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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: MulhollandDrive who wrote (172011)	12/17/2008 1:12:13 PM
From: Jim McMannis	Read Replies (1) \| Respond to of 306849

Obama team defends Emanuel in Blagojevich probe WASHINGTON (Reuters) – A senior adviser to President-elect Barack Obama defended chief of staff Rahm Emanuel on Wednesday for his contacts with Illinois Gov. Rod Blagojevich's office about filling Obama's Senate seat. Blagojevich has been charged with plotting to sell Obama's Senate seat in a nakedly corrupt act and the Obama presidential transition team has been working to distance Obama and his inner circle from the scandal-tarred governor. But the Chicago Sun-Times reported on Wednesday that Emanuel had privately urged Blagojevich's administration to appoint Obama confidant Valerie Jarrett to the Senate seat that Obama vacated when he was elected president November 4. Emanuel had asked the appointment be made by a certain deadline, the newspaper said. Emanuel is a Democratic member of the U.S. House of Representatives from Illinois chosen by Obama to be his White House chief of staff. Obama senior adviser David Axelrod offered a strong defense of Emanuel on MSNBC a day after Obama refused to answer a question about the Blagojevich case at a Chicago news conference because the U.S. attorney has the case under investigation. "I've known Rahm ... for a very long time. I've worked with him closely. He is someone who I think has enormous integrity and unparalleled skill. And I think we're lucky to have him," Axelrod said. "I have no concerns about Rahm. He is an enormous asset to us and will be an enormous asset to the country, as he has been in the Congress." The Blagojevich case has been an unwelcome distraction for Obama at a time when he is focused on plans aimed at rebuilding the U.S. economy when he takes power on January 20. Last week Obama said details would be released in a few days about the extent of contacts between his team and Blagojevich's office, but on Monday he said he would delay the release until Christmas week at the request of the federal prosecutors. He said he had no contact with Blagojevich about the Senate seat and that any discussions between the two sides by his team had not been inappropriate. Discussing the Senate seat would not be illegal. But what has remained unclear is whether Emanuel or Jarrett, who removed herself from consideration for being appointed to the Senate seat, were aware that Blagojevich was seeking a financial reward from whoever was picked. Axelrod said the Obama team was eager to release its report. "When you see it, it will corroborate what the president-elect has said, which is that he never spoke with the governor or any of his aides about this and that. There were no inappropriate discussions between members of his staff and the governor's office in this manner. And that, I think, will be very clear," he said.

To: MulhollandDrive who wrote (172011)	12/17/2008 1:38:14 PM
From: MulhollandDrive	Read Replies (1) \| Respond to of 306849

