The WTO stimulus and bail-out problem

The US has aggressively employed bail-outs and stimulus programs to help banks, auto companies and the overall economy. Now Argentina and 15 other countries are bringing a grievance to the WTO that these programs are industrial subsidies. They provide an unfair advantage in international trade and should allow retaliation by other member countries.

The longer the recession as lasted the more likely there will be a trade war. This is especially the case given this global recession is driven by such a large decrease in trade. Countries have seen 20+ percent declines in exports and similar declines in industrial production. This countries to have the same access to capital markets, so the US and Europe can deficit finance bail-outs to their home country industries. GM is a case in point. The "Buy American "language in the stimulus package is another example.

This could start a wave of tit-for-tat actions which will further retard global growth.

Stats of the week

The KBW bank stock index is up 100% from the lows. What a change in bank expectations.

The mortgage application index has fallen from 1200 in March to just over 600 in the last three months. 30-year mortgages have moved up from 4.75% to over 5.5% during the same period. Refi's has been a great way of restoring broken balance sheets. The higher mortgages rates cannot be good for the housing market as we enter the key summer season.

$199 billion of TARP funds have been given to banks. $2 billion has been paid back. Another $68 billion is expected from banks which means 35% has been given back in less than nine months.

Is this good or bad? When you look ta write-downs and potential losses, it is hard to imagine that we are out of trouble. The IMF believes there will be %1.o64 trillion in losses. Banks have written-down $564 billion so far, so there still has to be another $500 billion to go. Banks have raised about $75 billion, so where will the rest of the money come from?

Obscurity, Stupidity, and GM - quotes for the week

The obscure takes time to see, but the obvious takes longer. -Edward R Murrow

Interesting quote from a reporter. How much is obvious but not reported or misreported in the news?

"Think of how stupid the average person is, and realize half of them are stupider than that" -George Carlin

"What's good for GM is good for America" - GM President Charlie Wilson

At the time the quote was made in 1953, 1 out of every 200 workers was employed by GM and 3% of GDP. We may still be living in the past on the importance of GM. Motor vehicles only represents 1.5% of GDP from 4% as late as 1988. Japanese and European automakers sell more cars in the US than US big three. The value of GM market cap before bankruptcy was less than the Turkey's and Egypt's auto makers.

Endogenous versus exogenous QE monetary policy

There is growing discussion on differences in quantitative easing monetary policy. On the one hand, there is the activist exogenous monetary policy followed by the Bank of England and Fed through explicit purchase of financial assets in order to control rates. The purchase of mortgages or Treasury debt increases the central bank balance sheet. The purchase of specific securities is expected to lower rates directly. The central bank decides on the when and how much not the market.

On the other hand, endogenous quantitative easing has been followed by the ECB. In this case, the central bank sets a rate of interest but makes funds available to all that want them. The ECB balances has also exploded but it is based on the demand for funds by banks. The endogenous approach is solely based on market driven demand. Perhaps this is easier for a country that has more developed bank system but there has been less aggressive reaction to the endogenous approach than the activist approach.

Which is better? My guess is that the endogenous approach will be easier to reverse and control. The exogenous approach will require an active transaction of selling bonds by the central bank. The impact from their purchases could be offset by the future sale. The endogenous approach is a matter of banks making the decision of what they need from the central bank at its stated price. The bank doe snot have to do anything but change the price of money to change the balance sheet and demand.