Current Affairs/Investing./Television Media

Interesting Videoclips of the Week (March 29 – April 5, 2013)

Posted on by MV

Editor’s Note: 
In this series of articles, we include important or interesting
videoclips with our comments. This is an article that expresses our
personal opinions about comments made on Television and in Print. It is
NOT intended to provide any investment advice of any type whatsoever. 
No one should base any investing decisions or conclusions based on
anything written in or inferred from this article. Investing is a
serious matter and all investment decisions should only be taken after a
detailed discussion with your investment advisor and should be subject
to your objectives, suitability requirements and risk tolerances.

1. Japannnn… Love in Toyko

So went the lyrics of the title song of the 1966 movie “Love in Tokyo”. And now there is so much love coming from Tokyo towards owners of Treasuries, Bunds & European fixed income. That love even converted some sceptical hearts in American fixed income. Peter Hayes of BlackRock opined on Thursday on CNBC FM:

  • “the Japanese move last night was a very, very big deal for the fixed income market….”

What about the man who was has been steadfastly negative on Treasury duration for past several months? Bill Gross reluctantly admitted to BTV’s Sara Eisen:

  • “the BoJ has gone
    all in the amounts of they are going to be buying… to a certain extent
    Sara, that money is expected to move out of Japan and into Treasuries
    and other fixed income in other high quality markets with higher
    yields..the 10-yr treasury is only 1.75% but it is certainly much better
    than what they can get in Japan and if the Yen is weakening     – sort of a
    double play for Mrs. Watanabe    …”

In other words, Come to America, Mrs. Watanabe.

After that, came Thursday night in JGBs, one for the ages for any fixed income trader. Yields fluctuated wildly from dropping to mid 30s bps for 10-yr JGBs, then shooting up to 65bps to end up unchanged near 50bps – a year’s volatility compressed in one day. This nutty volatility may actually increase the appeal of US Treasuries not just to Mrs. Watanabe but also to Japanese Institutions. We urge readers to remember what happened to the Australian & Kiwi Dollars when Mrs. Watanabes began pouring money into down under.

What about stocks? Not just in Japan but all around the world? Whom would you ask about that? The real  Man in the Mirror in the Bill Gross terminology – Mark Mobius on CNBC Squawk Box:

  • “it’s wonderful for us and it’s working and it’s going to work because they are determined to get this moving at least to 3% inflation. As a result of that, the amount of money they’ll be printing is going to be very very good for markets. Not only the Japanese markets but markets all over the world. particularly in Asia. So as far as we are concerned,  we’re quite happy because we’re equity investors.”
  • “I think the Southeast Asian nations, of course. You’d seen Thailand outperforming everybody else but countries like Vietnam will do very well. The Kuala Lampur market is beginning to move. Singapore will of course benefit. Indonesia in particular. and now Myanmar is beginning to open up and that will be quite significant.”

But will the unprecedented experiment in Japan work? Is it like Gambler’s ruin with Kuroda-san doubling BoJ’s bets and threatening to increase QE ad infinitum? Is it dangerous as Soros warned? Will it break the JGB market as Kyle Bass warned? We will not touch any of that this weekend. We will wait for a week for the markets to stabilize. In the mean time, we will sing Love in Tokyo. 

2. U.S. Treasuries

Thanks to the JGB market, Treasuries were already up before the payroll number. Then came the report of 88,000 jobs and the awful drop in the participation rate. And yields on long duration Treasuries fell off the proverbial cliff. Interestingly, Treasuries did not back down from the crazy rally until late afternoon and then only by a small bit. 10-year & 30-year yields closed at 1.71% & 2.88% resp, a huge fall from 2.03% & 3.24% on March 14, 2013. 

We were happy to see two people we respect take a sort of a victory lap on Friday morning. Jim Bianco was an early and lonely bull on Treasuries telling his hosts on BTV & CNBC that yields would come down. Rick Santelli almost perfectly called the turn with his interview of Ray Stone about the lowest ever duration in institutional fixed income portfolios. Rick warned on Friday, March 22:

  • “this could be a contrary indicator that’s big for our viewers and traders out there. Because it can create a spiral where they need to run in and buy futures if rates start to drop”

This week saw at least part of the spiral. But what now? Rick told CNBC viewers Friday afternoon that as a trader he would sell some of his longs. That is a smart call because the RSI of TLT touched 80 on Friday afternoon.

