Populism on the Rise in GOP Race for President – By Nick Timiraos Updated Nov. 11, 2015 7:39 p.m. ET

Candidates bash big banks, the Fed, corporations and international trade deals in their latest debate

 WSJ's Editor-in-Chief Gerard Baker and Washington Bureau Chief Jerry Seib were moderators of the fourth Republican primary debate. They discuss the top political moments and takeaways from the GOP debate. Photo:AP

WSJ’s Editor-in-Chief Gerard Baker and Washington Bureau Chief Jerry Seib were moderators of the fourth Republican primary debate. They discuss the top political moments and takeaways from the GOP debate. Photo:AP

The latest presidential debate vividly captured how the 2008 financial crisis has reshaped the Republican Party by unleashing a potent populist strain that could further scramble an already unpredictable primary contest.

Candidates vying for the 2016 GOP nomination have grown distinctly more leery of big banks, corporations and international trade deals, and outright hostile toward the Federal Reserve.

Some of these impulses gave rise to the tea-party movement in 2009 and flared in the 2012 GOP primary contest, but they faded with the nomination of former Massachusetts Gov. Mitt Romney, a private-equity executive.

The debate in Milwaukee didn’t appear to fundamentally alter the state of the race. But with candidates heading off to Iowa and New Hampshire on Wednesday, it showed how their jockeying to carry the populist banner could intensify in the run-up to those states’ early nominating contests next February.

From defense policies to tax plans to help families: Watch highlights from the fourth Republican presidential debate in Milwaukee.

Candidates who have made full-on appeals for the antiestablishment mantle—businessman Donald Trump, former neurosurgeon Ben Carson and Texas Sen. Ted Cruz—are looking to consolidate that support as the field eventually narrows. Others, such as former Florida Gov. Jeb Bush, Ohio Gov. John Kasich and Florida Sen. Marco Rubio, are walking a finer balancing act to maintain broader appeal.

The populist undercurrent has upended the Democratic field as well, where Vermont Sen. Bernie Sanders, the self-described democratic socialist, has filled arenas while raising millions from small donors. Progressive party leaders have pushed front-runner Hillary Clinton to adopt more liberal proposals on everything from higher minimum wages to making Social Security benefits more generous.

“A nasty—and ignorant—anti-Wall Street climate prevails in both parties, and it’s something our industry has to worry about,” said Greg Valliere, chief global strategist at Horizon Investments, in a client note Wednesday.

The fourth GOP debate, sponsored by The Wall Street Journal and Fox Business Network, illustrated how Republicans are competing to bridge their populist message with the party’s traditional support for lower taxes and less regulation. Candidates castigated crony capitalism, questioned the value of a Pacific trade pact and bashed the Fed as a cause of the financial crisis and a tool of the Obama administration.

Carly Fiorina, the former chief executive of Hewlett-Packard, criticized President Barack Obama’s health-care overhaul for prolonging a “cozy little game between regulators and health-insurance companies.” She called on the government to require every health-care provider to publish “its costs, its prices, its outcomes, because as patients we don’t know what we’re buying.”

In the fourth Republican presidential debate in Milwaukee, candidates sparred over whose tax, military and immigration plans represented “conservative” principles. WSJ’s Jason Bellini reports.

Mr. Cruz said his flat-tax proposal would end preferential treatment of the rich and well-connected. “No longer do you have hedge-fund billionaires paying a lower tax rate than their secretaries,” he said. “Giant corporations with armies of accountants regularly are paying little to no taxes while small businesses are getting hammered.”

Mr. Rubio found himself defending a proposal to boost child-care tax credits as a way to support low- and middle-income Americans against charges from Kentucky Sen. Rand Paul that it would run up big deficits and create a new entitlement program.

One notable exchange came when candidates were asked how they would handle failing banks during a hypothetical rerun of the 2008 financial crisis. During a back and forth with Mr. Cruz, Mr. Kasich chided candidates for issuing “philosophical” platitudes.

“When you are faced, in the last financial crisis, with banks going under and people who put their life savings in there, you got to deal with it,” Mr. Kasich said, who was booed by the audience at one point.

