Take note !!
All employers who are registered with SARS for PAYE and UIF are required to submitt -
The Bi-annual -
EMP501 PAYE and; UIF recon's to SARS electronically and; for the period 1 March 2012 to 31 August 2012 by 31 October 2012.
Also generate EMP501 reconciliations, IRP5's & IT3A's.
If this is not done a penalty and Interest calculated on non submission could be levied.
Contact me for assistance :
Steven
Steven Morris Chartered Accountant (SA)
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Tuesday, 11 September 2012
Monday, 10 September 2012
Equities are riskier than bonds. Except when they are not.
PSG ASSET MANAGEMENT on the boil
"We have often written about the margin of safety we demand from equity investments. This prerequisite should ensure that we stay way clear of equities when they trade at grossly inflated prices, i.e. we avoid the equity bubbles. It is not only shares which can pose this trap. In February 1637, during the famous “Tulip Mania”, some single tulip bulbs sold for more than 10 times the annual salary of a skilled craftsman. Any asset class can be grossly overpriced, even cash. To ensure that our clients don’t suffer the permanent loss of capital which results from the bursting of asset bubbles, “margin of safety” transcends our entire asset allocation process.
In earlier Angles, we discussed how we determine whether an equity investment offers a sufficient margin of safety. But how would one go about determining whether bonds offer a margin of safety?
A first question could be: What could drive bonds to inflated levels?
There are mainly three possible scenarios:
Firstly, domestic yield greed. When cash rates drop yield seekers tend to move up the risk ladder into bonds. The lower the rates on cash, the more drastic this migration.
Secondly, international yield greed. Investors could be driven into, for example, South African bonds when the yields on their domestic bonds become relatively unattractive.
The last scenario is a flight to safety. Frightened investors tend to seek safety in government bonds. Decisions are no longer driven by rational yield comparison, purely the fear of capital loss. During these periods, return of capital becomes more important than return on capital.
The next step would be to consider whether any of these scenarios currently prevail. We think so, in fact we think all three prevail.
Interest rates in South Africa are currently at record low levels and investors desperate for yield have moved from cash into bonds.
Government bonds in many countries in the Western World are yielding near zero and foreigners have been snapping up emerging market bonds, like our own, yielding significantly higher rates.
Concerns around defaults in Europe have drawn investors to the government bonds of safe haven countries like the US and the UK.
The third bullet does not seem to have bearing on domestic bonds, but on closer investigation it seems that our bonds have moved in step with these bonds over time.
Although the South African bonds still yield much higher absolute rates, this difference is currently entirely explained by South Africa’s credit risk premium and the inflation differential:
US 10 Year Government Bond yield + SA Credit Spread (USD) + Inflation differential ≈ SA 10 Year Government Bond yield.
In numbers:
1.57% + 1.37% + (4.9% - 1.4%) = 6.44% vs. 6.62% yield on SA 10 Year Government Bonds.
In more simple terms: Ignoring country specific risks, our domestic 10 Year Government Bonds are priced on par with their US equivalents.
Another purely quantitative measure of the margin of safety offered by bonds is portrayed in the below chart.
The chart indicates by how much the bond yield needs to shift (bond prices need to fall) for investors to have been better off in cash over a 12 month period. So beyond the gold line the higher yield is negated by capital loss to such an extent that cash would offer a better total return. Clearly the margin is thin, 32.5 bps at the widest point.
We are not advocating that the South African bonds are the tulips of our time. We are, however, finding more margin of safety at selected equities and therefore our asset allocation funds are allocated accordingly."
The PSG Angle is an electronic newsletter of PSG Asset Management.
REF : Paul Bosman
"We have often written about the margin of safety we demand from equity investments. This prerequisite should ensure that we stay way clear of equities when they trade at grossly inflated prices, i.e. we avoid the equity bubbles. It is not only shares which can pose this trap. In February 1637, during the famous “Tulip Mania”, some single tulip bulbs sold for more than 10 times the annual salary of a skilled craftsman. Any asset class can be grossly overpriced, even cash. To ensure that our clients don’t suffer the permanent loss of capital which results from the bursting of asset bubbles, “margin of safety” transcends our entire asset allocation process.
In earlier Angles, we discussed how we determine whether an equity investment offers a sufficient margin of safety. But how would one go about determining whether bonds offer a margin of safety?