We recall the prediction made by David Woo of BAC-Merill Lynch on BTV Street Smart on February 28:

  • “We think we can actually retest 1.60% (in the 10-year yield), sometime in the next 4-6 weeks.”
  • “But I think as we go into March, if the data persists to be on the weak side, I think the market will have to basically capitulate and that will be the reason for a risk-off move that will send Treasury yields lower.”

That’s exactly what happened this week. The Treasury market rallied on Monday, Wednesday and Thursday on weaker data and seemed to capitulate on Friday. Kudos to David Woo for his prescient call. Perhaps Adam Johnson & Trish Regan can invite him for an update on their BTV Street Smart show.

And why not ask the most famous Treasury bull of them all? We mean Jeff Gundlach who told anyone who would listen that he was buying 10-year Treasuries at 2%+ yield. Look what he said to Reuters on March 4:

  • “I bought more long-term Treasuries in the last
    month     than I’ve bought in four years. I am a fan of Treasuries now. I
    wasn’t a fan of Treasuries in July,”

Now did Gundlach buy so much for a 30bps trade or does he see a bigger drop? Who would be the first to ask him? BTV or the fast team at CNBC?

We have no clue of course but we did notice that the 30-yr yield, the 10-year yield and TLT closed below/above their 200-day moving average on Friday. This would be bullish if these breaks hold. Because history suggests that a break of the 200-day that sticks leads to a large move in the direction of the break. If you doubt us, just look at the simple chart below.


                  (10-year daily chart of the 10-Year Yield with 200 day simple moving average)

3. U.S. Equity Market

Frankly, the action in stocks was impressive. The Dow dropped by about 170 points just after Friday’s open. Then it began rallying and closed down by only 40 points. The S&P broke 1,540 very briefly and rallied to 1,553. So both indices closed above their levels at 8.25 am just before the payrolls number. The most interesting action came from the oversold financials according to CNBC’s Robert Hum:

  • @HumOnTheMarkets – Dow Transports closes up 0.5% after falling more than 2% earlier, staging its biggest reversal since Oct 2011

Are the transports signalling an upturn? Or was it simply the natural reaction to the torching of Oil this week? Brent got hit much harder than WTI on Friday. Why? That’s what FT Alphaville tried to explore in their “Something* is happening in Beirut” .

So what are the gurus saying?

Lawrence McMillan on Option Strategist on Friday, April 5

  • “Our indicators are turning bearish now, and if there is a breakdown in $SPX, a full-blown correction should be underway.…I would not grade the recent breakout to new highs as truly false unless $SPX falls below support at 1540-1545…. This market has routinely ignored technical divergences and other negative items for quite some time, but a breakdown by $SPX would force the bulls to take notice.”


Mark Newton of Greywolf in a post-close tweet on Friday, April 5

  • @MarkNewtonCMT – Bottom line,1530 import for SP futs, 1538 cash- breaks below, which i
    think are likely    , should lead down to 1506, then 1486, more meaningful

If this is what DeMarkian Newton is saying, what is Tom DeMark saying himself? Will CNBC’s Melissa Lee or BTV’s Adam Johnson enlighten us? Remember Mr. DeMark’s predictions improve in accuracy as the year rolls on and, in 2012, his accuracy bottomed & rallied from April 2012.

Tom McClellan on CNBC Closing Bell on Wednesday, April 3

  • the market’s going to have a sick stumble. it will be able to get itself back up and investors will be thinking everything’s fine by about the beginning of May and the real pain will begin from early May through October of this year so this is just the stumble. This is not the big fall, the big pain,
  • everybody’s going to set their buy orders at 10% decline then say, oh, no and it’s going to keep on going …. Don’t look for a price low, look for an October low, whenever that is.


