, May 4, 2010. The European Central Bank announced its decision Monday to accept junk bonds from Greece as collateral for massive EU aid. German commentators on Tuesday lambast the bank for abandoning its principles and bending to political pressure.

• Brian Wesbury and Robert Stein (Forbes): Greece bailout plan represents triumph of the euro, May 4, 2010. With local interest rates soaring to 10% and even air force pilots on strike, it looks like Greece is going to get the financial aid it’s been asking for – in the form of about $160 billion in loans over the next three years from the European Union and International Monetary Fund. Without these loans, it is doubtful Greece would have been able to rollover its debt at any interest rate. Greece would have defaulted. By contrast, if Greece still used the drachma instead of the euro, we all know how its fiscal profligacy would have ended: with a major devaluation of the local currency and higher inflation. With a devaluation, everyone would have taken a haircut–including those who earned wages and salaries in drachma (in the public and private sector alike) and domestic or foreign investors locked into earning drachma-denominated interest or investment returns from bank deposits, government and corporate debt, or equities.

• Tracy Alloway (FT Alphaville): Who’s most at risk of falling into a European debt trap, May 5, 2010. Who’s driving who in the complex interplay between European bond markets and sovereign ratings? Every time one of these sovereign downgrades happens it becomes more difficult for sovereigns to sell their bonds, and harder for governments to service their existing debt. That increases governments’ borrowing and debt servicing costs and leads to … more ratings cuts. A vicious circle indeed.

• Times Online: Goldman Sachs and regulator “in talks” on fraud deal, May 5, 2010. Goldman Sachs was reported last night to be considering settlement talks with the US regulators over the fraud charges brought against it last month. The reports came as the firm’s equities division was fined $450,000 for violations of regulations on short selling in 2008 and 2009 in what has now become a daily war of attrition by regulators against the bank. Goldman executives are understood to believe that the SEC’s case is without merit, but the firm is thought to be keen to avoid a battle with regulators.

• Caroline Baum (Bloomberg): Blankfein should explain why clients buy “crap”, May 5, 2010. Anyone listening to members of the Senate Permanent Subcommittee on Investigations drill representatives of Goldman Sachs Group Inc. last week had to wonder which of the two teams was the smart money. It wasn’t so much that subcommittee Chairman Carl Levin, Democrat of Michigan, wouldn’t let go of the question on the appropriateness of Goldman betting against securities it was selling to clients; or that Goldman Chief Executive Lloyd Blankfein repeatedly failed to give the right answer, defined as the answer Levin wanted. What was remarkable was the failure of either party to the Q&A to convey an understanding of the market mechanism at the root of our economy.

• Chua Kong Ho (SFGate Bloomberg): China stocks ETF short sales rise to 2-year high, May 5, 2010. •Foreign investors are short selling China’s stocks through a yuan-denominated exchange-traded fund at the highest rate in more than two years, underscoring concern that property curbs will slow the economy. Investors are “overwhelmingly” concerned about China tightening its monetary policy and measures to curb property speculation, Jing Ulrich, JPMorgan Chase & Co.’s chairwoman for China equities and commodities, said in a Bloomberg Television interview. Europe’s debt crisis and concern about contagion are also hurting investor sentiment towards stocks, she said.

• Alex Frangos (The Wall Street Journal): Asia inflation fears point to likely rate rises, May 4, 2010. Prices across Asia are rising faster than expected, highlighting the region’s strong recovery compared with the West and raising the likelihood for tighter monetary policy.

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