Mr. Cruz initially said he would “absolutely not” support bailing out big banks but later said there was a role for the Fed to serve as a “lender of last resort.”

The exchange “seemed yet one more example of how the wounds from the financial crisis have yet to heal, and those who try to talk rationally about it are disadvantaged against populists,” said Charles Gabriel, a financial-industry policy analyst at Capital Alpha Partners in Washington.

Candidates voiced concerns about the power of big banks, even as they promised to sweep away new regulations, including the Dodd-Frank financial overhaul that requires the biggest banks to raise more capital to withstand financial crises. They also heaped criticism on the Federal Reserve, which has taken unprecedented steps to spur growth in the seven years following the financial crisis—but has also consistently overestimated growth rates in its forecasts.

Mr. Paul said the Fed’s policies had hurt the poor by leading to higher prices and lower currency values. But inflation has remained under the Fed’s 2% target for more than three years with many economists concerned more recently about deflation. Also, the dollar has strengthened this year as U.S. economic growth looks comparatively better than in the rest of the world.

Mr. Cruz said the Fed had become “a series of philosopher-kings trying to guess what’s happening with the economy.” To manage inflation, he advocated a return to the gold standard, an idea widely dismissed by mainstream economists.

Milton Friedman, the late Nobel laureate who championed free-market policies, urged President Richard Nixon to abandon the system of fixed currency-exchange rates that emerged after World War II shortly before Mr. Nixon took office in 1968. Mr. Nixon scrapped the peg in 1971.

At Tuesday’s primetime GOP debate, Sen. Ted Cruz and Gov. John Kasich took opposite positions on “too big to fail.” Photo: Getty

In Tuesday evening’s first debate, New Jersey Gov. Chris Christie criticized the Fed for keeping rates artificially low to support Mr. Obama. He then warned that rates were too low to revive the economy should it slide back into recession. “The Fed should stop playing politics with our money supply,” he said.

White House officials have rejected outright the idea that they would seek to influence monetary policy. Some analysts said the criticism of the Fed distracted from Republicans’ opportunities to offer more concrete pocketbook proposals.

“The most dismaying element” of Tuesday’s debate was that “none of the candidates appear to have read, much less absorbed, the innovative ideas” of “reform-minded conservative economists,” said Norm Ornstein of the American Enterprise Institute, a conservative think tank that has advocated many of those policies. “Instead, they all promoted ideas that appealed to the antediluvian base.”

Write to Nick Timiraos at nick.timiraos@wsj.com

Uncertainty over future interest rates should shape policy today – Nov 4th 2015, 21:00 BY H.C. | WASHINGTON DC

THE question of when interest rates will rise gets frequent attention. Less energy is spent wondering where they will end up in the long-run. But for companies thinking about long-term investment projects, and savers planning for retirement—who will need to contribute more to their pension pots should rates stay low—the second question is at least as important as the first. Two new papers from the Brookings Institution, presented at a conference on October 30th, seek to answer it.

In the long-term, interest rates are beyond the control of central banks like America’s Federal Reserve. If the Fed sets rates too high or too low, inflation will veer off-course. Where rates must eventually settle to keep inflation stable depends on economic circumstances. In particular, it depends on what “real” interest rate—the return to saving, adjusted for inflation—balances the economy’s demand with what it can supply. This elusive sweet spot is called the “equilibrium real rate”.

A long list of factors should, in theory, affect the equilibrium real rate. Top of the list is economic growth. If the economy is expanding quickly, people will expect higher incomes in future, causing them to spend more and save less today. That pushes up the equilibrium real rate. Similarly, weak growth should depress the equilibrium real rate.

But James Hamilton of the University of California at San Diego and three co-authors put this relationship to the test using data stretching back to the 19th century, and argue that it is, in fact, quite weak. For instance, in the early 1980s real rates hovered around 6% while growth was a little over 1%, but in the 1990s both growth and real rates were around 3%.

