Told ya so.
You wouldn't listen;
"They can't because of inflation"
"They can't because it will weaken dollar"
"They wont until the economy weakens more"
I Told you this had potential systemic issues and needed to be done.
Yeh, 800 odd points off the Nikkei last night and then this. But of course the big boys knew this in advance, made a killing yesterday in the last hour, and today in the first, and now they are already selling out to the suckers. This wont help long term. Does nothing to address the underlying causes of the problem which will continue to keep taking whacks at the foundation of the global financial system and US consumer economy.
I'm confused. I thought the rate was 5 1/4. Now with a 50 bps reduction, it's 5 3/4. Huh?
Or what's the difference between the "primary credit rate" and the "federal funds rate"?
"the Federal Open Market Committee judges that the downside risks to growth have risen appreciably." This change in language is why the markets are gapping up, not the drop in the discount rate. Fed is telegraphing a rate cut. The Greenspan put is alive and well.
It's a cut of the discount window rate, which is still above the fed funds rate.
If banks borrow from the window they still do at a penalty. They made the penalty less steep to ease credit conditions, but they still borrow at a penalty.
This move eases credit conditions, but still penalizes the banks who made bad bets and use this option.
One can perhaps argue that they will cut the funds rate at or before their next meeting, but that is separate issue.
jus me - the primary credit rate (aka the discount rate) is the rate at which the Fed lends to banks. The FF rate is essentially the rate at which banks lend to each other.
The key rate is the FF rate, and the Fed pretty much told everybody that they will cut it at their next regular meeting on 18 september.
On a related note, is it possible to offshore the Federal Reserve Board? I think that their function can be handled by the very well trained and intelligent MBA's in Taiwan or India for probably 90% cost savings.
Or even fully automate the Fed Rates entirely. If the stock market goes down by more than 5%, just automatically drop the rate 50bps. Repeat as necessary (no rate increase software will be required until the next upgrade, apparently).
Wilshire 5000 up 1.69% and S&P500 up 2.04%. If they give free money to the market what do you expect?
The growth of the market today is likely to be offset by a fall in the Dollar. Traders might think they're richer, but when compared to the rest of the world the share prices will likely decrease.
While the US market might think this move is a good thing, the international market won't.
Does the 50 basis point reduction in the primary credit rate address this fundamental longer term embedded structural problem ?
Wal-Mart CEO H. Lee Scott Jr. says customers are "running out of money."
Earlier this week, consumer juggernauts Home Depot and Wal-Mart reported softer than expected earnings.
Penned the New York Times, "the sober forecasts reverberated across Wall Street, sending the Dow Jones industrial average and the Standard & Poors 500-stock index down by nearly 2 percent, with the Dow dropping more than 200 points. Shares of both Wal-Mart and Home Depot fell around 5 percent.
"Economists said the sluggish performance of the chains Wal-Mart missed its profit forecast and Home Depots earnings dropped could signal broader troubles in the economy."
Buried in the article was a sobering remark indeed: Many customers are running out of money at the end of the month, said H. Lee Scott Jr., the chief executive of Wal-Mart.
In Los Angeles, economic concerns hit close to home.
Anxious customers of Countrywide Bank jammed its phone lines, branches and website after the nation's largest mortgage lender -- which owns the bank -- announced it was facing problems from a credit meltdown.
"Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable," wrote the LA Times Friday. "And federal regulators said they weren't alarmed by the volume of withdrawals from the bank."
Even though its a different "window", the fact is that the Fed has now officially loosened monetary policy and is injecting more money into the marketplace.
LEt's see, we now have almost a month exactly until the next announced Fed meeting, where it looks like they just basically told us you can expect a rate cut. Does anyone here think we can make it through a month of the kind of crap we've been seeing to even get to that meeting before pure desperation sets in and a cut is enacted anyway? I for one sure don't and I don't believe the Fed is the least bit credible on this, saying everything is just fine one day and then cutting the next. I mean, did one day change things from, no effect on the economy to, downside risks appreciably higher? Give me a friggin break.