Larry McDonald on CNBC FM & 1/2 on Wednesday, April 3

  • what’s disturbed me the last two, three days is the short interest on the XLF has broken out to multi-month highs. its highest level since last spring. and if you look back at 2010, ’11, ’12, we had those second-quarter elevator shaft drops, each time — each time the short interest in the financials was breaking out, and that concerns me substantially.
  •  yeah, recommending shorts to clients, and short — the main reason why is what we’ve seen since lehman is credit leads equities, and the CDS of big banks in last two weeks, it’s consistently wider with the XLF flat. We saw this in 2011, we saw this before Lehman, we saw this in 2012. It’s a problem, because a lot of players in the credit side maybe are seeing something over in Europe – Portuguese CDS are at multi month wide, a lot of the big Portugal banks, big banks in Portugal, are much wider the last two weeks. So credit is leading equity here , and I’m going to follow credit and equities will follow.
  • I think at the end of the day what’s happening is the Cyprus move has created a capital flow out of some of the banks in Europe... But what you do see, subordinated paper off substantially, and that tells me there’s a potential problem, especially in Portugal, because they have no room for error. and if deposits leave the top five banks and the government has to fill that capital hole, that’s a substantial risk. It’s a Greece-like risk facing us in the coming months.

With all this bearish guru opinion, wouldn’t it be ironic to see a big S&P rally next week?


4. Bond Closed End Funds (CEFs) & Stock Market Liquidity

Switch on any FinTV show and you will hear that the Fed is pouring liquidity into the stock market and you should jump into stocks because you do not want to fight the Fed. But none of these anchors or their favorite gurus ever tell you how they measure liquidity in the stock market.

This is an important topic and that’s why we urge readers to run to Friday’s article by Tom McClellan titled Bond CEFs Now Saying Liquidity Is In Trouble.  He handles the Fed issue directly:

  • “It is hard to get one’s mind around the idea that the stock market could be facing a liquidity problem when the Fed is throwing $85 billion a month at the banking system.  But that is the message here, from examining the actual behavior of those issues who are most sensitive to it.”

His main point is that Bond CEFs are the least deserving of or most sensitive to liquidity available in the stock market. So,

  • “When liquidity starts to dry up, the least deserving issues tend to get culled first from the herd.  That is what we are seeing now in the bond CEF A-D Line.  These liquidity-sensitive issues have already turned downward as a group, even though the SP500 was able to continue higher.  This is a message that there are now liquidity problems facing the market, even though the Fed is continuing to drop money from helicopters every month. Perhaps $85 billion a month is just not enough.”

Is Tom McClellan coming to the same conclusion that Fed-head Naaraayan Kocherlakota has come to – that more QE is now necessary? Will Bernanke agree & follow Kuroda? Will we see an increase in the April 30-May 1 FOMC meeting? And if we don’t, will the stock market sell off from early May to October as Tom McClellan predicted in his CNBC Closing Bell appearance on Wednesday, April 3 (see section 3 above). 

But how important is the sign from Bond CEFs?

  • “The 2007 example in this next chart helps us to understand why this warning sign is so important.  The bond CEF A-D Line peaked back in May 2007, even ahead of the overall A-D Line which peaked in June 2007, and ahead  of the final market price high in October 2007.“

Mr. McClellan’s article is much more detailed and the charts are really interesting. 


5. Gold

The action in Gold was violent this week especially when sell stops were triggered on Wednesday. Gold seemed to sell both on risk-on and risk-off days. But Gold rallied hard on Friday. So what’s up technically in Gold? Here is what Louise Yamada told CNBC Fast Money on Wednesday, April 3.

  • “…this period has been one in which the rallies have stopped at a declining moving average and each time it’s come up to the moving average,…somebody’s come in and it’s called distribution,…putting in place lower highs along the way. We have at the moment very strong declining monthly and weekly momentum for gold. So our risk level here is $1529  the support level that took place in May of 2012, and if we break that which looks more and more as though we’re about to do, you could go back to $1,400 which is about a 10% from here decline. But if you had even a worse decline, we have $1,315, which takes you back to the 2005 uptrend.”
  • Now, the GDX, (gold miners) broke down today. and that had broken down from a two-year top, now you’ve broken another support level which really defines a three to four-year top. And the miners have actually underperformed the gold bouillon itself for five years. And we’ve been telling people we would prefer not to own the stocks…. But now this vulnerability here. Yes and it’s very different from the 2008 consolidation. Both of them are about 18, 19 months, but that one had higher lows in place and you had positive momentum coming in on the second half of that consolidation which we’ve been looking for here in the event that it could be a long saucer. But it’s looking more and more vulnerable.