A whole lot of other stuff matters for the real rate too, such as productivity, demographics, and conditions in financial markets. The authors say that this creates much uncertainty as to where the equilibrium rate is today; their best guess is that it lies somewhere between 0% and 2%. This uncertainty, they argue, should make policy more inert. Often, rate-setters assess whether policy is tight or loose by comparing real interest rates to the equilibrium real rate. But when they do not know what the equilibrium real rate is, their next best option is to make changes in rates respond to the data. Rates should rise when the economy looks too hot, and fall when it looks too cold.

Article continues:



For Fed, a Rates Puzzle Looms – By KATY BURNE Updated Oct. 27, 2015 7:48 p.m. ET

Surging levels of cash in U.S. money markets threaten to undermine the Federal Reserve’s control over short-term interest ratesMI-CM486_FEDCON_16U_20151027184807

Surging levels of cash in U.S. money markets threaten to undermine the Federal Reserve’s control over short-term interest rates, some market participants said, citing forces in an obscure corner of the markets that could complicate a move to tighten monetary policy.

The Fed’s benchmark federal-funds effective rate, the daily average rate charged on overnight loans between banks, has fallen sharply at the ends of recent months. It has fallen around recent month-ends to just above the 0.05% rate or “floor” the central bank has tried to set as it prepares to raise short-term interest rates for the first time since 2006.

The declines have been caused by financial institutions boosting their holdings of cash ahead of financial-reporting deadlines, reducing demand for loans in the fed-funds market. The fed-funds rate fell to 0.07% on Sept. 30 and to 0.08% on Aug. 31, below its 0.13% average for the year, Fed data show. At least one transaction on Sept. 30 took place as low as 0.02%.

The declines underscore the challenges the Fed could face when it eventually raises rates in markets that have experienced dramatic changes since the financial crisis. If the central bank can’t manage interest rates effectively, it would lose control of a key lever that shapes economic and financial activity.

“It has to be within the [target] range often enough that you don’t erode investor confidence in the Fed,” said Michael Cloherty,head of U.S. interest-rates strategy at RBC Capital Markets LLC.

Fed officials aren’t expected to raise their target range for the fed-funds rate when they conclude their latest meeting Wednesday. Some Fed officials have indicated they believe a rate increase is possible at their next policy meeting in December.


U.S. Examines Goldman Sachs Role in 1MDB Transactions – By MIA LAMAR in Hong Kong, and BRADLEY HOPE and JUSTIN BAER in New York Oct. 14, 2015 12:01 a.m. ET

FBI and Justice Department gather information about bank’s role in transactions at Malaysia fund

The central business district in Kuala Lumpur, Malaysia. Goldman has pushed aggressively to expand in emerging markets, and Malaysia was an early area of success.

The central business district in Kuala Lumpur, Malaysia. Goldman has pushed aggressively to expand in emerging markets, and Malaysia was an early area of success. PHOTO: SANJIT DAS/BLOOMBERG NEWS


The central business district in Kuala Lumpur, Malaysia. Goldman has pushed aggressively to expand in emerging markets, and Malaysia was an early area of success. Photo: Sanjit Das/Bloomberg News

Goldman Sachs Group Inc. ’s role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal.

As part of a broad probe into allegations of money laundering and corruption, investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development Bhd., people familiar with the matter said.

The inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.

The widening scandal—investigators in five countries are now looking into 1MDB—highlights the sometimes risky path that Goldman has cut in emerging markets in search of faster growth.

A few years before the Malaysia deals, Goldman did a series of controversial transactions with the Libyan Investment Authority that also brought unwelcome attention. The Libyan sovereign-wealth fund claimed in a lawsuit filed in 2014 in London that the bank took advantage of its unsophisticated executives to sell them complicated and ultimately money-losing investments. Goldman has said the claims are without merit. A trial in the suit is scheduled to begin next year.

The bank earned $350 million for executing nine trades for Libya, according to the investment authority. It earned far more from the Malaysian fund. The bank was consulted during 1MDB’s inception, advised it on three acquisitions and arranged the sale of $6.5 billion in bonds that alone brought in close to $600 million in fees, according to people close to the bank.

1MDB is now entangled in accusations of billions of dollars of missing money, putting it at the center of a political crisis for Malaysian Prime Minister Najib Razak,who oversees the fund. Malaysian government investigators earlier this year traced $700 million into Mr. Najib’s alleged bank accounts through agencies, banks and companies linked to 1MDB, The Wall Street Journal reported in July. Malaysia’s anticorruption agency later said the funds came from an unspecified Middle East donor.

