The Geithner plan is actually a good one - it avoids creation of a government bad bank, it avoids nationalization

Foreign Exchange - Currency Outlook

The big question on the table today is "Where is Tim?" Geithner is disappointing the market by not disclosing details of the plan to lend money to the private sector (vultures) to make a market in toxic assets. It looks like he is part of the problem rather than part of the solution, and critics are calling him an empty suit who has never placed a trade himself.

This is a terrible thing.

Remember that Rubin had instant credibility on the Street because he had been a trader.

The Geithner plan is actually a good one - it avoids creation of a government bad bank, it avoids nationalization (a semantically loaded word), and most of all, it avoids the government putting a price on assets at taxpayer expense. So where is it? Market News says "The market is anxiously awaiting the Fed's rollout of its Term Asset Backed Lending Facility (TALF) which has the potential to lend up to $1 trillion against assets and loans to spur lending in autos, credit cards, student and small business loans and commercial mortgage backeds. Bernanke said last week the facility should open any day."

When the history of this period gets written, we will find out the cause of the delay, but right now, nobody cares. If it turns out to be a legal constraint, the Street will issue the Shakespearean scream "let's kill all the lawyers." And yet it really is preferable to resolve these problems without writing new laws or twisting the capitalist principles on which the country is (more or less) founded. This is why letting judges arbitrarily re-set the principal of mortgages is such a contentious idea. We need flexibility and adaptability, yes, and fortunately laws can be amended, but delay is a bad thing in its own right, at least if you are a saver/investor today.

It's likely that Geithner is side-tracked by the Citigroup problem. Citi, along with about 20 other banks, is supposed to undergo the stress test this week. Presumably it will fail, despite big downsizing actions already taken. Converting the government’s preferred shares to common stock would solve some capital adequacy issues (while creating massive moral hazard and a competitive advantage for Citi).

The other question of the day is "What will Ben say?" Bernanke starts the semi-annual Congressional testimony today. He wants to talk about the economy but is going to get button-holed on bank nationalization whether he likes it or not. Congressmen will have their usual opportunity to look stupid and partisan on TV, although Bernanke is more gentle than Greenspan used to be. The real question, although it's conceivable no one asks it, is what is the Fed’s exit strategy, i.e., how will it halt inflation after all that Fed-created money at the banks is no longer used for capital and is used for lending? The obvious answer is to pull a Volcker—to raise interest rates so high that lending is choked off. This is obviously a long way in the future, probably years, but it's important for the inflation - obsession crowd that Bernanke acknowledge this is the expected outcome and assert that he will deal with it. After all, expectations of future inflation from money supply creation is why a Chinese official said

"We hate you."


Some foreign exchange analysts want Bernanke to state out loud that the Fed will adopt an inflation target. This would supposedly reduce fear of upcoming inflation and add confidence that the Fed knows what it’s doing by ballooning its balance sheet. But we say inflation targeting is still too hot a potato and Bernanke will be cagey about it. The downside among politicians outweighs the upside among market players.

Institututional factors tend to trump economic data and this is a huge week for institutional factors. The fiscal responsbility summit that kicked off yesterday - with Obama promising honesty in government accounting plus efforts to reduce the deficit - and meetings go on all week. This is probably an effort to woo those idiotic Republicans who want basically to secede from the rest of the US (with some governors rejecting federal unemployment money for its citizens - good luck in the next election). Tonight Obama will pre-empt our regular TV shows with an address to Congress and the nation on the budget, which is formally released on Thursday. Tomorrow the banks’ stress tests begin. The White House is no doubt hoping to get through the week to Friday’s GDP revision without having to nationalize anything.

Finally, we do get data although probably no heavy surprises. Today it's the Case Shiller home price index, backward looking to December, and Thursday, durables. We suspect the dolar could ping-pong around and perhaps weaken today if stocks recover, but looking ahead, the ECB will be cutting rates next week and we have to ask whether that is fully built in.

The trend is your friend and the foreign exchange traders continue to sell euros and buy US dollars and trend remains downward.

Pounds to US Dollars = 1.4417
Pounds to Euros = 1.1260
Euro to Pounds = 0.8870
Pounds to Australian Dollars = 2.2330

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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