The bad loans that people made are still there. This is not going to solve any problem. A majority of ARM loans is due to reset from September through April. What are they going to do then, lower the FFR to 1% and watch the dollar turn into Monopoly money and inflation go to 10%. The fact that people cant pay their debt has not changed. This is not going to allow those CDO's and MBS deals to somehow miraculously be solvent because borrowers can now pay their mortgages.
heads up all, the cut was to the discount rate, NOT the target rate.
This is the symbolic Discount Rate, not the Federal Funds rate. But that will happen in September, if not sooner.
"The Federal Reserve, reacting to concerns about the subprime lending crisis and the volatility in the financial markets that have resulted from it, announced Friday that it is cutting its so-called discount rate temporarily by a half percentage point, to 5.75 percent.
The discount rate is the rate the Federal Reserve banks across the country charge qualified lenders - mainly banks - for temporary loans. It is largely symbolic.
The central bank did not change its more closely watched federal funds rate, which affects rates that consumers pay on various types of loans. That rate remains at 5.25 percent.
The Fed added that "although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably" and that the Fed was prepared to take more action if necessary.
I agree Geoff, seems to me they are sugar coating, or buying time as they say...and the rate are climbing just look on market watch all arrows point up.
um, isnt that just the point? if everyone can make their mortgage payments then the MBS market will work the way it should. this all started because people can't make their mortgage payments.
come on people, get with it! debtor nations have one option and one option only....inflation....here it comes...
50 bp cut in sept and another at the next meeting...with perhaps an emergency cut in there somewhere...
FFR to be at 4.25% at least by year end.
market should rally on a pure NPV basis alone
the big question is how does the long end react.
i just can't wait to start raising my prices across the board, keep salaries constant, and pay down my 30 year fixed with inflated money...
We were obviously confused about which rate got cut. Do you think the market did as well? The initial jump was huge but things are paring back quite noticeably now.
I'm also beginning to wonder whether the market, now off its adrenaline rush at the beginning of the trading day, is now beginning to question the Fed's credibility.
Shredding credibility is right. For all the people that say we have to re-establish liquidity, here's a modest proposal that the Fed could adopt instead:
Force the offending cash-short financial institutions to issue massive converts rather than repo ACBP trash (AAA-rated by WHOM?). Buy the converts outright.
The bank gets cash, everyone knows the government bailed them out, and the shareholders get screwed with dilution.
Now, what, exactly, is wrong with doing the above rather than tip-toeing around the word bail-out?
All, I added a short explanation of the discount window from the WSJ.
Maybe more important than the cut in the rate was the lengthening the term of the loan from 1 day to 30 days. Banks can now give the Fed some subprime loans - and pay the Fed 5.75% - for 30 days. That seems very attractive.
There's definitely another shoe to drop. Bottom line, is this cut going to fix what's causing the credit squeeze problem. No. Only a return to a stable equilibrium in the housing market will do that, and that's still quite a way off. Today = dead cat bounce. The key with their statement though and the reason why I think the market rallied today is that last sentence in their statement where they acknowledge that growth has weakened appreciably. That's a clear heads up that the more well known target rate will be cut, likely at their next meeting-IMO.
cross post:
Just as the Iraq surge is designed to provide some breathing space and stability to reach a political settlement, todays action by the Fed is designed to give the markets a little bit of breathing room to unstuck the gears of the credit market and work things out. The Fed took the intermediate step of cutting the rate at the discount window by 50 basis points this morning to 5.75%. This is a much more targeted move than lowering the Fed Funds rate. Essentially the Fed will now loan money to banks, and will accept mortgage backed paper as collateral. It will do so at a higher rate than the Fed Funds rate, but less of a penalty than before. It also preserves the Feds credibility much more than a cut in the Fed Funds rate would have. After all it was less than two weeks ago when the Fed came out and said they still had a tightening bias, that the risks of inflation not falling were bigger than the risks to the economy from the tight credit conditions. This is to some extent a bailout of those who made dumb decisions with reckless lending, but less so than a cut in the Fed Funds rate would be. With that statement the Fed had put itself in a bit of a box, but this move is a partial way out of that box. This is also a very important psychological boost to the market. Right now psychology is extremely important. Moves like yesterdays 350 point swing are not driven by changes in economic fundamentals, but by changes in the mood of the currently very bi-polar market. Clearly the move by the Fed has cheered up the mood on the street as witnessed by the market opening sharply (+200 as I write), and up over 500 points in the last 4 trading hours.