The government investigation hasn’t detailed what happened to the funds that went into the prime minister’s alleged personal accounts. Transactions around the fund are under investigation by the FBI and Justice Department, as well as authorities in Malaysia, Singapore, Hong Kong and Switzerland.

1MDB and Mr. Najib didn’t reply to requests for comment. Mr. Najib has denied any wrongdoing or taking money for personal gain. 1MDB has said money was paid out properly to fulfill the fund’s financial obligations and that it would cooperate with any investigations.


Article continues:


China Poised to Boost Banks’ Liquidity to Counter Weaker Yuan – By LINGLING WEI Updated Aug. 23, 2015 6:38 a.m. ET

People’s Bank of China officials say another reduction in banks’ reserve-requirement ratio is imminent

China’s central bank is readying another reduction to banks’ reserve-requirement ratio, which could free up over $100 billion for loans.

China’s central bank is readying another reduction to banks’ reserve-requirement ratio, which could free up over $100 billion for loans. PHOTO: ASSOCIATED PRESS

BEIJING—The People’s Bank of China is preparing to flood the country’s banking system with new liquidity to boost lending, according to officials and advisers to the central bank, as a weaker currency could spur more funds leaving Chinese shores.

The step—which involves cutting the deposits banks are required to hold in reserve—would signal that the Chinese central bank’s exchange-rate maneuvering in the past two weeks is backfiring, forcing it to resort to the same easing measures that so far have failed to help spur economic activity.

The move, which the people say could come before the end of this month or early next month, would involve a half-percentage-point reduction in the reserve-requirement ratio, they say, potentially releasing 678 billion yuan ($106.2 billion) in funds for banks to make loans.

It would be the third comprehensive reduction in the reserve requirement this year. Another option being considered at the PBOC is to only target the cut to banks that lend large amounts to small and private businesses—the ones deemed key to China’s future growth—though that strategy hasn’t proven effective in the past in channeling credit to those borrowers.

On Aug. 11, the PBOC engineered a nearly 2% decline in the yuan’s official rate set by the central bank against the dollar, which has resulted in a decline of 4% in the currency’s market rate—the yuan’s steepest slide in two decades. The central bank tied the devaluation to its effort to make the exchange rate more market-driven, as investors have shifted in the past year to now expect the currency to weaken rather than strengthen.

But the devaluation came at a time when a faltering stock market had already severely battered investors’ faith in the government’s ability to manage the economy. And as fears grow of a deepening slowdown, the yuan has kept falling, and the PBOC has resorted to a strategy it has said it would use less: direct intervention to control the yuan’s value.

Article continues:



U.S. Banks Take Global Lead – By JUSTIN BAER And MAX COLCHESTER Updated July 30, 2015 7:59 p.m. ET

UBS’s trading floor in Stamford, Conn., in 2011. European banks poached star bankers and expanded operations in Asia and the U.S., including building massive trading floors in Stamford that were conceived as a satellite to Wall Street.

UBS’s trading floor in Stamford, Conn., in 2011. European banks poached star bankers and expanded operations in Asia and the U.S., including building massive trading floors in Stamford that were conceived as a satellite to Wall Street. Photo: Douglas Healey/Bloomberg News

In the trans-Atlantic rivalry for investment-banking supremacy, the Americans are running up the score.

European bank executives over the past week have delivered a series of dour proclamations about their need to shrink and further dial back their global ambitions. Meanwhile U.S. banks are preparing to pounce, with executives touting the gloom emanating from their European counterparts as a big opportunity to press their newfound advantage.

On Thursday, Deutsche Bank AG ’s new co-Chief Executive John Cryanwrapped up the first half’s earnings period for major European banks by warning of more pain to come. “We must shrink our balance sheet,” he said, indicating plans for the German bank to pull back from a number of countries and businesses.

Those remarks followed Barclays PLC Chairman John McFarlane, who on Wednesday conceded that the big Wall Street firms are “an enormous threat”to European investment banks. “They have the scale that we no longer have to be global,” he said.