6. Housing

Housing has been a major contributor to the U.S. economy for the past several months. And XHB, the homebuilder ETF, has led the rally in the S&P this year. So what happens to housing and XHB could be  important. So first the take on housing from Professor Robert Shiller on CNBC Fast Money:

  • “I think the market is very volatile because it’s gotten very speculative. All these stories of institutional investors coming in to buy single-family homes. that’s kind a new development. on top of that, there has been a trend toward greater volatility in the housing market for 50 years now. It’s getting more and more speculative. but remember, speculative means down as well as up. so I think there’s a substantial probability of future losses as well.”

Now the technical take on XHB from Carter Braxton Worth, favorite technician and now “very raucous neighbor” of CNBC Anchor Melissa Lee:

  • “the home builders, the number one theme in all markets for the last year, year and a half are starting to falter…. we are toying with the prospects of breaking the trend that’s been in effect for the last two years … these stocks are now massively under performing the market … we think this is a big break coming and would be very aggressive as short sellers. This is not good and it speaks a lot about what’s coming for the stock market.”



Featured Videoclips:

  1. Mohammed El Erian on CNBC Santelli Exchange on Thursday, April 4
  2. David Stockman on BTV Surveillance on Tuesday, April 2
  3. Hank Paulson on BTV on Friday, April 5

1. How much time will Bernanke buy & how much collateral damage will he create? – Mohammed El Erian with CNBC’s Rick Santelli – Thursday, April 4

  • RS – I get a bit nervous when I think the chances of this turning out well, with all the central bank activity, I think getting hit by a meteor is a smaller percentage in terms of this working out than the Fed. Do you agree or disagree?
  • EE – I think you’re right to be nervous. This is the most experimental that we have ever seen central banking. They are venturing deeper and deeper, using imperfect tools and not getting the numbers they expect. Again today, the numbers disappointed on the economic side. But rather than step back and ask why, they just go deeper and deeper. The question is will they finally succeed in transition from assisted growth to real growth? or will it end in tears?  This is a major uncertainty and the market doesn’t understand how binary this outcome is.
  • RS – That wasn’t the only central bank. we have all three. but I would rather concentrate for a moment on the ECB. first of all, do you think this meeting laid the groundwork for an interest cut at the next meeting? 
  • EE – probably, and not just for an interest rate cut but also for a further relaxation of the collateral rules. so the ECB will become even more like a fiscal agency, just like the Fed and just like the Bank of Japan are becoming fiscal agencies.
  • RS – but it isn’t working out well. tell me if you agree with this. when i talk to friends about if Cyprus is important or unimportant, the answer is what is the catalyst? they say it was the haircuts close to 55% given to their the Greek holdings. it seems to me like picking and choosing isn’t working out well. that’s what you’re describing is the policy of ECB.
  • EE – I will be the first to say do not think Cyprus is unique. Cyprus tells you three things about Europe. 
    • one is there is no growth & there is no growth model.
    • Secondly, this is not just an interconnected world, this is an interdependent world- so every time some stumbles, the change of someone stumbling is high.
    • And thirdly, as Draghi said this morning, policymakers don’t have a complete range of instruments. So they create collateral damage. We saw the collateral damage in Cyprus. So Cyprus for me is signaling something much deeper about Europe today.
  • RS– do you think the employment issues in the U.S. are structural?
  • EE – structural.
  • RS – I’m glad you said that. Anna Schwartz in one her her last interviews that Ben Bernanke may be on the wrong rail with this train. She said don’t compare this to the 1930s. They had bank runs. It was a liquidity problem then. This time around it was about trust and toxic assets. If it’s a structural unemployment, Mohammed, why is he applying medicine that doesn’t address the issues? 
  • EE – Because he feels he has no choice. He is like a pharmaceutical company. He feels he feels he has to come to the market with a medication, but he recognizes it’s untested. so he feels he has to do something. in particular he feels he has to buy time for other agencies that can address the structural issues. He has to buy time for them to do something. Question is how much time is he going to buy? how much collateral damage will he create in the process?

