Posted: 06 Feb 2010 07:06 AM PST

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Fed's tools have limits - Herald Tribune

Posted: 06 Feb 2010 06:52 AM PST

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Columnist Paul Krugman rightly commends Federal Reserve Chairman Ben Bernanke for the Fed's response to the financial crisis. No doubt that response did help prevent another Great Depression. However, he criticizes Bernanke for not reacting adequately to the economic crisis left in its wake.

Krugman contends that it is the Fed's responsibility to do all it can to end the resulting mass unemployment. What can the Fed do that it has not already done? The Fed, the Treasury and the banks themselves have already taken measures to improve bank capitalization, where possible, and therefore their ability to extend credit. As well, interest rates have been kept low to encourage borrowing and spending. We can't expect the Fed to buy up the bad loans of all the regional banks that are not in a position to extend credit.

In any case, the ability to lend does not mean the banks will lend without a great deal of caution. After all, excessive risk-taking was the major cause of the financial crisis. Moreover, a low interest rate does not mean that businesses will borrow any more than they absolutely have to when consumers are not buying.

Here is the problem: More spending, that is, rising demand for goods and services by business and consumers, is the key to job growth, and this will take time.

In this environment, the chief tools of the Fed, interest rates and the ability to provide liquidity (and persuasion) to the banks, are simply not enough.

What else can Bernanke do?

Tom Hutchings

Bradenton

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Republicans in rear guard action against new financial industry ... - American Thinker

Posted: 06 Feb 2010 06:52 AM PST

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"I fully support enhancing both consumer protection and safety and soundness regulation," Mr. Shelby said. "I will not support a bill that enhances one at the expense of the other, however. In order to strike the appropriate balance they must be integrated with each other, not separated from each other."
President Obama put forward a package of regulatory changes last June, and the House passed a sweeping overhaul in December, largely along partisan lines.
The House bill would, among other things, create a council of regulators to oversee systemic risk, establish a process for dissolving large institutions without requiring government bailouts, give shareholders an advisory vote on executive pay, strengthen the Securities and Exchange Commission's power to protect investors, regulate over-the-counter derivatives and tighten rules for mortgage lenders and credit rating agencies.
Many, if not most, of those provisions have attracted bipartisan support.
But a proposal for a separate agency with power to issue regulations governing consumer financial products has emerged as the main sticking point. President Obama has expressed support for the notion, which is contained within the House bill.
Several people involved in the Dodd-Shelby negotiations, who spoke on the condition of anonymity out of deference to Mr. Dodd, said the chairman had agreed in principle to concede a new agency in favor of a new consumer protection unit within an existing regulatory body. But these people said Mr. Dodd and Mr. Shelby could not agree on the degree of independence of that unit.

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Recovery, debt woes to hound stocks - CNBC

Posted: 06 Feb 2010 03:32 AM PST

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By Ellis Mnyandu

NEW YORK (Reuters) - Stocks face more turbulence that could send indexes spiraling through key levels next week as doubts about the pace of the global recovery persist and fears over Europe's sovereign debt woes rattle sentiment.

Investors worry that the debt problems will hinder efforts to sustain the nascent economic recovery and undermine confidence in the stability of governments that stand behind the euro.

With the Dow briefly dipping back below 10,000 and the benchmark S&P 500 <.SPX> down 7.3 percent from its 15-month closing peak of January 19, money managers and analysts say there is a growing sense that the U.S. stock market's rally from the lows of March 2009 has all but run its course.

"I am in a camp that believes we're in a correction. The mood has turned short-term negative," said Eric Kuby, chief investment officer at NorthStar Investment Management Corp in Chicago. "The general trend for more than nine months has been for the market to rally, but now it seems as if the enthusiasm has abated, and it's hard for the market to move forward."

EUPHORIA VS REALITY

Investors had bet the start of 2010 would show that the recovery was gaining momentum, but their optimism has been met with more signs of turbulence in the labor market and by worry over possible contagion from fiscal upheaval in Greece, Portugal and Spain.

As a result, the euro has fallen sharply against the U.S. dollar due to risk aversion, hurting stocks and the prices of global commodities. On Friday, the benchmark S&P 500 capped its fourth straight weekly decline, falling 0.7 percent. The Dow dropped 0.6 percent and the Nasdaq shed 0.3 percent.

"The markets are not taking any prisoners. They're not looking at things as isolated incidents. They're looking at this as the spreading of a contagion," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

"It's not clear at this point whether this will stop at Europe or whether the correction has run its course."

Uncertainty surrounding the Obama administration's legislative reform agenda for the banking and healthcare sectors added to the bearishness, along with uneasiness about the United States' own ballooning fiscal deficit.

There are also signs that China is looking to curb lending to prevent its economy from overheating, which risks derailing the global recovery if stimulus was withdrawn too soon.

The U.S. government's January non-farm payrolls report sowed even more caution on Friday as it showed the economy unexpectedly lost 20,000 jobs in January.

BRING ON THE BARGAIN HUNTERS

All told, the correction was long anticipated, but there is uncertainty about how far it will go. The technical damage from the latest correction briefly drove the Dow below 10,000 on Thursday and Friday, but the index has yet to close under that level.

Meanwhile, the S&P 500 has broken through key support at 1,085 and slid as low as 1,044.50 on Friday before rebounding slightly toward the close.

Market technicians have warned that further downside could take the S&P 500 as low as 1,036 -- a level that will signify the "textbook" 10 percent correction from the January 19 closing peak.

But if the previous pullbacks -- in July and in October 2009 -- are any indication, investors could again look for opportunities in the days ahead to scour the market for stocks whose prices have been pushed down to attractive levels. Late on Friday, there was some evidence of investors snapping up beaten-down shares as technology and materials sectors led a last-minute bounce.

"When everything is too bleak, that's when you should look for the other side," said Ron Florance, director of asset allocation and strategy for Wells Fargo Private Bank in Charlotte, North Carolina. "Corrections are like diets. They're never really pleasant, you kind of dread them, but at the end of the year, you look better and you feel healthy."

The highlight on the economic calendar is set to be the Commerce Department's January retail sales report on Thursday, along with December business inventories and weekly jobless claims. That trio of reports will follow the release on Wednesday of the U.S. international trade deficit for December. On The Reuters/University of Michigan survey of consumer sentiment's preliminary February reading is due on Friday. For details, see <ECI/US>

Particular attention will be paid to Federal Reserve Chairman Ben Bernanke, who is scheduled to testify before the House Financial Services Committee on Wednesday. The hearing will explore the unwinding of the Fed's emergency programs.

The steady stream of fourth-quarter earnings will continue. Next week's focus will shift to more consumer-oriented companies, with Walt Disney Co <DIS.N>, Coca-Cola Co <KO.N>, CVS Caremark Corp <CVS.N>, PepsiCo <PEP.N>, Marriott International <MAR.N>, Hasbro <HAS.N>, and Electronic Arts <ERTS.O> among those due to report.

The consumer's financial health is key as investors look for clarity on the recovery's prospects.

(Reporting by Ellis Mnyandu; Additional reporting by Leah Schnurr; Editing by Jan Paschal)

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