A first question could be: What could drive bonds to inflated levels?
There are mainly three possible scenarios:
Firstly, domestic yield greed. When cash rates drop yield seekers tend to move up the risk ladder into bonds. The lower the rates on cash, the more drastic this migration.
Secondly, international yield greed. Investors could be driven into, for example, South African bonds when the yields on their domestic bonds become relatively unattractive.
The last scenario is a flight to safety. Frightened investors tend to seek safety in government bonds. Decisions are no longer driven by rational yield comparison, purely the fear of capital loss. During these periods, return of capital becomes more important than return on capital.
The next step would be to consider whether any of these scenarios currently prevail. We think so, in fact we think all three prevail.
Interest rates in South Africa are currently at record low levels and investors desperate for yield have moved from cash into bonds.
Government bonds in many countries in the Western World are yielding near zero and foreigners have been snapping up emerging market bonds, like our own, yielding significantly higher rates.
Concerns around defaults in Europe have drawn investors to the government bonds of safe haven countries like the US and the UK.
The third bullet does not seem to have bearing on domestic bonds, but on closer investigation it seems that our bonds have moved in step with these bonds over time.
Although the South African bonds still yield much higher absolute rates, this difference is currently entirely explained by South Africa’s credit risk premium and the inflation differential:
US 10 Year Government Bond yield + SA Credit Spread (USD) + Inflation differential ≈ SA 10 Year Government Bond yield.
In numbers:
1.57% + 1.37% + (4.9% - 1.4%) = 6.44% vs. 6.62% yield on SA 10 Year Government Bonds.
In more simple terms: Ignoring country specific risks, our domestic 10 Year Government Bonds are priced on par with their US equivalents.
Another purely quantitative measure of the margin of safety offered by bonds is portrayed in the below chart.
The chart indicates by how much the bond yield needs to shift (bond prices need to fall) for investors to have been better off in cash over a 12 month period. So beyond the gold line the higher yield is negated by capital loss to such an extent that cash would offer a better total return. Clearly the margin is thin, 32.5 bps at the widest point.
We are not advocating that the South African bonds are the tulips of our time. We are, however, finding more margin of safety at selected equities and therefore our asset allocation funds are allocated accordingly."
The PSG Angle is an electronic newsletter of PSG Asset Management.
REF : Paul Bosman
Friday, 7 September 2012
Glencore sweetens offer for Xstrata
Glencore has made a last ditch proposal to save its $80bn combination with London listed Xstrata, improving its offer for the miner’s shares, after the involvement of Tony Blair, the former UK prime minister.
Glencore, which has adjourned a meeting to vote on a tie-up, has raised the merger ratio from 2.8 of its shares for every Xstrata share to 3.05 shares and proposed that Ivan Glasenberg, the chief executive of the trader, lead the enlarged group.
Glencore, which has adjourned a meeting to vote on a tie-up, has raised the merger ratio from 2.8 of its shares for every Xstrata share to 3.05 shares and proposed that Ivan Glasenberg, the chief executive of the trader, lead the enlarged group.
Hopes for last-minute Glencore-Xstrata deal rise
Glencore and Qatar are in last minute negotiations to save the $80bn merger between the trading house and miner Xstrata.
Glencore on Friday morning adjourned an extraordinary shareholder meeting set to approve the deal in an effort to reach agreement on a revised offer in the next two hours.
Glencore on Friday morning adjourned an extraordinary shareholder meeting set to approve the deal in an effort to reach agreement on a revised offer in the next two hours.
Thursday, 6 September 2012
Draghi Credibility at Stake as ECB Tries to Save The Euro
Sept. 6 (Bloomberg) --
TIME WILL TELL !!
"European Central Bank President Mario Draghi’s task today is straight-forward: produce a plan to save the euro.
Draghi pledged more than a month ago to do what’s needed to preserve the single currency; now he’s under pressure to follow through with details of a bond-purchase plan to lower borrowing costs in Spain and Italy and prevent a breakup of Europe’s monetary union. Expectations have built to such an extent that Draghi risks losing credibility unless he delivers at a press conference after today’s Governing Council meeting in Frankfurt, economists and investors said.
“Draghi has put his credibility squarely on the line,” said Julian Callow, chief European economist at Barclays Capital in London. “He has made it his business to save the euro, so he is going to be called on that.”
Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in a fragmented euro-area economy and save the currency, according to a recording of a closed-door session obtained by Bloomberg News. His blueprint, sent to council members just two days ago and opposed by Germany’s Bundesbank, proposes unlimited buying of government debt with maturities of up to about three years, two central bank officials said yesterday on condition of anonymity.
Rate Cut?
Draghi will hold a press conference at 2:30 p.m., 45 minutes after the ECB announces its interest-rate decision.
Economists are split over whether policy makers will lower the benchmark rate to a new record low, with 30 of 58 in a Bloomberg survey predicting a quarter-point cut to 0.5 percent and 28 forecasting no change.
Separately, the Bank of England will keep its key rate at 0.5 percent and maintain its bond purchase target at 375 billion pounds ($597 billion), another survey shows. That decision is due at noon in London.
The ECB’s 23 council members have a full agenda. As well as discussing rates and the modalities of Draghi’s asset-purchase plan, they will also consider new economic projections and decide whether to loosen rules on the collateral banks can submit in return for central bank loans.
“We think that a loosening of collateral requirements for refinancing operations is likely to be announced, but the ECB does not yet seem ready to move its deposit rate into negative territory,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.
Negative Territory
If the ECB were to cut its benchmark, it would also need to lower its deposit rate if it wanted to maintain the 75 basis- point gap between them. That would mean taking the deposit rate, currently at zero, into negative territory, so that banks would have to pay the ECB to park excess cash with it.
Still, the main focus will be on the bond plan, and Draghi “has set the bar very high for market expectations,” said Andrew Bosomworth, head of Pacific Investment Management Co. in Germany. “To not disappoint, the ECB will have to make its reaction function transparent and at least spell out the maturities it is going to buy.”
Draghi’s plan involves the ECB buying short-dated bonds on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market, which would require them to sign up to conditions. Neither Spain nor Italy has made such a request yet.
Draghi’s Rationale
Draghi’s rationale for the purchase plan is that ECB interest rates are not being transmitted in most euro-area countries because investors are pricing in the risk of a breakup, something he considers unacceptable. The ECB must regain control of rates in order to fulfill its primary mandate of price stability, he told lawmakers in Brussels on Sept. 3.
The ECB will sterilize its purchases to soothe concerns about printing money, two officials said yesterday. The ECB won’t have seniority on any bonds it buys, and no yield-spread targets or bands will be set publicly, they said.
Draghi will stress the conditionality of the program, with the ECB likely to stop buying the bonds of any government that fails to meet the terms it agrees to when it signs up for aid from Europe’s rescue fund, the people said.
Prime Minister Mariano Rajoy and German Chancellor Angela Merkel meet in Madrid today to discuss the euro crisis and are due to hold a joint news conference at about 2:30 p.m. in Madrid, the same time Draghi speaks.
Tightrope
French President Francois Hollande also meets with U.K. Prime Minister David Cameron in London and Italian Premier Mario Monti hosts European Commission President Jose Manuel Barroso in Florence.
Draghi is walking a tightrope, said Ken Wattret, chief euro-area economist at BNP Paribas in London.
Because Italian and Spanish bond yields have dropped in anticipation of ECB action, there’s a risk that the two countries won’t see the need to ask for help, Wattret said. On the other hand, disappointment with Draghi’s plan today may trigger a market selloff that “could be the circuit breaker that forces Spain at least to ask for aid,” he said.
Spain’s two-year yields dropped to as low as 3.04 percent yesterday from a euro-era high of 7.15 percent on July 25. Italy’s two-year yields have dropped almost three percentage points over the same period.
Spain plans to sell as much as 3.5 billion euros ($4.4 billion) of short-dated bonds at an auction at about 10:40 a.m. in Madrid today.
German Opposition
The ECB has been at the forefront of fighting the debt crisis, which has so far pushed five countries into bailouts and driven the 17-nation euro economy to the brink of recession.
In addition to governments dragging their heels, Draghi’s bond-purchase plan faces opposition from German policy makers, politicians and executives.
“An unlimited and far-reaching intervention by the central bank by buying sovereign debt is beyond the mandate of the ECB,” Commerbank AG Chief Executive Officer Martin Blessing said at a banking conference in Frankfurt yesterday. “I cannot image how one can build trust and a strong currency union by violating the law. There is the danger that we keep on buying time while the pressure to reform is declining.”