2. Fed has destroyed pricing – David Stockman on BTV Surveillance – Tuesday, April 2

Read this article and witness the passion. This detailed summary is courtesy of Bloomberg TV PR.

Stockman on why he’s so gloomy on the U.S. since every time we’ve gotten into this mess we get out of it with technological progress:

  • “We didn’t get out of this mess entirely with technological progress. I believe in it. I believe in the free enterprise economy, and I think it does generate productivity, growth, and wealth over time. What I am arguing in the book is that the machinery of the state has failed badly because we piled on way too much. We are out of control fiscally. It is almost a doomsday machine, I can explain. And second, the central bank is off the deep end with this money printing, which is dramatically distorting and deforming the financial markets. You can’t have capitalism without prices in the bond market, in the debt markets, in the money markets. And the fed has essentially destroyed prices. It administers everything.”


On Bill Dudley of the New York Federal Reserve Bank saying that he has confidence we can unwind all the damage we’ve done with a huge balance sheet:

  • “I don’t buy that because that huge balance sheet has gone nowhere. It has stayed right within the canyons of Wall Street. They have taken their balance sheet from $800 billion, which took 94 years to assemble, and in seven weeks they doubled it. They were printing money like $600 million an hour. It is now tripled, quadruple, up to $3.2 trillion.”
  • And what happened? During that period, from September 2, ’08, excess reserves in the banking system went from nothing – $40 billion – to $1.7 trillion today. So the money is staying in the canyons of Wall Street. It funds the carry trade where you can buy anything that might have a return, a yield, a risk asset.”

  
On whether the Fed is going to be able to pull money out of Wall Street in an organized manner: 

  • “Not a chance because everybody in Wall Street is basically front running the Fed. What the Fed is buying, the belly of the curve, I am buying. What the Fed is buying, short term, I’m using to fund my position. So no one really owns the treasury bonds today, it is all rented on huge repo spreads. And the minute the yields start heading up a little bit and the bond prices go down, you are going to destroy the arbitrage, the fast money is going to sell, then the slower money is going to have to sell because the fast money is selling. And where is the bid? At the bottom of the market…The Fed never gets up.”

On what the alternative is given the deflationary trap that the U.S. is caught in:  

  • “I don’t think we are caught in a deflationary trap…Well, because you are suf
    fering, my friend, from the recency bias. Yes, prices in Phoenix are way down, but they are still a heck of a lot higher in real terms than they were in 1995. The only thing that happened is a bubble collapsed which had to because it was an artificial bubble fueled by the Greenspan one percent interest rate policy and now the Fed is basically saying that bubbles can’t collapse, we’ll just do it again…”


On whether the Fed is trying to manage the bubble collapse:    

  • “Well, we’re getting in deeper and deeper every time. And the ultimate consequence will be more of a train wreck. Today, at 1560 plus or minus, we are at the same point the S&P was in March 2000, 4,750 days ago. We have had two massive collapses in the interim – the dot.com $5 trillion evaporated, the Lehman meltdown $7 trillion evaporated. So it is serial bubble. They are bicycling the thing up and down. It happens in Wall Street.”


On whether he has patience that the U.S. will grind its way out and get to a better place five or ten years from now:   

  • “No, because the ten year ago forecast said that we would have a surplus in 2012, that revenue would be $3.5 trillion, and it was $2.5 trillion. What they are using today is a rosy scenario forecast for ten years that would make the rosy scenario I did in 1981 in the Reagan administration look like an ugly duckling by comparison. They are saying that we are going to create 17 million jobs in ten years compared to two million in the last ten years, that we are going to go 14 years without a recession. It has never happened in history. Most cycles last 48 months.  So when you actually do a forecast based on the last ten years, just say the performance in the last ten years, the growth rate, the business investment, job creation, you have $15 trillion to $20 trillion in deficits in front of us, not $7 trillion. We are not on a glide path going downward.”