The question now is if the banks, investment banks, hedge funds etc will use this window of stability to arrange work outs of lots of the bad paper that is out there. Yes somebody will still have to take the hit as the market starts to clear. But the hit can be done in a more orderly way. It is actually important that there be some that do actually take a hit, or the Feds action will be seen as simply an invitation to disregard risk in the future. However, to the market a bid that is at a price that is not as nice as you would like is better than no bid at all, and the no bid situation is what we have been facing for the last week or so. Lets hope that the market participants use the Fed surge more wisely than the Iraqi government has used the U.S. troop surge. If they dont the conditions we saw over the last week or so will return. If they do, the basic underlying fundamentals of still very strong earnings (out side of the Financial sector where one must assume is where most of the landmines are still hidden) and low interest rates will start to reassert themselves.
Ok so the Discount Window rate got cut and the time to repay got extended from 1 day to 30 days. Now what? Hos exactly is this going to ease the liquidity crunch, how will it stop all the MBS from continuing to devalue and all the pier loans to turn into bridge loans. I just don't get it.
I don't know if I'm comfortable with a bail out. Taking away the risk in a free market capitalist market is like taking away sin in religion. This is not going to help out anything except the big banks. Not the consumer who still cant pay their mortgages. This is just the overnight rate to banks.
I think folks over-estimate what the Fed did today - they didn't rescue anyone... all this little shot does is allow the markets to trade through... it was in effect instituting what has been going on through TOMO for over a week now... the open window is cheaper but FF is still the same - at least for now.
I was thinking about this yesterday but too busy getting a kid ready for a week long wilderness canoe trip to post... wondering what the world will look like when he gets out.... My guess was the Fed could care less if the market is 2000 points higher or lower then as long as it trades through in an 'orderly fashion' and the last few weeks its been anything but orderly - both up and down. Credit markets worse than equities of course...
FWIW - I think it would be pretty hard to be up/down as much as 2000 points on the DOW over a week and have the markets remain orderly... but you follow my drift.
Anyway this action is similar to what the ECB did last week... open the window & say 'have at it boys - now play nice'.
"We can only speculate about this, but the decision to move the primary discount rate rather than the Fed funds rate may indicate that the Fed anticipates some institutional failure as soon as today, probably not a bank, but rather an institution that has substantial bank liabilities that may not be able to clear. Markets should not be calmed by this tactic. Unlike the Fed funds rate which affects all banks cost of funds a discount rate cut only lowers the cost of emergency borrowing by institutions in distress. This move is not going to provide any relief to the overall economy. However, we believe that the Feds action and statement today raise the odds of a reduction in the Fed funds rate at the September FOMC meeting, or perhaps even before."
I'm a bit confused, even after reading the explanation of the discount window. Why is the rate described as "symbolic"? It's an actual rate used for lending money by the Fed, right? What's symbolic about it?
When our own president gets on the box and says "that all the evidence points to a soft landing" when everything in fact points to cash - where is our credibility as a nation.
It may be ok for him with his 100,000 acres of land in Paraguay but what about the rest of us?
Geoff - the run on Countrywide may explain it. Tanta gave her opinion earlier on why Countrywide is too big to fail. First Countrywide, then a few others, and then all hell like no one has seen before breaks loose.
dryfly, I think this does provide more liquidity - there have been two problems: 1) a credit crunch (no help) and 2) a liquidity crisis (this does help).
Also, the Fed has changed their bias from a rate hike to a rate cut for the Fed Funds rate (skipped the neutral bias stance!). This is part of the communication strategy - tell everyone what you are going to do before you do it - so a rate cut in September is VERY likely now.
Also - this reminds me of hockey... I have season tickets to a local college team & go almost every week. One observation - Ben would make a terrible hockey referee.
More fights occur because a referee is too cordial & 'talks' to players too much rather than icing them down in the box early & often. Seriously, bad refereeing causes more fights than goonery. Everybody's a potential goon in hockey if they can get away with it - same with markets.
Message to Ben - its probably too late, you lost control of the game... but 'next time'... blew the whistle early & often, then you won't have to wrestle them to the locker room later.
Now when will my season tickets arrive, its almost September?
THis is not a bail out yet, but its heading that way. From now on why dont we give low rates to high risk individuals and companies and high rates to low risk individuals and companies.
"When our own president gets on the box and says "that all the evidence points to a soft landing" when everything in fact points to cash - where is our credibility as a nation."
I thought that too. A complete joke - although what else is he going to say.
Can anyone recommend a good stock that deals in Grease & Lubricants..with the Printing press running full steam ahead I figure there might be a run on such a product.
Big prints in CFC yesterday...rumored PPT intervention, and now the window cut.
The FED couldn't afford to have the hedgies burn CFC down in the short term. Its a huge gamble on Ben's part, but I think that its a good one. We are going into recession, and there is nothing that can be done to save us from that fate. Ben's just trying to make it an orderly entry into the abyss.
gng - it's symbolic because almost nobody will use the discount window, except if the WSJ assessment posted by dis is correct. The key issue is that the Fed has clearly signalled that it has changed its stance on interest rates and that it intends to cut the Federal Funds rate in September (well, maybe not certain but the odds now look much higher than they did yesterday).
"We can only speculate about this, but the decision to move the primary discount rate rather than the Fed funds rate may indicate that the Fed anticipates some institutional failure as soon as today, probably not a bank, but rather an institution that has substantial bank liabilities that may not be able to clear."
What is an entity that "has bank liabilities"? Are they saying that if a random widget-maker or retailer has a large account in a bank and needs to pull money because they're in distress, that the bank may not be able to return their deposits and therefore needs a discount window to deal with it?
Geoff , I think you are right.. yesterday's reversal in the late afternoon , coupled with the premarket action prior to the discount window cut of 50 bps seemed to be known to some folks. I noticed DOW futures move off the lows quite noticeably prior to the announcement . Couple those items with the fact that theFed move was premarket, on Option Ex day no less , and the attempt to manipulate markets and force a short squeeze seems pretty clear at least to me. However , the pullback from the giddy moments of this morning indicate the move isn't working out as planned . Ten year T Bill yields are moving higher and the dollar got hit hard after the surprise move ... I think the Fed panicked , has lost credibility and this doesn't change the real issues for lending or housing. As someone on the board correctly noted "What's next ? " 50 bps move on the Fed Fund rate in Sept ? So what , that won't bring back subprime , Alt A or any other screwy loans products most smaller lenders feasted on in recent years. And it won't bring back First Magnus or AHM either . Nor will the builders benefit from this cut today or 50 on the fed fund in a month... they still won't sell homes b/c buyers are out of the market.... and it doesn't change the ARM reset problem one iota.
someguywhoknows said,
The FED couldn't afford to have the hedgies burn CFC down in the short term. Its a huge gamble on Ben's part, but I think that its a good one. We are going into recession, and there is nothing that can be done to save us from that fate. Ben's just trying to make it an orderly entry into the abyss.
If DIS's comment is an accurate reflection of the situation, that kind of move should spark a sell-off not a rally, except of course to the extent that it ensures a rate cut. But wait, if it ensures one rate cut, what exactly is one small cut for mankind going to do? Nothing really. I think that if they are going to go with one, it opens the door to the going with many option, and almost ensures it. If you cut one, and it does nothing, which is what will happen (maybe not to the markets, but nothing to fix the underlying problems) then you either have to go all in, or look like a complete moron who gets caught in between.
