Friday, May 9, 2014

This Week in Bank Failures

Fed chair Janet Yellen said yesterday the Fed has not done any planning on steps to reduce the size of its enormous balance sheet. She suggested the most likely action would be to hold bonds, the biggest category of assets the Fed has, until they mature. It’s a strategy I have been expecting all along, as it allows the balance sheet to decline gradually while avoiding the market risks and transaction costs of selling these assets at auction. Based on this approach, the Fed balance sheet could shrink to pre-crisis levels by 2022, Yellen suggested.

One possible way to reduce the burden of student loans would be to allow college graduates to refinance their loans, the way homeowners routinely do. This would reduce the leverage that student lenders have over debtors and could reduce some of the predatory practices of lenders at the same time that it reduced the interest payments of student borrowers. A bill that would permit this has been introduced in Congress.

The U.S. Treasury recorded a surplus in April. This isn’t too surprising, as April is the month with the highest income tax revenue, but it is nevertheless a hopeful sign about the state of the federal budget.

Target decided to remove its CEO this week, apparently feeling its top executive was hindering reforms needed after a Christmas-season data breach. The point-of-sale network intrusion was noted but ignored for weeks at the retailer, which responded only after government officials inquired about fraudulent use of data leaked from the network.

Following up on a successful bond auction, Portugal is preparing for a “clean exit” from its European bailout arrangement, following the pattern previously set by Ireland. To my mind, Portugal’s seemingly miraculous financial recovery is a measure of how much its fiscal troubles, along with those of several other European countries, were driven not by accounting fundamentals but by bond market manipulation.