November 5, 2019
$11 Trillion U.S. Mortgage Market Has a Shadowy New Player
“U.S. financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market. Behind the concern aired recently at the Financial Stability Oversight Council headed by Secretary Mnuchin: The rapid growth of so-called shadow banks in the origination and servicing of home loans, especially riskier ones. “There is a real weakness here,’’ said University of California, Berkeley professor Nancy Wallace, who co-authored a 2018 paper entitled ‘Liquidity Crises in the Mortgage Market’ with a fellow academic and three Fed economists. “Many of these firms are financially fragile.’’ That’s because they’re dependent on short-term bank credit lines that could be pulled at times of financial stress. The worry is that could end up hurting the housing market and the economy as the financiers are forced to cut back or curtail their mortgage business. FSOC, the umbrella group of regulators established after the financial crisis which includes Fed Chairman Powell and Securities and Exchange Commission chief Jay Clayton, discussed the home loan market in September. Staff from the Fed, the Federal Housing Finance Agency and the Conference of State Bank Supervisors gave a presentation on the “growth of nonbank mortgage origination and servicing and potential related risks,’’ the council said in a little publicized readout of the meeting. The presentation focused on the industry’s reliance on short-run financing, including the possibility of liquidity drying up — a concern highlighted in the paper Wallace wrote with Fed Deputy Associate Director Karen Pence.”
ECB Needs Europe to Spend More — And Gets An Extra Bonus If It Does
“When Christine Lagarde calls on governments to aid the euro-zone economy by spending more, the new European Central Bank president has an added incentive. Convincing countries such as Germany, which runs a budget surplus, to stimulate growth is now a priority for the institution. That would complement the quest to revive inflation — and at the same time create more bonds for officials to snap up under their quantitative easing program. Uncertainty over government borrowing is one reason central bankers can’t easily work out how long they have before QE runs into the ECB’s self-imposed limits on how much debt it can buy, according to a euro-area official involved in the discussions speaking on condition of anonymity. Giving her first speech as ECB chief on Monday night in Berlin — at an event to honor former German Finance Minister Wolfgang Schaeuble, now president of the lower house of parliament — Lagarde chose not to push the ECB’s request so soon, staying away from policy remarks. She has a bit of room to wait. Her predecessor Mario Draghi said as his term ended last month that it will be “quite a bit of time” before the problem arises of limits to QE. He also alluded to the lack of visibility though, as estimates of remaining volume in the market are based on assumptions for debt issuance, which are derived from assumptions about public spending. At his farewell ceremony last week, Draghi said governments and the central bank need “mutually aligned” economic policies — and the ECB is doing its bit with ultra-low interest rates to encourage politicians to at least temporarily look past their post-crisis focus on debt reduction. QE “has allowed many governments to have more fiscal space,” Silvia Ardagna, managing director in the investment strategy group at Goldman Sachs Private Wealth Management, said in an interview. “There’s potential for some governments to step in with fiscal stimulus. That’s something we expect Lagarde to push for.” ”
China Wants U.S. to Drop Tariffs on $360 Billion of Imports for Trade Deal
“China is seeking the roll back of U.S. tariffs on as much as $360 billion of Chinese imports before President Xi Jinping agrees to go to the U.S. to sign a partial trade deal with President Donald Trump, according to people familiar with the matter. Negotiators asked the Trump administration to eliminate tariffs on about $110 billion in goods that were imposed in September and lower the 25% tariff rate on about $250 billion that began last year, said some of the people, who asked not be named discussing the private talks. Chinese officials also suggested the U.S. could temporarily waive some tariffs, people familiar with Beijing’s position said. In return, China could remove tariffs on a reciprocal amount of U.S. goods, mostly farm products, one of the people said. China has also previously demanded that Trump cancel plans to impose duties on roughly $160 billion in imports, scheduled for Dec. 15, which would hit consumer favorites like smart-phones and laptops. At the very least, those tariffs have to be taken off the table for Xi to get on a plane to meet Trump, the people said. The Financial Times reported earlier that U.S. officials are debating whether to remove levies imposed in September including clothing, appliances, and flat-screen monitors, citing people briefed on the discussions. The Ministry of Commerce in Beijing didn’t immediately respond to a fax seeking comment on China’s position. U.S. Trade Representative Robert Lighthizer and other officials have consistently argued that the duties on the $250 billion of goods are a way of making sure that China lives up to its commitments and should be in place for the long-term. On Tuesday, Xi reiterated China’s commitment to economic openness and the global trading order at a speech in Shanghai, striking a somewhat softer tone than his address to the same conference a year ago, where he took some veiled swipes at Trump’s “America First” polices. The two presidents are working toward a face-to-face meeting to ink the first phase of a trade deal, which would include Chinese pledges on increasing purchases of U.S. agriculture products, keeping its currency stable and protecting intellectual property.”
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