So, are we now saying that we are going to go back to a 2.25% FF rate? Good god, that would be madness - did we learn NOTHING from the past few years?
Ben must have been thinking of this song (adapted from Eric Clapton):
Let It Grow
adapted by Ben B. from Eric Clapton:
Standing at the crossroads, trying to read the signs
To tell me which way I should go to find the answer,
And all the time I know,
Plant your [money] and let it grow.
Let it grow, let it grow,
Let it blossom, let it flow.
In the sun, the rain, the snow,
[Money] is lovely, let it grow.
Looking for a reason to check out of my mind,
Trying hard to get a friend that I can count on,
But there's nothing left to show,
Plant your [money] and let it grow.
Chorus
Time is getting shorter and there's much for you to do.
Only ask and you will get what you are needing,
The rest is up to you.
Plant your [money] and let it grow.
If the dollar weakens it will cause a monstrous trade imbalance. Inflation will roar ahead and the fed will HAVE to increase rates. Are we going to go back to the early 80's with 20% loans?
f the dollar weakens it will cause a monstrous trade imbalance. Inflation will roar ahead and the fed will HAVE to increase rates.
My point exactly. The Fed may have to increase rates again even before the end of the year. That sort of action can't be good for people's confidence in the Fed's intelligence.
Wal-Mart CEO H. Lee Scott Jr. says customers are "running out of money A snider person than I would say that they ran out of money quite awhile ago. Now they're running out of credit.
At the risk of lifting the wizards curtain and ruining this gesture, I need to point out that a cut in the discount rate is not an ease, and in fact from the standpoint of mechanics is barely relevant, as borrowing at the window was minimal through Wednesday. The Fed is no doubt hoping to capitalize on the past. Prior to 2003, when the discount rate was lower than the funds rate, cutting the discount rate was the most powerful tool in the monetary policy toolbelt. Indeed, prior to 1994, when the Fed began announcing changes in the funds rate target, a discount rate move was the ONLY move that was explicitly announced. Many market participants will think of the discount rate cut in those terms, which is not the correct way to consider it. Instead, this should be thought of as another (indeed, probably the last) intermediate step short of an ease. Stephen Stanley, RBS Greenwich Capital
Yes and no. All things being equal the subprime meltdown is deflationary. But things aren't equal. Overseas investors are going to take their money away. This move will reduce the value of the dollar and cause inflation.
Imagine - America is in recession and the Fed has to increase rates to battle inflation. Not good.
Brian23 THis is not a bail out yet, but its heading that way. From now on why dont we give low rates to high risk individuals and companies and high rates to low risk individuals and companies.
Look, I understand your feelings, but they are not in fact rational. The Fed is doing what it must do.
A run on funds is survivable - the money is going to end up in FDIC-insured bank accounts. A bank run is not survivable; the result would be the 80's. It only takes one bank shutting down in these circs to spark more bank runs.
I want to remind you that a bank holiday now would be a red flag that would produce runs on multiple banks as soon as they reopen. The Fed is doing what it has said it will do - maintain liquidity. If it doesn't, you are going to see something worse than the 80's.
So again, if CFC is on the brink, how does putting up collatoral of subprime loans to the fed for some emergency money save them? There are no more new loans in their market, they hold a ton of forclosures and many more are headed that way. I am not sure how they will be able to escape the inevitable. But I guess now they have 30 days of the discount window to figure it out.
To clarify (I crack myself up when I write things like that):
I wasn't saying that Countrywide Bank was too big to fail.
I was suggesting that CFC mortgage servicing operations are too big to fail. Or, perhaps, too big to be digested by anyone else in a big hurry. Welcome to the part of reality were mortgage loan servicing ain't tradable like stocks.