China’s gold hoard will slay the mighty dollar – JODY CHUDLEY, THE DAILY RECKONING JUN. 27, 2015, 9:21 PM

Caishen, the Chinese god of wealth/prosperity/fortune China

Reuters/Pichi ChuangA performer dressed as Caishen, the Chinese god of wealth/prosperity/fortune, holds a container shaped like a prosperous gold ingot, in front of an electronic board displaying stock information at a brokerage house on the first day back to work after the Chinese Lunar New Year holidays in Taipei.

Tiger Woods in his prime wasn’t close to being invincible. He was invincible.

From the time Tiger Woods burst onto the golf scene by dominating the 1997 Masters until he won the 2008 U.S. Open on a broken leg, he played golf at a level that we may never see from anyone again.

I had a front-row seat to that 2008 U.S. Open victory. I was underneath the grandstand, peering through legs trying to get a look at Tiger on Sunday as he nailed yet another epic clutch putt to force a playoff that he would ultimately win.

The crowd reaction was so loud I thought that the grandstand was coming down on top of me.

If you had told me on that Sunday that the 2008 U.S. Open would be the last major Tiger would win, I would have laughed at you. Now, with his game in complete disarray and a body that is constantly broken, I think that it probably was his last hurrah.

Tiger Woods in 2008 reminds me of the U.S. dollar today…

With European and Japanese central banks doing everything possible (and then some) to weaken their respective currencies and the U.S. Fed actually discussing rate hikes, it seems impossible to imagine the U.S. dollar being anything but strong. Seemingly invincible.

But just as Tiger had issues already going on behind the scenes in 2008 with his swing and personal life, so too are cards being played that will ultimately weaken the U.S. dollar.

Today, we’ll take a look at China’s ambition to uproot the global currency market. Let’s start by talking gold…

Nobody Knows Just How Much Gold China Actually Now Controls

It is amazing what you can find out today on the Internet.

I use it to fix my car. There are wonderful instructional videos on YouTube available for free.

I use it to diagnose what is wrong with myself and family members. Don’t get me started on the dangers of using the Internet for medical purposes versus simply taking the word of a doctor.

And I can use it to find virtually every single piece of financial data that I ever want.

There is one thing that I can’t find on the Internet, no matter how much time I spend searching.

How much gold China has in its reserves.

I can’t do that because China hasn’t released an updated gold reserve figure since 2009.

In 2009, the People’s Bank of China announced that it had significantly increased its holdings of gold from its last update, in 2003. In 2003, the gold in reserve stood at 600 tonnes. In 2009, it jumped 76%, bringing the total to 1,054.1 tonnes.

Despite the big increase, China, as of that 2009 update, had only a fraction of the gold reserves of the United States. China also had less gold than Germany, the IMF, Italy and France.

Article continues:



Iceland put bankers in jail rather than bailing them out — and it worked – Updated by Matthew Yglesias on June 9, 2015, 11:30 a.m. ET

Yesterday, Iceland’s prime minister, Sigmundur Gunnlaugsson, announced a plan that will essentially close the books on his country’s approach to handling the financial crisis — an approach that deviated greatly from the preferences of global financial elites and succeeded quite well. Instead of embracing the orthodoxy of bank bailouts, austerity, and low inflation, Iceland did just the opposite. And even though its economy was hammered by the banking crisis perhaps harder than any other in the world, its labor didn’t deteriorate all that much, and it had a great recovery.

How great? Well, compare the evolution of Iceland’s unemployment rate with what happened in Ireland, the star pupil of the Very Serious People:

Or compare it with the United States:

How did Iceland pull it off?

Let the banks go bust

For starters, rather than scrambling to mobilize public resources to make sure banks didn’t default on their various obligations, Iceland let the banks go bust. Executives of the country’s most important bank were prosecuted as criminals.

Reject austerity

 Trading Economics

Iceland was nonetheless hit by a very serious recession that caused its debt-to-GDP ratio to soar. But even after several years of steady increases, the government didn’t panic. It prioritized recovery. And when recovery was underway and the ratio began to fall, the government let it fall gently.

Article continues: