How big is Quantitative Easing in the US going to be?

• ... We now view the Fed as following a looser version of the “threshold rule” championed by Chicago Fed President Charles Evans.
• What are the thresholds? We read the committee as signaling that the federal funds rate will not rise until the unemployment rate has fallen to the 6½%-7% range. The corresponding threshold for the end of QE3 may be in the 7%-7½% range.
•These implicit commitments are undoubtedly subject to an inflation ceiling ... may be a year-on-year core PCE reading of 2½%-2¾%.
(...) Under the committee’s economic forecasts, we estimate that the funds rate would stay near zero until mid-2015, while QE3 would run through mid-2014 and total $1.2trn.
• Under our own economic forecasts, we estimate that the funds rate would stay near zero until mid-2016, while QE3 would run through mid-2015 and total just under $2trn.

Read more at http://www.calculatedriskblog.com/2012/09/goldman-estimate-qe3-could-be-12-to-20.html#zvhz8YKwbMvUUSAY.99

Is a Grexit becoming more or less likely?

The probability of a Greek exit from the euro has not receded in the wake of the ECB announcement; on the contrary, it's now more likely because it's "more manageable"

Troika leaders (from the ECB, IMF, and the EU) probably don't think a Greek exit is as big a deal as they thought it was before the ECB announced its new plan

A Greek exit would still cause capital flight from Italy and Spain but would be necessarily accompanied by massive global central bank intervention. (...)

 Nevertheless, Grexit is not certain and its potential timing is highly uncertain. The risk of Grexit in the next couple of months probably has receded, with deadlines being pushed off. Policymakers may be unwilling to trigger Grexit in the run-up to the US elections, and while Middle East tensions are so high.

Read more: http://www.businessinsider.com/citi-greek-exit-from-euro-more-likely-2012-9#ixzz271glbVfT
Read more: http://www.businessinsider.com/citi-greek-exit-from-euro-more-likely-2012-9#ixzz271gVqLrO

German Constitutional Court offers Merkel a day of hope and happiness

KARLSRUHE, Germany – Germany’s Federal Constitutional Court on Wednesday gave Chancellor Angela Merkel a significant victory in her bid to master the debt crisis that has buffeted the continent for years and endangered its common currency, granting approval to one of the key pillars of her strategy.
With the ruling, the 17 countries of the euro zone will be able to move ahead with the establishment of the European Stability Mechanism, something like a continental version of the International Monetary Fund. The mechanism will handle bailouts and work in tandem with the European Central Bank to buy the bonds of countries such as Italy and Spain that are straining under high interest rates.
The court ruled that Germany could proceed with its contribution to the mechanism but set certain conditions, including a requirement for parliamentary approval of any increase in the agreed German contribution of 190 billion euros, or about $240 billion.

Source: NYT

Nate Silver: Obama's odds of getting reelected have improved

The most impressive thing that our model did in 2008, in my view, was not in “calling” all but one of the states right on Election Day. There was very little doubt about who was favored in perhaps 46 or 47 of these states. The other three or four were tossups — and whether you guessed the winner right had as much to do with luck as skill.
Rather, it was what the model did in September of that year, when it detected very, very quickly after the collapse of Lehman Brothers that John McCain’s goose was cooked, with Barack Obama’s projected probability of winning the Electoral College increasing by about 25 percent in a period of just 48 hours.
We’re not seeing anything quite that dramatic in the polls right now. Nevertheless, the polling movement that we have seen over the past three days represents the most substantial shift that we’ve seen in the race all year, with the polls moving toward Mr. Obama since his convention.
How far will Mr. Obama’s numbers rise, and how long will his bounce last? We don’t know that, of course. But the range of possible outcomes reads pretty favorably for him.

Source: NYTimes

Global debt clock

Source: The Economist

The ECB's bond buying programme

Mario Draghi has made his leaked proposal official: the European Central Bank will buy unlimited amounts of troubled euro zone debt on the open markets in an effort to push down sovereign borrowing costs. The NYT’s Jack Ewing and Steven Erlanger write that the plan puts the ECB’s “unlimited financial clout behind an effort to protect Spain and Italy from financial collapse” and “effectively spreads responsibility for repaying national debts to the euro zone countries”.
The plan, called “Outright Monetary Transactions” (OMT), will purchase bonds maturing in the next three years, after countries have made a request to the euro zone’s bailout fund and fully agreed to its conditions. If countries renege on their promises in areas like banking reform or fiscal policy overhauls, the ECB will terminate the bond purchases. Importantly, the ECB will not have seniority over private bondholders.

Source: blogs. reuters

Going back to the roots of the current crisis: Don't expect a recovery soon

To understand the effects of an economic crisis, you have to go back to its roots. A new study by Alan Taylor draws attention back to the causes of the 2008 financial crisis. Through a series of tests run on a sample of 14 advanced economies between 1870 and 2008, Mr Taylor establishes a link between the growth of private sector credit and the likelihood of financial crisis. The link between crisis and credit is stronger than between crises and growth in the broad money supply, the current account deficit, or an increase in public debt.Over the 138-year timeframe Mr Taylor finds crisis preceded by the development of excess credit, as in Ireland and Spain today, are more common than crisis underpinned by excessive government borrowing, like in Greece. Fiscal strains in themselves do not tend to result in financial crisis.When the boom period of credit expansion is coupled with growth in public-sector borrowing, however, the subsequent negative impact on the economy will be worse. Why? When a crash occurs, governments will not have the fiscal capacity to buffer the crisis due to their already stretched borrowing levels. Instead, they become forced to retrench and adopt austerity measures—which tend to drag on growth further, prolonging recession. (...) Financial crisis recession will tend to result in a longer-term recessionary drag than a “normal” business cycle recession. When a regular recession is preceded by excess credit growth, Mr Taylor finds there tends to be a mild drag on GDP of 50 to 75 bps. (...) But a financial crisis recession tends to bring about a larger drag on the economy, of 100 to 150 bps. Add in a high level of public debt-to-GDP, near to 100%, and growth tends to drop by 400 bps.

Source: Economist

Draghi hints at short term bond buying

The president of the European Central Bank dropped more hints about how the bank could support struggling countries, suggesting the bank was free to buy government bonds maturing in three years or less.
The comments by Mario Draghi in a closed hearing at the European Parliament on Monday came ahead of the ECB's monthly policy meeting Thursday....Mr. Draghi indicated Monday that the ECB would be open to buying bonds with a maturity of two to three years, stressing that such purchases wouldn't break European Union treaties, according to several lawmakers present at the hearing.

Source: WSJ