Financial Reform Bill Is A ‘Disaster’: Sen. Gregg

Hat tip to Va-Bear for sending this to me.

By: Natalie Erlich
The financial regulatory bill is a “disaster,” and its proposed consumer protection agency would create a Fannie and Freddie “on steroids,” Sen. Judd Gregg, R-N.H. told CNBC on Monday.

“The bill is a disaster because it doesn’t address the fundamental underlining causes of the economic issue, which were real estate and underwriting,” he said. “This bill became, ‘I want to score the most points against Wall Street.’ Most of the initiative of this bill wasn’t directed at solving the problem, but it was directed at scoring political points.”

Gregg, who sits on the Senate banking, budget and appropriations committees proposed underwriting standards along with Sen. Bob Corker, R-Tenn., yet they were not included in the final bill, he said.

The Senate version of financial reform was approved late last week and must now be reconciled with the House version before it is signed into law by President Obama.

Meanwhile, the provision on consumer protection will expand the reach of government and create conflicts with the banking industry, Gregg said.

“You’ll basically have a consumer protection agency which decides to go out and in the morning and say, ‘well everybody who’s XYZ should have a loan, even though the local community bank says XYZ shouldn’t have a loan, because if we give them a loan, we know they’re not going to pay back,’” he said. “It’s going to become an agency that defines lending on social justice purposes instead of safety and soundness purposes.”

Gregg also blasted derivatives language in the bill, saying that it lacks coherence.

“You’ve got this Alice in Wonderland tea party atmosphere around derivatives,” he said. “Basically, the construct is it will make the derivatives in the market less sound, it will cause a huge contraction of credit—maybe up to three-quarters of a trillion dollars—and it will push massive amounts of derivative activity offshore and out of our control. So they will become even less controllable in the sense of having oversight.”

Despite the bill’s major flaws, said Gregg, it does include redeeming points like “too big to fail.” For example, the bill authorizes regulators to impose restrictions on large, troubled financial institutions. It also creates a process for the government to liquidate failing companies at no cost to taxpayers.

Beware of the bubble in bonds

(Fortune) -- Here we go again. In just six weeks the prices of U.S. Treasuries have soared, sending the yields on the 10-year bond from 4% back to 3.2%, close to their levels when terror reigned early last year. Don't let Wall Street's cheerleaders convince you that the sudden drop in the cost of borrowing heralds a new era of moderate inflation that will keep Treasury prices aloft, and interest rates low, for years to come.

On the contrary, in a volatile era when little about our economic future is certain, one thing couldn't be more obvious: Treasuries are forming still another outrageous, treacherous bubble. "We're seeing a flight to safety that cannot last, and it's bringing back the 'greater fool theory,' " charges Allan Meltzer, the distinguished monetarist at Carnegie Mellon. "Investors believe they can unload those bonds at higher prices to someone else. Remember, those same bonds yielded 4% last month. They will be forced to sell those Treasuries at a big loss."

Let's take time to analyze why a3.2% Treasury yield is totally unsustainable, especially in the spreading shadow of inflation. Those yields comprise two parts: The "real rate" of interest and the "inflation premium." Corporate bonds have a third metric, the "risk premium," or an extra yield to compensate for the chance of a default -- it's big for junk bonds and narrow for top corporates. For Treasuries the risk of nonpayment is virtually zero, leaving just the first two factors.

Risk factors

That doesn't mean that Treasuries aren't risky. Far from it. Both the inflation premium and the real rate can change swiftly and sharply, as we're seeing right now. The reason is that they depend on investors' vision of the future, a view that can shift from optimism to fear in a hurry. Right now, the problem is that both the inflation premium and the real rate are far too low.

Let's start with the real rate. The best measure is the yield on TIPS, which automatically compensates investors for inflation with an extra payment, so that their rates reflect what investors demand over and above the CPI. Right now, the yield on 10-year TIPS -- or the real rate -- is a minuscule 1.25%.

That leaves an inflation premium of less than 2% (the 3.2% yield minus the 1.25% real rate), meaning investors expect that for the ten years they hold that Treasury, prices will rise less than two points a year.

Neither today's real rate nor the cushion for future inflation is remotely reasonable, for two reasons. First, both are far below any historical measure, which is always a danger signal. Second, given perils ranging from huge deficits to an exploding money supply, they should be far higher than normal, not lower. Getting back not just to normal, but to beyond normal won't be pleasant.

Over long periods the yield on the Treasuries tends to track growth in real GDP, plus inflation. Over the past 20 years, for example, the rate on the 10-year has averaged 5.5%, about evenly divided between the real rate and the inflation premium. That's close to economic growth of 4.9%.

So why are yields now sitting a full 2.3 points below their historical levels? A major factor is the expansionary policy of the Federal Reserve. "When the Fed holds short-term rates at close to zero, it also restrains longer-term rates," explains Brian Wesbury, chief economist at First Trust Advisors. "The Fed funds rate is the anchor, and that holds the boat, the long-term rate, on a short line." The second explanation is the recent flight to the safest dollar investments -- that's Treasuries -- following the debt crises in Greece and Spain that sent global investors fleeing the euro.

Both trends are temporary. Right now the rate of inflation is indeed low. The CPI is growing at just 2.2% on an annualized basis. But even today's official rate is understated. The recent decline is strictly the result of a fall in a measure called "owner equivalent rents," homeowners' estimates of what their homes would rent for. Those numbers suffer from long lags; rents dropped dramatically with the fall in housing prices, but they've now stabilized, so the trailing numbers give a false picture of true inflation. "Inflation for everything else is 3%," says Wesbury. "That's a far more realistic number."

Full Story is here http://money.cnn.com/2010/05/25/markets/bonds_bubble.fortune/index.htm

TDI Podcast 162: ZeroHedge, FlashCrash & Did the FED Create the Euro Panic?

Guest: Tyler Durden, ZeroHedge discusses the facts surrounding the “flash crash” a couple of weeks back. We also go into high frequency trading as well as an interesting conspiracy theory related to the Euro and Treasuries. Did the U.S. govy want a flight to safety?

http://www.thedisciplinedinvestor.com/blog/2010/05/23/tdi-podcast-162-zerohedge-flashcrash-did-the-fed-create-the-euro-panic/


From Shaza.