reuters.com Fed unleashes greatest bubble of all Wed Dec 17, 2008 7:08am EST -- John Kemp is a Reuters columnist. The views expressed are his own -- By John Kemp Like the sorcerer's apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control. Now the Fed's decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in the U.S. government debt. THE ASYMMETRIC EXPERIMENT Bubble mania is no accident. It is the direct consequence of the Fed's asymmetric response to shifts in asset prices. Pressed to "lean against the wind" and adopt counter-cyclical interest rate and credit policies in the asset market, senior Fed policymakers have repeatedly demurred. Led by Bernanke and Greenspan, officials have argued it is too hard and subjective to identify bubbles until afterwards, and not the Fed's job to second-guess asset allocation decisions of professional investors. Even if bubbles could be identified, they argue, pricking them would require swinging rate rises that would inflict widespread damage on the rest of the economy. Far less damaging to allow asset markets to follow their natural cycle and stand by to cut interest rates sharply, supply liquidity and contain the fallout when the bubble bursts. But the Fed's asymmetric policy response to rising and falling asset prices (colloquially known as the "Greenspan/Bernanke put") directly led to much of the excessive risk-taking which has humbled the financial system over the last eighteen months. More importantly, the Fed's decision to respond to the collapse of the technology and stock market bubble by lowering rates to 1 percent and holding them there for an extended period is now widely accepted as a mistake that contributed to the bond bubble and subsequent housing market boom in the middle of the decade. If the low-rate strategy was a mistake, it was a conscious one. In testimony to the UK Parliament last year, former Bank of England Governor Eddie George admitted the bank had deliberately sought to stimulate the housing market and house prices to support consumption during the downturn. Greenspan, Bernanke and Co seem to have adopted a similar approach in the United States. The real mistake, however, was not creating one bubble to offset the collapse of another, but believing they could control what they had wrought. When the Fed did eventually start to raise short-term interest rates in 2004, long rates remained stubbornly low for a year, and then rose much more slowly than anticipated, a development the puzzled Fed chairman and his able assistant Dr Bernanke described as "the Great Conundrum." Even as rates eventually rose, the alchemy of securitization ensured the real cost of credit remained far too low until the subprime bubble finally burst in late 2007. The second mistake is a basic design flaw in the Fed's "risk-management" approach to setting monetary policy. Risk management is a nice idea, but not terribly useful. As engineer will explain, risk management involves trade offs and is not cost-free. The Fed has struggled to formulate a response to "low probability, high impact" events such as the threat of deflation in the early 2000s. Its response has been to cut rates aggressively to ward off the danger of extreme downside events, a strategy officials liken to taking out an insurance policy. That's fine, but when these low risk events have not in fact occurred, as was never statistically likely, the resulting policy settings have proved far too loose, and the central bank much too slow to change it. Concentrating on theoretical but small risks such as deflation has too often blinded the Fed to much larger risks near at hand of bubbles and asset inflation. INTO THE UNKNOWN Even as officials recognize policy has played a role stimulating an endless series of bubbles, the Fed finds itself trapped with no way out. Following the collapse of much of the modern banking system, the risk of pernicious deflation is now very real--more so than in the early 2000s. So like the sorcerer's apprentice, the Fed has cranked up the Great Bubble Machine for what policymakers hope will be one final time. The Fed's "unconventional" monetary strategy comes in four parts: (1) Cutting interest rates to near-zero to lower the cost of borrowing. (2) Injecting short-term liquidity into the financial system in the form of bank reserves (quantitative easing). (3) Trying to pull down yields on longer-dated Treasury bonds through a combination of the jawbone (promising to keep short rates low for an extended period) and the threat to intervene in the market directly by buying longer-dated paper. (4) Trying to reduce credit spreads above the Treasury yield for other borrowers, and increase the quantity of credit available, by buying mortgage-backed agency bonds for its own account, and financing other market participants to buy securities backed by other consumer credits, auto loans and student loans. Most attention has focused on the zero-rate policy and quantitative easing at the short end of the curve. But the real significance lies in the unconventional operations targeting Treasury yields and eventually credit spreads at the long end. Operations at the short end are designed to bolster the banking system and restart lending. But the Fed knows the banking system is not large enough to replace the much more important sources of credit from securities markets. Operations at the long end are designed to get bond finance and securitized credit flowing. Short-end interest rates and quantitative operations are significant because they help shape the whole term structure of interest rates embedded in the curve. ONE LAST SUPER-BUBBLE The strategy has already succeeded in halving yields from over 4 percent in mid October to just 2.25 percent now. By convincing investors interest rates will remain ultra low for a long period, the Fed has made them willing to lend to the U.S. government for up to ten years for what is a paltry return. There are two risks. First, the massive rise in bond prices and compression of yields has come in the secondary market. The U.S. Treasury has not yet succeeded in placing much of its massively expanded debt and new requirements for next year at such low levels. But given the panic-driven demand for default-free assets, officials should not have too much difficulty. The bigger one is that the Fed is misleading investors into the biggest bubble of all time. Bernanke is making what learned economists call a "time-inconsistent" promise to hold interest rates at ultra low levels for an extended period. The problem is that if the unconventional monetary policy works, and the economy picks up, the Fed will come under pressure to "normalize" rates and reduce excess liquidity to prevent a rise in inflation. The resulting rate rises will inflict massive losses on anyone who bought bonds at today 2.25 percent rate. Bizarrely, Bernanke and Co are in fact inviting investors to bet the policy will fail, the economy will remain mired in slump for a long period, deflation will occur and interest rates will remain on the floor, as Japan's have done since the 1990s. Buyers of real estate and subprime securities have recently been lampooned for foolishly overpaying at the top of the market. Bernanke and Co are gambling memories will prove short and investors will prove just as eager to pay top prices for long-term government and private debt even though the downside is large. Let us have one last bubble, and when it collapses, we promise not to do any more in future...honest.