 
On what Paul Krugman, Brad DeLong and others are getting wrong right now:  

  • “They don’t see the elephant in the room called the Fed, and the other central banks buying hand over fist almost all the treasuries that are being issued. The interest rate is not two percent, that is administered, pegged, set by the fed. Ask yourself, if the Fed said we’re going fishing for six months and we are not going to be in the market, we’re gone, do you think the treasury at ten years would stay two percent? Not a chance…It would go way up. There would be a tremendous panic sell off in the bond market because it is entirely propped up. So therefore, they are disingenuous.”

 
On the Republican Party:

  • “That is the problem. We have no conservative party left. The Republicans have simply adopted Keynesianism for the prosperous classes by using the Tax Code for this stimulus, that stimulus, to help this part of the economy or that part of the economy.”

On whether he agrees with Glenn Hubbard who suggested that we need to go after entitlements on a long glide path and against the wealthy first: 

  • “No, because we have been kicking the can for decades and decades, according to the advice of Keynesians like Hubbard. Hubbard is a complete Keynesian. He is a brilliant guy who told Bush cut taxes in 2001, cut taxes in 2003, oh, why you are at it, go have two unfinanced wars and don’t worry about the deficit because it doesn’t matter. This is the kind of advice Republicans are getting from the likes of Professor Hubbard, and it is no wonder that we are heading towards national bankruptcy. It has got to stop.”

  
On what would happen if we went cold turkey: 

  • “It’s too late to go cold turkey. Nobody is going to do it, that is why we are drifting towards the wall. The deficit is much bigger than they are saying. As I indicated, with an honest economic forecast, just like we’ve had for ten years, you are looking at $15 trillion, $20 trillion. You are looking at a national debt $30 trillion.”

 
On whether he believes in American optimism and that we will grow and find a path through this: 

  • “No, the optimum was in the people of Main Street, the entrepreneurs, the businessmen, the hard workers, the bus drivers, the farmers. I am attacking the elite. I am attacking the people that run Wall Street, the people inside the Beltway in Washington. I am attacking all of the Keynesian professors from both parties who have gotten us into this idea, just print enough money and we are going to get wealthier, just borrow enough money and we’re going to stimulate the economy.”

3. Right back to 2007 & 2008? – Hank Paulson with BTV’s Judy Woodruff – Friday, April 5

This is an interesting clip. The detailed summary below is courtesy of Bloomberg Television PR.

Paulson on Fannie Mae and Freddie Mac:

  • “Well, I read the Wall Street Journal and the Washington Post today, and I had to pinch myself. I could hardly believe what I was reading. But first of all, with regard to Fannie or Freddie, yes, the housing is recovering. And so when housing recovers, of course they’re going to make more money, and that’s a good thing now, because the government losses will end being – or the taxpayer losses will be less than projected. But this really troubles me if anyone is going to look at that and say, now we shouldn’t reform them, because if we start again – today, the government is guaranteeing 90 percent of the mortgages. If the government keeps doing this, and markets aren’t allowed to work, we’ll be right back where we were in 2007 and 2008.”

On the U.S. economy:

  • “I have significant concerns about the deficit, which is the huge issue. The debt we have, the fact that entitlements are growing faster than the U.S. economy, and we need to do something about that. But I feel better today than I did, you know, a month or two ago about growth. I mean, I think this is going to be a good quarter. I see business investment picking up. You know, housing is starting to recover. The consumer is back a bit. And so I – I’m cautiously optimistic about growth this year. I think we could see growth around 3 percent, 200,000 jobs a month. Now, that’s the good news. And the bad news is, at that level, it’s going to take a long time to work our way through this high level of unemployment we have. And I think it’s going to take some real compromise in Congress to restore the competitiveness o
    f the U.S. economy    .”

On what entitlement cuts need to be made:

  • “We need to slow the growth. And that’s for certain. And there’s various approaches you could use to doing that. You know, I’m a believer in means testing. It’s sort of ridiculous that I get the same Medicare benefits that those who are struggling to make ends meet do. I think it’s perfectly reasonable to extend the retirement age for those that are under 50, for instance. I think we’re going to have to do some things. And if we don’t, we’re leaving a very heavy burden for our children and grandchildren.”