Our Banker China will be calling us soon Guaranteed. - Bork
China knew in advance as did ECB & BoJ... had to have known. I would bet money there were late night discussions.
China doesn't look at their reserves as 'savings'... its ammunition. BB just confirmed to them how damned good their position is (they really got us by the short ones for sure).
Anyone thinking there will be protectionist actions taken against China - think again.
Repeated from previous post:
Mr. Poole, meet Mr. Paulson
(quote)
Aug. 17 (Bloomberg) -- Goldman Sachs Group Inc. said the Federal Reserve will cut the overnight target interest rate to 4.5 percent from 5.25 percent this year, citing ``sharp tightening in financial conditions'' and expectations the economy will slow.
The Fed will reduce the rate by at least 0.25 point on or before policy makers meet on Sept. 18, economists led by Jan Hatzius and Ed McKelvey in New York forecast in a note today before the central bank reduced its discount rate.
The Fed will cut another 50 basis points after that, possible at the next two meetings in October and December, McKelvey said in an interview. The Fed today cut the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.
Japan has structural problems in the banking system, it was not CB interest rate policy that caused deflation, but a long term credit shutdown in all domains (retail, real estate, manufacturing, construction).
Japanese bank's loans outstanding decreased almost 30% since 1997.
Savings didn't change.
Banks replaced loans with government bonds on which the Japanese Ministry of Finance bought US T bills and Agency MBS.
come on, analyzing japan's neg interest rates by saying it did nothing is bad analysis - who is to say that without that their economy would have been the same? oh wait, maybe it would have completely collapsed instead of muddled through.
somebody please stop the madness on this topic:
falling dollar = inflation
yes i know thats what macro econ 101 says.
but we've had nearly a 50% drop in the dollar vis a vis the euro over the last few years and where is the inflation in imports ex. oil?
"With interest rates at zero they still had other options - like printing money - but they didn't act."
Yes they did, they were, at least til recently, essentially printing money. But what happened is that the money wasn't going to domestic Consumption or investment, but was borrowed and invested just about everywhere else, from New Zealand to Iceland...
Tanta - on the subject of CFC servicing. That servicing may not be profitable at the rates in the contracts. Might the only way out be BK for CFC, with a sale of the servicing infrastructure, so that the bankruptcy allows the servicing contracts to be renegotiated with higher fees? I can't imagine the nightmare of trying to negotiate with a bunch of SPVs to increase the servicing fees in order to keep CFC a going concern. I would think that a BK voiding the old contracts, and the purchaser of the platform setting a new rate, would be a heck of a lot easier.
Imagine - America is in recession and the Fed has to increase rates to battle inflation. Not good.
One Salient Oversight | Homepage | 08.17.07 - 11:09 am
FWIW, I concur and have thought that same thing for over a year now....
Overseas investors are going to take their money away. This move will reduce the value of the dollar and cause inflation.
counter intuitive
the RACE for CASH acatually increases the value of the Physical dollar in the short term...
Asset's and credit market's contract, while CASH has another day in the sun(been awhile)...just MO
but we've had nearly a 50% drop in the dollar vis a vis the euro over the last few years and where is the inflation in imports ex. oil?
RE, healthcare, schools, stocks? ever heard of those?
inflation is not what the government tells you, its what you see in shops.
inm germany the milk is going to increase 50% in price and bread 20% during the next year, yet government says it just comprise 1,4% of the CPI so everything is fine
Several consumer deal sites had information that Countrywide was in trouble. A lot of people on those sites had opened money market accounts and CDs for the premium yields offered by Countrywide Bank. My guess is the amount of withdrawls was going t create a run on Countrywide bank and the Fed had to bail them out to stop the fear from spreading.
Mike Englund, chief economist at Action Economics, said: I think it is a brilliant move. It will appease those who want the Fed to do something and those who want it to do nothing.
In other words, no one is actually AT the wheel here.