Germany’s Constitutional Court could also throw a spanner in the works when it rules on the legality of Europe’s permanent bailout fund, the European Stability Mechanism, on Sept. 12.
“The ECB is taking a leap of faith that governments will pursue and implement the reform agenda,” Bosomworth said. Still, unlike in the past, “there is more of an awareness among governments about how important this is,” he said.
Draghi’s bond-purchase plan won’t solve Europe’s debt crisis, said Erik Nielsen, global chief economist at UniCredit Bank AG in London. “But he’s fed up with markets pricing in euro-area breakups, and I wouldn’t mess with him if I were a trader.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net "
TIME WILL TELL !!
"European Central Bank President Mario Draghi’s task today is straight-forward: produce a plan to save the euro.
Draghi pledged more than a month ago to do what’s needed to preserve the single currency; now he’s under pressure to follow through with details of a bond-purchase plan to lower borrowing costs in Spain and Italy and prevent a breakup of Europe’s monetary union. Expectations have built to such an extent that Draghi risks losing credibility unless he delivers at a press conference after today’s Governing Council meeting in Frankfurt, economists and investors said.
“Draghi has put his credibility squarely on the line,” said Julian Callow, chief European economist at Barclays Capital in London. “He has made it his business to save the euro, so he is going to be called on that.”
Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in a fragmented euro-area economy and save the currency, according to a recording of a closed-door session obtained by Bloomberg News. His blueprint, sent to council members just two days ago and opposed by Germany’s Bundesbank, proposes unlimited buying of government debt with maturities of up to about three years, two central bank officials said yesterday on condition of anonymity.
Rate Cut?
Draghi will hold a press conference at 2:30 p.m., 45 minutes after the ECB announces its interest-rate decision.
Economists are split over whether policy makers will lower the benchmark rate to a new record low, with 30 of 58 in a Bloomberg survey predicting a quarter-point cut to 0.5 percent and 28 forecasting no change.
Separately, the Bank of England will keep its key rate at 0.5 percent and maintain its bond purchase target at 375 billion pounds ($597 billion), another survey shows. That decision is due at noon in London.
The ECB’s 23 council members have a full agenda. As well as discussing rates and the modalities of Draghi’s asset-purchase plan, they will also consider new economic projections and decide whether to loosen rules on the collateral banks can submit in return for central bank loans.
“We think that a loosening of collateral requirements for refinancing operations is likely to be announced, but the ECB does not yet seem ready to move its deposit rate into negative territory,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.
Negative Territory
If the ECB were to cut its benchmark, it would also need to lower its deposit rate if it wanted to maintain the 75 basis- point gap between them. That would mean taking the deposit rate, currently at zero, into negative territory, so that banks would have to pay the ECB to park excess cash with it.
Still, the main focus will be on the bond plan, and Draghi “has set the bar very high for market expectations,” said Andrew Bosomworth, head of Pacific Investment Management Co. in Germany. “To not disappoint, the ECB will have to make its reaction function transparent and at least spell out the maturities it is going to buy.”
Draghi’s plan involves the ECB buying short-dated bonds on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market, which would require them to sign up to conditions. Neither Spain nor Italy has made such a request yet.
Draghi’s Rationale
Draghi’s rationale for the purchase plan is that ECB interest rates are not being transmitted in most euro-area countries because investors are pricing in the risk of a breakup, something he considers unacceptable. The ECB must regain control of rates in order to fulfill its primary mandate of price stability, he told lawmakers in Brussels on Sept. 3.
The ECB will sterilize its purchases to soothe concerns about printing money, two officials said yesterday. The ECB won’t have seniority on any bonds it buys, and no yield-spread targets or bands will be set publicly, they said.
Draghi will stress the conditionality of the program, with the ECB likely to stop buying the bonds of any government that fails to meet the terms it agrees to when it signs up for aid from Europe’s rescue fund, the people said.
Prime Minister Mariano Rajoy and German Chancellor Angela Merkel meet in Madrid today to discuss the euro crisis and are due to hold a joint news conference at about 2:30 p.m. in Madrid, the same time Draghi speaks.
