Bank Research Consensus Weekly 10.31.11
The Past, the People, the Policies
Spyros Andreopoulos, Morgan Stanley
Understanding central bank policies in the era of DDD (debt, deficits and deleveraging) requires understanding what shapes the thoughts of the people that make the decisions in these institutions.Most policy committees at central banks these days include a fair amount of (former) academic economists. Many of these have spent substantial parts of their careers studying ‘depression economics': the Great Depression of the 1930s, the Japanese slump of the 1990s, or both. (The two episodes hold an enduring fascination for economists, as they are both insufficiently understood and highly important from a policy perspective - therefore constituting a worthwhile intellectual battleground.) What informs the policy choices and strategies in these institutions at the current juncture are therefore, among other things, the lessons drawn from the past - including past mistakes.
Dollar Sell-Off Catches Investors on the Wrong Foot
Kasper Kirkegaard, Senior Analyst, Danske BankThe dollar has fallen just as fast as it rallied and is now almost back to August levels. This has caught the market on the wrong foot, as a general euro bearish sentiment meant that investors had been sitting on significant short euro positions. These are now being unwound – explaining the speed of the correction.
Financial Repression: Expensive Education for Savers
John E. Silvia, Chief Economist, Wells Fargo
In the early years of the post-WWII period, the Federal Reserve continued its policy of keeping nominal interest rates low to support U.S. Treasury financing of its debt at low interest rates. Unfortunately, in the post-WWII era, inflation rose double digits, on average, over the period 1947 and 1948. For savers during the war and over the early post-war period, this was an expensive lesson. In 1951, the Fed and the Treasury reached an accord that ended the Fed policy of low interest rates to help the Treasury finance its debt.
United States – Plans To Save The World
James Marple, Senior Economist,TD Bank Financial Group
Without a doubt the theme of the last week was policy makers’ actions to avoid economic and financial catastrophe. In Europe, policy makers worked into the wee hours of Thursday morning to come up with a three part rescue plan for the Eurozone (see our report). Financial markets were relatively optimistic on initial receipt of the plan. Global equities rose and the Euro rallied. However, some of these early gains have since been unwound as details (or more accurately the lack thereof) were digested.
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Compiled by David Song, Currency Analyst
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