As in, the jig is up. Lower the interest boom, and buyers still won't drive up housing prices. The MEW and HELOC conveyor rusts away, and the local big-box stores shut down, selling commercial space to Liquidators and Dollar Stores.
Domestic demand for autos and fuel declines as well. Deflation occurs.
Or that might all be wrong, because maybe there is some stealthy value-producing industry propping the economy up, providing employment and existential security to millions of people without us being able to observe it directly. Maybe it's the same industry that has kept construction employment high in spite of decade-low housing starts and completions.
First thing I thought of was Countrywide (MOM on target I think), then next thing I thought of was that scene in pulp fiction when uma thurman gets and adrenaline revival shot in her chest after she OD'd...
Question? Could a hedge fund in distress run to the discount window put up a Ton of Mark to Model CDO's as colateral, buy S&P 500 stocks at the opening and then sell them at the close as in 2:30 and make a few bucks. Can they improve their bottom lines by doing this every day hoping to be more on the upside of tades than on the downside in hopes of improving their bottom line before all of those redemptions hit in Mid September? Is this a possible bail out scenario? I am not sure how this game works but somebody is loosing a ton of money and they fed must be hoping to minimize the loss with lucky trades. Real in the little guy and then fry him on the grill. How many unsepecting 401k holders are on the dinner menue?
That servicing may not be profitable at the rates in the contracts.
If that is the case, it would behoove us to ask why that is.
And this crappola about how that's all due to deliquencies we didn't see comin' isn't the right answer.
CFC buys servicing rights from everyone else in the universe because it has had a competitive bid. It had that because it's an 800 pound gorilla with these famous economies of scale and efficiencies and Next Generation Holodeck servicing software and blah blah blah.
So you're right, if CFC can't make money servicing $1.43 trillion, nobody else can take it over and do so.
But many, many billions of that servicing is for Fannie and Freddie. Fixed-rate GSE paper at 0.25% per month.
We're going to renegotiate the servicing fee on that? I think not.
since when do you IMPORT health care, real estate and schools??
but you know, the RE guys, doctors and proffessors, want to make vacation in paris, or buy bmw and mercedes, or just simply have income increase covering the fall of usd
btw. a lot of medical equipment is from europe, ever heard of siemens?. its not just GE.
there was an article about european companies having good bussiness since their high precision and quality equipment is in high demand from all over the world despite the increase in euro
This isn't a bailout, a calamity, or an early warning of calamity. It's also not mysterious, sinister or unexpected.
During a recession the Fed eases to stimulate the economy (started easing in 2001). Done.
Once the Fed is satisfied that the economy can move forward under its own power again the Fed removes the excess easing (started 2004, finished in 2006). Done.
The Fed always overdoes a little on the tightening and winds-up easing a bit in mid-cycle...like now.
If you look at the market-controlled short-term rates you can see that the Fed funds rate is too high, so it's completely normal for the Fed to ease. Not as part of a "rescue" but simply as a response to the level that market participants have established for short-term interest rates.
On this point I tend to agree with CR that the Fed is likely to lower the Fed funds rate sometime soon. I just disagree with him on the outcome, since the effect of lower rates will stimulate housing and relieve a lot of the pressure resulting from ARM resets.
Well, I must bid you all goodnight. It is 1.25am on Saturday morning here in Australia. I hope to wake up in the morning to the news of another market meltdown.
I remember that. The Japanese central bank was stupid since it was supposed to ensure price stability. Deflation isn't price stability.
With interest rates at zero they still had other options - like printing money - but they didn't act.
Since the Japanese seem inable to allow any business to fail, the logical step would have been for the government to step in an assume banks non-performing loans. The BOJ should have then monitized enough government debt to offset the NPL's.
It would have been much better for regulators to not allow the scale of NPL's in the first place. But, instead the government decided to deficit spending. Now household balance sheets are better, banks still have the NPL's on their books, and Japanese public debt has grown to the point that it can never be paid back.
NPL's are deflationary and they are a sticky problem to solve once they pile up in the financial system. By allowing credit to grow faster than the incomes needs to support the growth of credit pretty much guarantees NPLs.
