Quake, Inflation, Fannie

The impact of the earthquake, tsunami and nuclear incident in Japan unfolded across the Japanese and world economies over the weekend as certainly as the shocking physical disaster had unfolded across the eastern coast of Honshu, the nation's main island.

March 14, 2011
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user Yuichiro Haga

The impact of the earthquake, tsunami and nuclear incident in Japan unfolded across the Japanese and world economies over the weekend as certainly as the shocking physical disaster had unfolded across the eastern coast of Honshu, the nation’s main island. Even before radiation leakage was a worry, the Japanese were trying to cope with the scale of the disaster, which will cause electricity supply and manufacturing disruptions, a strain on the Japanese government’s budget and probably other, hard-to-anticipate economic problems.

The Bank of Japan announced that it will pump a record 7 trillion yen ($85 billion) into the nation’s financial system. The Japanese central bank might also decide to speed up asset purchases. On Monday morning, Japanese time, the NIkkei stock index dropped precipitously in early trading, just as it did after the 1995 Kobe earthquake, but regained some of that ground later in the trading day. Further afield, the disaster seemed to drive the price of oil down (Japan is a big user of imported oil) and the dollar up, compared with the yen.

Still, the history of economic recovery from natural disasters among developed nations is fairly strong–especially Japan. Manufacturing in the Kobe area was back on its feet less than a year and a half after that disaster, while major infrastructure repairs, such as the main highway through Kobe and the city’s port, took around two years.

Inflation is on Consumer Minds

International events and the price of gas and food seem to have finally made an impression on consumer confidence, with the Reuters/University of Michigan’s Consumer sentiment index coming down this month from unexpected three-year highs in February. The composite index for mid-March dropped to 68.2 compared with 77.5 for the full month of February. The expectations index, which is the leading component of the composite index, fell more than 13 points to 58.3, and inflation expectations were also up.

Another indicator of consumer anxiety, though anecdotal, came on Friday when New York Fed chief Bill Dudley said in a speech to the Queens Chamber of Commerce that “relative to most other major economies, the U.S. inflation rate is lower, the amount of slack much greater and commodities represent a relatively small share of our consumption basket.”

Maybe so, but the audience apparently wasn’t having it, with audience members pointing out during the question-and-answer period that consumers are indeed feeling inflation, particularly in gas and food. Dudley replied by saying that (for example) one can now buy a spiffy new iPad 2 (not his adjective) for the same price as they less-powerful iPad 1 not so long ago. Reportedly, one member of the audience called the example “tone deaf,” and another said, “I can’t eat an iPad.”

SEC Investigating Former Fannie Mac Chief

Will Mudd’s name be mud? Daniel Mudd, now head of Fortress Investment Group L.L.C., but CEO of Fannie Mae from 2004 to 2008–when the government ousted him–has received a Wells Notice from the the Securities and Exchange Commission. Such a notice means that the commission is going to recommend civil action against Mudd, but also that he also has an opportunity to try to persuade the SEC not to make such a recommendation.

Mudd oversaw Fannie Mae’s financial-reporting restatement in the mid-2000s, but did not survive the GSE’s meltdown during the throes of the Panic of 2008. Among other things, the SEC is likely going to allege that Mudd didn’t accurately disclose Fannie Mae’s exposure to subprime and Alt A mortgages before that exposure blew up in the GSE’s face.

“I have been informed that the SEC staff has sent my counsel a Wells Notice arising out of my service at Fannie Mae…” Mudd said in a statement to Bloomberg News on Friday. “As the executive responsible for initially registering Fannie Mae with the SEC, and having led the company through the SEC-mandated restatement, I have the highest respect for the Commission. Nevertheless, I could not disagree more with this turn of events.”

Wall Street bounced back on Friday somewhat, with the Dow Jones Industrial Average up 59.79 points, or 0.5 percent, which put the average above 12,000 again, though all bets are off for the markets after the disaster in Japan. The S&P 500 gained 0.71 percent and the Nasdaq advanced 0.54 percent.