"Kee" Points with Jim Kee, Ph.D.

Europe: On Friday Standard and Poor's removed triple-A status from France and Austria and downgraded seven other countries, including Spain, Italy, and Portugal, though Germany retained its triple A rating. "Calmly" is the way most would describe the markets' responses to the downgrades. This partly reflects the fact that rating agencies don't know anything the markets don't already know, so debt downgrades tend to be old news. It also probably reflects the fact that official downgrades help to instill and/or maintain a sense of urgency on the part of European officials regarding fiscal reform and financial system support. But the downgrades are a reminder to investors that the European debt crisis isn't going away anytime soon. It is my hope that as resolve within the European Union increases, the market responses to headlines will gradually moderate as fears of a global financial system contagion or collapse fade. Maybe that's starting to happen with these debt downgrades, but I don't think we'll have a strong sense of things, e.g. will European countries make good on their reform commitments, until at least mid-year? Europe's problems aren't small… the housing bust there has lead to deleveraging and consumer retrenchment like it has here. And an Iranian supply-driven oil price spike wouldn't help, particularly since Europe is Iran's largest customer.

Meanwhile in the U.S., economic data for the week came in a bit softer than the week prior, with a rise in weekly jobless claims and weaker (more or less) than expected December retail sales. The UCLA-Ceridian Pulse of Commerce Index, which measures real-time trucking activity and hence the flow of goods in the economy, increased .2 percent in December, which follows small gains (.1 percent) in November and October. Econometrician Edward Leamer infers from this a GDP growth rate of around 2 percent. That's about what we at STMM expect. The U.S. economy is very resilient, and it takes a pretty big shock to knock it into negative growth. But I think a lot of near-term uncertainty (elections, Europe, Iran) will keep us off of our long-term 3 percent growth path for a while longer. Hong Kong-based Gavekal sees the possibility of an upside surprise to U.S. growth this year, primarily because of more policy stability (relative to the last few years); the direction of recent statistics like ISM surveys, construction spending, etc.; and labor market improvements. We'll see.

Bernanke and the Fed were in the news a lot last week due to recycled headlines about the Fed failing to see the housing crisis coming. This has been known by anyone who bothered to read Bernankeís (or Vice Chairman Yellen's) public statements over the past few years. What the press should be reporting on is Bernanke's letter (representing the Board of Governors) to Congress concerning the "egregious errors and mistakes" in recent press articles about the Federal Reserve's activities. Kee Points readers should find the following assertions of interest. They are cold hard facts that seldom get mentioned:


  1. "First, these articles have made repeated claims that the Federal Reserve conducted "secret" lending that was not disclosed to the public or the Congress. No lending program was ever kept secret from the Congress or the public."
  2. "One article asserted that the Federal Reserve lent or guaranteed more than $7.7 trillion during the financial crisis. Others have estimated the amounts to be $16 trillion or even $24 trillion. All of these numbers are wildly inaccurate. As disclosed on the Federal Reserve's balance sheet, published weekly and audited annually by independent auditors, total credit outstanding under the liquidity programs was never more than about $1.5 trillion; that was the peak reached in December 2008."
  3. "To be sure, that is a very large amount, but it was a necessary response to ensure that the crucial mistake made during the Great Depression – failing to prevent the collapse of the financial system – was not repeated. Importantly, such lending helped support the continued flow of credit to American families and businesses."
  4. "Other inaccuracies may occur if total potential lending is counted as actual lending. For instance, the TALF program was authorized at $200 billion, but its total lending never exceeded $40 billion… although the articles never stress this point, it is important to note that nearly all of the emergency assistance has, in fact, been fully repaid or is on track to be fully repaid… The articles also fail to note that the lending directly helped support American businesses by providing emergency funding so that they could meet weekly payrolls and on-going expenses. The commercial paper funding facility, for example, provided support to businesses as diverse as Harley-Davidson and National Rural Utilities, when the usual market mechanism for their day-to-day funding completely dried up."
  5. "And the articles fail to mention altogether that one facility, the TALF, supported nearly 3 million auto loans, more than 1 million student loans, nearly 900,000 loans to small businesses, 150,000 other business loans, and millions of credit card loans... Most of the Federal Reserve's lending facilities were priced at a penalty over normal market rates so that borrowers had economic incentives to exit the facilities as market conditions normalized, and the rates that the Federal Reserve charged on its lending programs did not provide a subsidy to borrowers."