Tightrope
French President Francois Hollande also meets with U.K. Prime Minister David Cameron in London and Italian Premier Mario Monti hosts European Commission President Jose Manuel Barroso in Florence.
Draghi is walking a tightrope, said Ken Wattret, chief euro-area economist at BNP Paribas in London.
Because Italian and Spanish bond yields have dropped in anticipation of ECB action, there’s a risk that the two countries won’t see the need to ask for help, Wattret said. On the other hand, disappointment with Draghi’s plan today may trigger a market selloff that “could be the circuit breaker that forces Spain at least to ask for aid,” he said.
Spain’s two-year yields dropped to as low as 3.04 percent yesterday from a euro-era high of 7.15 percent on July 25. Italy’s two-year yields have dropped almost three percentage points over the same period.
Spain plans to sell as much as 3.5 billion euros ($4.4 billion) of short-dated bonds at an auction at about 10:40 a.m. in Madrid today.
German Opposition
The ECB has been at the forefront of fighting the debt crisis, which has so far pushed five countries into bailouts and driven the 17-nation euro economy to the brink of recession.
In addition to governments dragging their heels, Draghi’s bond-purchase plan faces opposition from German policy makers, politicians and executives.
“An unlimited and far-reaching intervention by the central bank by buying sovereign debt is beyond the mandate of the ECB,” Commerbank AG Chief Executive Officer Martin Blessing said at a banking conference in Frankfurt yesterday. “I cannot image how one can build trust and a strong currency union by violating the law. There is the danger that we keep on buying time while the pressure to reform is declining.”
Germany’s Constitutional Court could also throw a spanner in the works when it rules on the legality of Europe’s permanent bailout fund, the European Stability Mechanism, on Sept. 12.
“The ECB is taking a leap of faith that governments will pursue and implement the reform agenda,” Bosomworth said. Still, unlike in the past, “there is more of an awareness among governments about how important this is,” he said.
Draghi’s bond-purchase plan won’t solve Europe’s debt crisis, said Erik Nielsen, global chief economist at UniCredit Bank AG in London. “But he’s fed up with markets pricing in euro-area breakups, and I wouldn’t mess with him if I were a trader.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net "
Monday, 3 September 2012
At Jackson Hole, a growing fear for Fed's independence
REF : REUTERS
By Pedro Nicolaci da Costa
"JACKSON HOLE, Wyoming (Reuters) - Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank's hard-won independence and undermine confidence in the nearly 100-year old institution.
That was the pervasive sentiment among economists gathered at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against the dramatic backdrop of the Grand Teton mountain, many said a closely-contested presidential race has turned the monetary authority into a political football.
"I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected," said Alan Blinder, Princeton economics professor and a former Fed vice chairman, adding that historically opposition to the U.S. central bank had come predominately from the left.
"There's a lot of hostility," said Blinder, who was appointed to the Fed by former president Bill Clinton.
The primary topic of conversation at the rustic mountainside resort was whether or not Fed Chairman Ben Bernanke and his colleagues would deliver another round of monetary stimulus soon.
But, when probed on the issue on the sidelines of the meeting, many participants voiced concern about the heated political rhetoric aimed at the Fed, including a bill that would audit the conduct of monetary policy that is gaining increasing traction among Republicans.
Republican presidential nominee Mitt Romney has said the Fed should be audited and that he would not reappoint Bernanke, himself a Republican who was originally picked for the job by George W. Bush, to a third term when his current one expires in early 2014. Still, he has pledged to respect central bank independence.
The Fed is already subject to regular audits, but congressman Ron Paul's bill would remove an exemption for monetary policy deliberations.
For some observers, that pressure is already affecting the Fed's behavior, preventing it from pushing more aggressively for stronger economic growth following the sharp blowback received back in 2010, when policymakers announced their last large scale bond purchase program.
Some analysts outside the Fed's inner circle -- the ones that weren't invited to Jackson Hole -- argue top central bank officials brought some of the political heat on themselves. By backing bank bailouts that came with few strings attached and allowing some of the chief culprits of the financial crisis to continue doing business as usual, these critics say, the Fed was seen as too close to Wall Street, making it an easy political target.
LONE RANGERS
Ironically, the complete political gridlock that characterizes U.S. fiscal policy has left the Fed in the difficult position of being "the only game in town."
