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Fed Attacks the Fed as Soros Pumps Up the Press For Another Sterling Devaluation Bet

Currencies / Fiat Currency Apr 11, 2010 - 09:40 AM GMT

By: Mike_Shedlock

Currencies

Best Financial Markets Analysis ArticleIn a candid attack on his former colleagues, Poole Says Fed Has ‘Tilted Playing Field’


“The Fed did not provide assistance to all on an equal basis but tilted the playing field,” Poole said in remarks prepared for a lecture at the University of Delaware, where he is a scholar in residence. “Why should the Fed have had a program to buy commercial paper from large corporations and no program to help small businesses starved for funds?”

The Fed’s program to purchase $1.25 trillion in mortgage- backed securities issued by government-sponsored enterprises probably contributed to the demise of the market for non- government mortgage-backed securities and will “complicate monetary policy in the years ahead,” Poole said.

“Much more research is necessary to determine whether the Fed made the right choices; clearly, I have my doubts,” said Poole, 72. He was president of the St. Louis Fed from 1998 until retiring from the post in March 2008, the month that Bear Stearns collapsed.

Poole expressed concern about “an appalling lack of economic literacy in Congress” and said that neither the House nor Senate versions of legislation to overhaul financial regulation address the most important shortcomings.

Poole is correct about the Fed's favoritism and the Fed buying mortgages. It is very doubtful the Fed helped housing much, but at some point the Fed has to get rid of that $1.25 trillion in mortgages. That will pressure mortgage rates.

Why did the Fed even purchase the last half-trillion? By then, the Fed was already discussing an exit strategy. It made no sense.

Certainly Congress does consist of economic illiterates, but the same thing can be said about the Fed. Pray tell what did Bernanke or Greenspan get right?

New York Faces $1 Billion Cash Shortage in June

In a scene playing out in nearly all states in varying degrees New York Faces $1 Billion Cash Shortage in June.

New York state faces a $1 billion cash shortage in June, budget director Robert Megna told reporters today.

The state is considering all options to deal with the shortage, including borrowing, Megna said. “We are significantly underfunded in the first week of June,” Megna said.

Soros Bought More Gold, Says Pound Devaluation Is Option For UK

Inquiring minds are reading Soros Says Pound Devaluation Is Option for Next U.K. Government

Billionaire investor George Soros said the next U.K. government after the May 6 election should decide whether to allow a further devaluation of the pound to rebalance the economy and assist the recovery.

Britain “has more room to use exchange rate adjustments as a way of adjusting the economy” than do nations that use the euro, he said in an interview yesterday in Cambridge, England. “It’s a question for the next government to decide. It has a number of options, of which a currency depreciation is one.”

The pound has dropped about 25 percent on a trade-weighted basis since the start of 2007, making exporters’ goods less expensive overseas. Bank of England policy makers are counting on sterling’s weakness to aid the recovery and rebalance the economy away from domestic spending at a time when the nation faces a record budget deficit.

“It’s a question now of, if you now cut the budget deficit and borrow less, you could probably keep the currency, raise the interest rate, you could keep the currency from going down,” he said. “Britain, by having kept out of the euro, has that option of allowing the exchange rate to adjust.”

Soros said that history shows Britain still has room to borrow more to bolster its public finances. Its debt levels have been higher, and Japan’s 10-year borrowing costs are about 1.5 percent even after its debt load swelled, he said.

“Probably Britain is not at the limit of its borrowing capacity,” he said. Still, “Britain is in a very difficult situation.”

At about 12 percent of gross domestic product, the U.K. deficit rivals that of Greece. Net debt climbed to 60.3 percent of GDP in February.

Soros Fund Management LLC manages about $25 billion. The firm increased its investment in SPDR Gold Trust, the world’s largest exchange-traded fund for the metal, by 152 percent in the fourth quarter. Soros told Reuters in an interview in January that he didn’t trade himself.

Is Devaluation That Simple?

Soros makes devaluation sound so simple. Is it? Please consider a definition of devaluation.

A deliberate downward adjustment to a country's official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country's government (i.e central bank) can alter the official value of the currency.

There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit.

In a genuine devaluation, the central bank would have to peg the rate to some other currency and defend that peg (buying or selling currency to enforce the target rate). Given that the British Pound floats, devaluation per se, is not exactly the right word.

Nor is the word "allow" the right word as in "The Bank of England should decide whether to allow a further devaluation of the pound".

I seem to recall Soros collecting a $1 billion bet that the pound would crash whether Thatcher would "allow" the pound to drop or not. To be fair, there are some things Thatcher could have done to support the Pound, but she did not want to.

Likewise, there are some things the U.K. can do now to pressure the pound (such as spending ridiculous amounts of money) or dropping interest rates.

However, the Bank of England is right near zero-bound at .5% and wasting more money on fiscal stimulus is not exactly the most prudent thing to do.

For now, UK interest rates are on hold at 0.5% and the Bank of England also decided not to pump any more money into the UK economy under its policy of quantitative easing (QE).

Moreover, at zero-bound, quantitative easing does not accomplish much other than create an exit strategy problem down the road. Money just sits as excess reserves unless consumers want to borrow and banks want to lend, neither of which is happening.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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