On whether tax reform would include higher revenues:

  • “I think it would be perfectly fine to have higher revenues. I think we may need more revenues. But I think this should be part of doing something with entitlements, because I think to just keep postponing entitlement reform is a big mistake. And you can’t solve this problem just with taxes. No matter what you do with taxes, we’re going to be eaten alive by debt over the long term if we don’t slow the growth of entitlements. But in terms of tax reforms, I would be pretty radical. I would eliminate essentially all deductions, you know, in the personal income tax and – and lower the rate. And I would eliminate virtually all deductions or preferences when we’re dealing with corporate income taxes.”

On the Federal Reserve and Chairman Bernanke:

  • “Well, as treasury secretary, I never commented on monetary policy, and I guess I shouldn’t as a former treasury secretary, but I’ll say a few things. I’ve, first of all, got great confidence in Ben Bernanke, number one. Number two, he’s been forced to do some pretty dramatic things to restore our economy, because there’s been a lot of inaction in the executive branch and in Congress. Now, what the Fed has done has kept interest rates at an artificially low level. And this has given us a grace period to deal with our fiscal problems, but if you stop and think about it, with 10-year Treasuries yielding about 2 percent in the 1990s, the average was well over 5 percent. And if you take a look and project what is going to happen, in terms of the interest on our debt, when rates go up to a more normal level, that’s another reason why I think we need to move pretty quickly and deal with the deficit.”

On whether the Fed should start unwinding stimulus:

  • “I’m not close enough to that. I have confidence that I think he’s needed to do what he’s done. I have confidence that they’ll figure out that the chairman will figure out the right path here. But this can’t go on forever. And there is a cost to everything. There is no perfect solution. So when you have very, very low interest rates, artificially low interest rates, it benefits people that are borrowers and we’ve needed to do that while we’re deleveraging – it benefits the equity market – wealthy people that own equities, but it takes a big hunk out of those that live on fixed incomes and are retired.”

On whether Lehman Brothers should have been handled differently:

  • “It’s amazing that I still get this question as often as I do, because no one made a decision to let Lehman Brothers go, that Ben Bernanke, Tim Geithner and I have said countless times that there really wasn’t a decision to make, because the Fed did not have any powers – anything they could have done that was legal that would have prevented a failure of Lehman. And, you know, we learned at the time of the Bear Stearns rescue that, when an investment bank is disintegrating, it goes very, very quickly. And a Fed loan – and it wouldn’t have worked and it didn’t work – loan in Bear Stearns. It took a buyer coming in to inject capital. And, frankly, as I’ve thought about it more, about the Lehman situation, in some ways, we were fortunate, because we tried very hard to come up with a solution, and we were hopeful BofA would buy Lehman, but what was happening was we had at the same weekend that Lehman was going, we had AIG, Merrill Lynch, and Lehman going, and it turns out BofA bought Merrill Lynch. And if BofA had bought Lehman and Merrill Lynch had gone down, it would have been worse, because Merrill Lynch was a lot bigger. So as I look back today on the financial crisis, I feel great gratitude for the way we worked together, and I think that dealing with sort of an unprecedented set of circumstances, we collaborated – Treasury, with the Fed, with the FDIC – and the major decisions we made were the right ones, and prevented a huge disaster.”

On how he would grade the Obama administration’s handling of the financial sector and the economy:

  • “Well, I would say really, really well, because you had this huge advantage, that Tim Geithner was a key member of the team, putting in these reforms in place, working with him closely. So President Obama selected him. And then what they did – and I think it was very courageous on Obama’s part because there was all these bailouts, these rescues were so unpopular – but Tim persuaded him to stick with the capital markets stabilization programs we had put in place. And then they adapted those very well – a number of them – to meet the changing situation and managed them very well. And so to me, there was complete continuity. I think the programs were largely in place when Obama came in the office. They – and I think there could have been – must have been real temptation to go in different direction, to nationalize the banks, et cetera. But they managed those programs flawlessly. And then they did other things, like the stimulus plan.”

 

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MV