Both the Fed and the independent Congressional Budget Office have said a looming "fiscal cliff" of spending cuts and expiring tax breaks at the end of this year could shove a fragile economy into a new recession.
In response to the financial crisis and deep recession of 2007-2009, the Fed cut interest rates to effectively zero and bought some $2.3 trillion in government bonds and mortgage debt to keep borrowing costs down and stimulate investment. Despite such aggressive efforts, growth remains subpar, registering an annual rate of just 1.7 percent in the second quarter, a level seen as too tame to bring down the country's 8.3 percent jobless rate.
Bernanke, during his keynote speech here on Friday, spent much time outlining the benefits of recent Fed policies, arguing they prevented a much deeper slump and helped put unemployment on a downward trajectory.
But many Republicans in Washington have cried foul, berating the central bank for risking high inflation in the future -- even if there has been little sign of substantial upward price pressures from the expansion of the Fed's balance sheet five years after officials started cutting rates.
Critics also contend the Fed's loose monetary policy has made it easier for the government to run large deficits.
"Central banks are under a lot of scrutiny right now," said Karen Dynan, a former Fed economist now at Brookings Institution. "It's partly because they are using these unconventional measures that people don't really understand and don't really trust."
Romney's choice of Paul Ryan -- an ardent Fed critic who supports "sound money" -- as his running mate appeared to ratchet up the potential for a possible Romney administration to tighten the screws on the central bank.
Such an attack would most likely come in two forms: support for Texas libertarian Ron Paul's Audit the Fed bill, which Bernanke has said would be a "nightmare" for Fed independence, and an attempt to curtail the Fed's mandate and force it to focus solely on inflation rather than giving equal weight to unemployment.
Fed officials including Bernanke have warned that monetary policy cannot go it alone in supporting the economy, and yet there is little prospect of any resolution to Washington's long-running showdown over fiscal policy and the budget.
"Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve," Bernanke said in his Jackson Hole remarks.
UPSIDE DOWN
Historically, the notion of political interference in monetary affairs boiled down to fears that, if politicians with short-term horizons had their way, they would always have central bankers crank up the printing presses in order to juice up growth -- leading, in extreme cases, to hyperinflation.
In the current case, however, opposition has emerged against a proactive central bank that has been forced to widen its range of policy tools in a zero interest rate environment.
Susan Collins, professor of economics at the University of Michigan's Gerald R. Ford School of Public Policy, stressed the dangers of political interference in monetary policy of either stripe.
"Compromising that (independence), maybe not immediately but over the medium- to longer-term, would have some really unfortunate consequences," said Collins.
These could include a loss of market confidence that perversely pushes borrowing costs higher and tarnishes the central bank's credibility.
"I absolutely hope that some wiser council would prevail should that issue come to the fore," added Collins.
Comments from Romney advisor Martin Feldstein, also attending the Jackson Hole event, suggested a more Fed-friendly tone could yet reemerge from Republican side. Feldstein, a Harvard professor who would likely be on Romney's short-list to replace Bernanke at the Fed, downplayed the Republican push to strip the Fed of its dual mandate.
"I don't think that is a realistic idea," he said, noting that even central banks with single mandates have to pay close attention to growth and employment. "I don't think the dual mandate has handicapped them in their focus on keeping inflation down."
Steven
By Pedro Nicolaci da Costa
"JACKSON HOLE, Wyoming (Reuters) - Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank's hard-won independence and undermine confidence in the nearly 100-year old institution.
That was the pervasive sentiment among economists gathered at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against the dramatic backdrop of the Grand Teton mountain, many said a closely-contested presidential race has turned the monetary authority into a political football.
"I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected," said Alan Blinder, Princeton economics professor and a former Fed vice chairman, adding that historically opposition to the U.S. central bank had come predominately from the left.
"There's a lot of hostility," said Blinder, who was appointed to the Fed by former president Bill Clinton.
The primary topic of conversation at the rustic mountainside resort was whether or not Fed Chairman Ben Bernanke and his colleagues would deliver another round of monetary stimulus soon.
But, when probed on the issue on the sidelines of the meeting, many participants voiced concern about the heated political rhetoric aimed at the Fed, including a bill that would audit the conduct of monetary policy that is gaining increasing traction among Republicans.
