RBS' Gallo: 'Fed Underestimating Buildup of Risk in Credit Markets'
http://www.moneynews.com/StreetTalk/Gallo-Federal-Reserve-risk-markets/2014/07/01/id/580193#ixzz36YVSS3yf
http://www.moneynews.com/StreetTalk/Gallo-Federal-Reserve-risk-markets/2014/07/01/id/580193#ixzz36YVSS3yf
The Federal Reserve has made clear that
interest rates will remain near record lows for a long time, and Alberto Gallo,
head of macro credit research at RBS, thinks that's a mistake.
"The Fed is underestimating a buildup of risk in credit markets, which is threatening financial stability," he writes in the Financial Times.
The Fed has a two-pronged policy, including clear communication and macro-prudential regulation, the latter of which is designed to prevent financial instability. "Both are ineffective," Gallo notes.
"Providing certainty about the low path of interest rates is self-defeating. It gives an even stronger green light to investors and companies engaged in risk taking. U.S. firms are adding record debt through mergers and acquisitions and share buybacks."
As for macro-prudential policymaking, its history is checkered, and it "may not work," he argues. "Most existing prudential tools target mortgage lending. In financial markets, investors can generally invent new structures to take risks and elude regulation."
Without interest rate hikes, macro-prudential policies won't be able to keep investors from taking "irrational risks," Gallo explains.
"I believe the only way to stop excessive risk taking is to signal clearly that interest rates will rise sooner rather than later, and that the music is about to stop."
Meanwhile, Stephen Roach, a lecturer at Yale University and former chairman of Morgan Stanley Asia, says the Fed's massive easing program might spark another global financial crisis.
"Monetary accommodation, to the point of ignoring the stresses and strains of financial stability and what they mean for asset markets and credit markets, is something that needs to be seriously rethought," he tells CNBC.
"The Fed is underestimating a buildup of risk in credit markets, which is threatening financial stability," he writes in the Financial Times.
The Fed has a two-pronged policy, including clear communication and macro-prudential regulation, the latter of which is designed to prevent financial instability. "Both are ineffective," Gallo notes.
"Providing certainty about the low path of interest rates is self-defeating. It gives an even stronger green light to investors and companies engaged in risk taking. U.S. firms are adding record debt through mergers and acquisitions and share buybacks."
As for macro-prudential policymaking, its history is checkered, and it "may not work," he argues. "Most existing prudential tools target mortgage lending. In financial markets, investors can generally invent new structures to take risks and elude regulation."
Without interest rate hikes, macro-prudential policies won't be able to keep investors from taking "irrational risks," Gallo explains.
"I believe the only way to stop excessive risk taking is to signal clearly that interest rates will rise sooner rather than later, and that the music is about to stop."
Meanwhile, Stephen Roach, a lecturer at Yale University and former chairman of Morgan Stanley Asia, says the Fed's massive easing program might spark another global financial crisis.
"Monetary accommodation, to the point of ignoring the stresses and strains of financial stability and what they mean for asset markets and credit markets, is something that needs to be seriously rethought," he tells CNBC.
Source:http://www.moneynews.com/StreetTalk/Gallo-Federal-Reserve-risk-markets/2014/07/01/id/580193/
Thursday, 03 Jul 2014 08:16 AM
Read Latest Breaking News from Newsmax.com http://www.moneynews.com/StreetTalk/Gallo-Federal-Reserve-risk-markets/2014/07/01/id/580193#ixzz36YVdkR3g
Thursday, 03 Jul 2014 08:16 AM
Read Latest Breaking News from Newsmax.com http://www.moneynews.com/StreetTalk/Gallo-Federal-Reserve-risk-markets/2014/07/01/id/580193#ixzz36YVdkR3g
Comments
Dodd-Frank codified bailouts, so why think the banksters have
mended their ways. Low interest rates have not resulted in big business
investment or expansion in the U.S, because demand is flat and going down. It’s down because excessive immigration over
the decades caused record, systemic real unemployment at about 37%.
Denial is not a good strategy, especially for the Federal
Reserve. Companies are buying back their
own stock to keep their stock price propped up.
The stock market has already been adjusting to real inflation, about 10%
a year since 2009. High risk bank backed
investments going bad will result in more bailouts.
Norb Leahy, Dunwoody GA
Tea Party Leader
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