1) The big story in credit markets this week has been the rise in Treasury yields. In most recessions, that would be taken as a sign of impending resurgence; in this one, it’s also a threat to fragile credit conditions–particularly in home mortgage markets. From Tim Duy’s Fed Watch (“A return to a nasty external dynamic?”):
The core issue is the steep rise in Treasury yields, which apparently were kept in check only by the expectation that the Fed would continued to gobble up the endless stream of securities issues by the US Treasury. The Fed sank that hypothesis at the last FOMC meeting, and a subsequent statement by Federal Reserve Chairman Ben Bernanke made clear that the Fed does not have a 3% target on 10 year Treasury yields. Since then, yields have climbed as high as 3.75% before prices rebounded today, bringing yields down to 3.61%. Should we be concerned with the gains?…
[W]e are stuck with two apparently contrasting views. On one hand, rising long rates and the related steepening of the yield curve should indicate improving economic conditions – after all, rising yields simply imply that market participants are gaining confidence to put their money to work in more risky endeavors. The steeper yield curve should boost bank earnings and, in time, encourage lending. On the other hand, higher yields may undermine support for the housing market, thus extending the downturn.
[Also see: WSJ, Mortgage rates surge, sap hopes.]
2) Writing at TomDispatch, Andy Kroll pores over a long trail of government documents and hearings to assess the federal bailout of Wall Street in “Six ways the financial bailout scams taxpayers.” Some of this will be news to you, some won’t, but it’s best overview of its kind that I’ve seen:
Seven months in, the bailout’s impact is unclear. The Treasury Department has used the recent “stress test” results it applied to 19 of the nation’s largest banks to suggest that the worst might be over; yet the International Monetary Fund as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in U.S. markets, rising unemployment, and generally tougher economic times ahead.
What cannot be disputed, however, is the financial bailout’s biggest loser: the American taxpayer. The U.S. government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and — with the exception of the automakers — letting companies take taxpayer money without a coherent plan for how they might return to viability.
3) Paul Krugman’s column today, “The big inflation scare,” challenges the growing chorus of political conservatives claiming that the cash infusions from TARP, the Fed, the FDIC, et al. will inevitably lead to runaway inflation:
First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.
So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.
The first story is just wrong. The second could be right, but isn’t.
More: Robert Scheer/Nation, California budget blues; Floyd Norris/NYT, Credit relief may not last long; NYT Dealbook blog, PIMCO’s Gross sees modest goals in slow recovery; Gerald F. Seib/WSJ, Obama’s business coalition; Bloomberg, GM bondholder group agrees to plan that clears bankruptcy path; David Cay Johnston/Columbia Journalism Review, Welcome to the jungle.