Republican presidential nominee Mitt Romney has said the Fed should be audited and that he would not reappoint Bernanke, himself a Republican who was originally picked for the job by George W. Bush, to a third term when his current one expires in early 2014. Still, he has pledged to respect central bank independence.
The Fed is already subject to regular audits, but congressman Ron Paul's bill would remove an exemption for monetary policy deliberations.
For some observers, that pressure is already affecting the Fed's behavior, preventing it from pushing more aggressively for stronger economic growth following the sharp blowback received back in 2010, when policymakers announced their last large scale bond purchase program.
Some analysts outside the Fed's inner circle -- the ones that weren't invited to Jackson Hole -- argue top central bank officials brought some of the political heat on themselves. By backing bank bailouts that came with few strings attached and allowing some of the chief culprits of the financial crisis to continue doing business as usual, these critics say, the Fed was seen as too close to Wall Street, making it an easy political target.
LONE RANGERS
Ironically, the complete political gridlock that characterizes U.S. fiscal policy has left the Fed in the difficult position of being "the only game in town."
Both the Fed and the independent Congressional Budget Office have said a looming "fiscal cliff" of spending cuts and expiring tax breaks at the end of this year could shove a fragile economy into a new recession.
In response to the financial crisis and deep recession of 2007-2009, the Fed cut interest rates to effectively zero and bought some $2.3 trillion in government bonds and mortgage debt to keep borrowing costs down and stimulate investment. Despite such aggressive efforts, growth remains subpar, registering an annual rate of just 1.7 percent in the second quarter, a level seen as too tame to bring down the country's 8.3 percent jobless rate.
Bernanke, during his keynote speech here on Friday, spent much time outlining the benefits of recent Fed policies, arguing they prevented a much deeper slump and helped put unemployment on a downward trajectory.
But many Republicans in Washington have cried foul, berating the central bank for risking high inflation in the future -- even if there has been little sign of substantial upward price pressures from the expansion of the Fed's balance sheet five years after officials started cutting rates.
Critics also contend the Fed's loose monetary policy has made it easier for the government to run large deficits.
"Central banks are under a lot of scrutiny right now," said Karen Dynan, a former Fed economist now at Brookings Institution. "It's partly because they are using these unconventional measures that people don't really understand and don't really trust."
Romney's choice of Paul Ryan -- an ardent Fed critic who supports "sound money" -- as his running mate appeared to ratchet up the potential for a possible Romney administration to tighten the screws on the central bank.
Such an attack would most likely come in two forms: support for Texas libertarian Ron Paul's Audit the Fed bill, which Bernanke has said would be a "nightmare" for Fed independence, and an attempt to curtail the Fed's mandate and force it to focus solely on inflation rather than giving equal weight to unemployment.
Fed officials including Bernanke have warned that monetary policy cannot go it alone in supporting the economy, and yet there is little prospect of any resolution to Washington's long-running showdown over fiscal policy and the budget.
"Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve," Bernanke said in his Jackson Hole remarks.
UPSIDE DOWN
Historically, the notion of political interference in monetary affairs boiled down to fears that, if politicians with short-term horizons had their way, they would always have central bankers crank up the printing presses in order to juice up growth -- leading, in extreme cases, to hyperinflation.
In the current case, however, opposition has emerged against a proactive central bank that has been forced to widen its range of policy tools in a zero interest rate environment.
Susan Collins, professor of economics at the University of Michigan's Gerald R. Ford School of Public Policy, stressed the dangers of political interference in monetary policy of either stripe.
"Compromising that (independence), maybe not immediately but over the medium- to longer-term, would have some really unfortunate consequences," said Collins.
These could include a loss of market confidence that perversely pushes borrowing costs higher and tarnishes the central bank's credibility.
"I absolutely hope that some wiser council would prevail should that issue come to the fore," added Collins.
Comments from Romney advisor Martin Feldstein, also attending the Jackson Hole event, suggested a more Fed-friendly tone could yet reemerge from Republican side. Feldstein, a Harvard professor who would likely be on Romney's short-list to replace Bernanke at the Fed, downplayed the Republican push to strip the Fed of its dual mandate.
"I don't think that is a realistic idea," he said, noting that even central banks with single mandates have to pay close attention to growth and employment. "I don't think the dual mandate has handicapped them in their focus on keeping inflation down."
Steven
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