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To: Little Joe who wrote (18840)	9/14/1998 4:58:00 PM
From: Alex	Respond to of 116759

SHADOW FOMC: FEARS OF DEFLATION BASED ON FAULTY PREMISE --Fed Can't Correct Misguided Policy in Japan, Brazil --A 'Mistake' For Fed to East 'At This Time' By Kevin Kastner ÿÿÿÿÿWASHINGTON (MktNews) - The Federal Reserve must resist the temptation to lower interest rates given the current economic situation in the United States despite the Asian crisis and spreading Latin American turbulence, the Shadow Open Market Committee said Monday morning. ÿÿÿÿÿFears of deflation, the committee said, are based on a faulty premise. "They confuse inflation with the movement of a specific select group of prices" such as oil and commodity prices. "Deflation in the United States is highly unlikely" as prices on average have continued to rise slightly, the committee members said. ÿÿÿÿÿ"The Federal Reserve has a responsibility to serve as a lender of last resort to domestic financial markets," the Shadow committee said. "The Federal Reserve -- and it cannot be -- manager of the world economy." ÿÿÿÿÿThe committee noted that U.S. domestic demand continues to be strong with domestic production hurt by a widening trade deficit. ÿÿÿÿÿThe increasing red ink in trade results from economic ills in outher countries but the Fed must still resist trying to make corrections for the "misguided policies" in countries such as Japan and Brazil. ÿÿÿÿÿWhile oftentimes disagreeing with the Federal Reserve, the Shadow committee did have favorable comments to make about improvements in monetary policy thee Shadow members said they have seen in the last five years. These changes can especially be seen in the strong economy and in the continued low inflation rate. ÿÿÿÿÿHowever, the committee of academics and economists did criticize what they see as the Fed's seeming lack of "formal commitment" to long-term price stability, repeating the call for the Fed to focus on zero inflation as its long-term goal. ÿÿÿÿÿThe committee members said they were concerned that changes in the Board or its leadership that they said could shift policy back to one that tolerated higher inflation rates. ÿÿÿÿÿThe committee urged the Federal Reserve to slow the rate of growth of the monetary base to 4% per year, "a rate consistent with long term economic growth and price stability." ÿÿÿÿÿ"The risk of higher inflation remains. It would be a mistake for the Federal Reserve to lower interest rates and expand monetary growth," the committee said. ÿÿÿÿÿThe committee is made up of several professors and one market economist. The members are Carnegie Mellon's Allan Meltzer, Oberlin College's Gregory Hess, NationBank's Securities Mickey Levy, University of Rochester's Charles Plosser, National Bureau of Economic Research's Anna Schwartz and Dr. W. Lee Hoskins. Market News International Washington Bureau: (202) 371-2121 [TOPICS: MNSFED] 11:30 EDT 09/14 c 1998 Market News Service, Inc.

To: Little Joe who wrote (18840)	9/14/1998 5:11:00 PM
From: Alex	Read Replies (4) \| Respond to of 116759

Yes Little Joe. I wonder if this is the sale that Bill M. has been speaking of ( the Dutch sale). I believe that the story had already been posted here on GPM. I've been having problems with my mouse over the past week but I 'think' I finally have got it figured out (cleared up). Not an easy task for me : - ). It was making it very difficult for me to read the posts here and also to provide links. Anyway, something on derivatives................. DREADING DERIVATIVES RISKY STAKES COULD BATTER BANKS By KIMBERLY SEALS McDONALD ------------------------------------------------------------------------ Could the next market shock lurk in derivatives? Bank stocks have been in a virtual free fall on Wall Street as investors fret over the potential fallout from their exposure to the tumultuous emerging markets such as Russia, Latin America and Asia. If bank balance sheets weren't already taking hits on several fronts, major U.S. banks are also principal players in the derivatives market and there's renewed speculation that an unknown amount of risky derivatives exposure may be waiting in the wings. Friday, shares of Lehman Brothers were hammered, falling 7 percent amid speculation that the fourth-largest U.S. securities firm is in financial difficulty. Traders said the rumor mill pegged the problems to vast losses from derivatives. Lehman issued a statement saying it categorically denied as baseless and irresponsible rumors circulating (Friday) morning concerning the firm's financial position. Derivatives, those funky financial instruments whose value is derived from another asset, like stocks, bonds and currencies, became Wall Street's dirty little word when financial portfolios exploded in 1994. The highly complicated agreements are designed to hedge against certain financial risks, but work best under steady conditions and can behave poorly in bad times. Although the scope of the global derivatives market is large and quite lucrative, the lack of public disclosure makes it difficult to get a handle on it. With derivatives, the contracts are privately negotiated and the value of the deals are not disclosed on public exchanges, such as the stock market. Some estimates have calculated that some $10 trillion in derivatives contracts are set to mature this year for U.S. banks. And some analysts suspect that between Russia, Asia, Latin America or wherever the contagion spreads next, there will be a number of clients who won't pay. Despite the staggering numbers, some analysts maintain that the sky is not falling on banks and that a derivative explosion is not imminent. The banks have already disclosed their losses and exposure and their derivative exposure is included in those numbers. There's nothing out there looming, said David Berry, director of research at Keefe, Bruyette and Woods. U.S. banks, including BankAmerica, Bankers Trust, Chase Manhattan and Citicorp were owed $6.8 billion in loans, derivatives, foreign exchange and other securities by Russian companies and the Russian government as of March 31, according to a division of the Federal Reserve. Unfortunately, industry watchers note that history has proven that typical derivative models are often unable to fully measure the scope of risk in sudden financial disasters. Risk management consultants say the real severity is usually not known for some time. The wreckage from Russia alone is expected to be great. According to Brown Brothers Harriman, U.S. banks have relatively small $7.68 billion in exposure. Derivatives are included in that amount, but other undisclosed positions could further compound the banks' derivative problems. Analysts expect banks to boost their loan loss provisions on some loans from Russia, crimping third quarter earnings. While Russia may not be significant enough to cripple earnings, Latin America is a different story, analysts say. All bank rating agencies agree that a downturn in Latin America is potentially much more serious for U.S. banks than the collapse of the Russian economy. Last week Latin American markets were disintegrating, and the region's linchpin, Brazil, is experiencing unprecedented outflows of capital and facing the threat of a currency devaluation. Many of the banks looking for a foothold in Asia and other less-developed markets used local banks as an intermediary instead of dealing with weak credit counter parties. Those same banks have been in a swift downward spiral in most emerging market regions, leaving them less able to cover their own exposure.