Is there anything to be read into the fact that the Fed statement mentioned that the rates were dropped at the request of the New York (as you would expect) and the SAN FRANCISCO banks? Should I loosen my tinfoil, or is there something to be read into the fact that SF was one of the requesting banks?
This is basically a 30 day lifeline to Countrywide . . . . . . for urgent liquidity needs, they can present AAA rated mortgage paper to the Fed and pay a 50 bp penalty over FF for the money.
Have a couple of feelers out and it's not clear whether or not the Fed will accept AAA rated tranches of subprime paper, or not, but supposedly they're not accepting anything and everything.
The 30 days rather than 1-3 days is significant, and speculation is out there that the Fed did this and only this without a cut in FF because they didn't have any degree of consensus on the FOMC to cut the FF (maybe Mr. Poole is long his office pool on the odds of the nascent Cramer head explosion?).
My read is that this guarantees that no mortgage company gets sucked under in the liquity crunch in the next 30 days SOLELY because of the liquidity crisis, which is pretty much what the Fed's supposed to do, IMHO. Beyond that it doesn't do very much . . . . . . wonder how long it will take the markets to figure this out, if in fact this is correct?
gaborka Rest of the world is pegging against dollar.
That makes no sense. The rest of the world isn't pegging against the dollar. The entire forex market involves the buying and selling of Yen, Euro, USD, Australian Dollars, Swiss Francs, etc etc etc.
You don't need to respond to my response here. I'm off to bed.
btw. bourse in prague is falling, us retrieving its investments from eastern europe. the sooner this poison capitol leaves, the earlier RE here will start to fall, its all just debt
Does the question of propping up prices versus letting them fall depend on your view of the global economy?
If so, I can understand how you can look at the potential in developing markets and how this will have a positive impact on earnings. But, I don't know how you can say this optimism hasn't already been priced into the markets. And, considering our exports I don't see how the US is positioned to take advantage of this. It will just increase the competition.
If you see bumps in the road for the global economy isn't it better to let things deflate some now. Don't worry we'll blow the balloon back up again later. But, if we keep filling it up now it's sure to pop and we'll all be crying.
On this point I tend to agree with CR that the Fed is likely to lower the Fed funds rate sometime soon. I just disagree with him on the outcome, since the effect of lower rates will stimulate housing and relieve a lot of the pressure resulting from ARM resets.
Sebastian
SebASStion,
I am looking for a house in the DC mSA have been for four years now....prices still high, homes overvalued based on incomes...
I have good credit, and cash, no debt.
They could drop the rate to 1% and i wouldnt buy still. Because i do not believe that a reduction in rates will help the following:
ARMs given to unqualified people
I/O given to UQP
UQP cant refi and still afford
many prime have maxed out MEW
many houses still yet to be foreclosed on with the really toxic stuff and that hits 09-10.
So its about house prices.
And if folks are not lowering now, they wont if rates go down.
It will take buyers not refis
and buyers will not buy
and those that do want too probably cant meet the criteria now anyway..
Ladies and Gentlemen, the Bernanke Put is now in place. Everyone please return to your seats and continue consuming and getting in debt. Do your duty. Buy debt. No, no - don't ask questions about the debt or if you'll get your money back. Just buy it.
Lovely. I look forward to being paid in pesos - I mean dollars. Can't wait for $5 a gallon gas or when Wal-mart becomes unaffordable. I assume salaries will keep up with hyperinflation because the economy is so strong, right? Hahaha - oh, yeah, that's right: the extra money will let the wealthy buy a spare weekend yacht or something. Whatever!
At least Countrywide was upgraded. All those bank runs must be good for business! "Sir, please be calm! I know you want your money back, but we don't have it. We DO have debt for you, sir. Lots of it. Would like an Option Arm? How about helping bailout a hedge fund? Debt for all!"
i heard some rumors about british liquidating their RE investments in slovakia even before 5 year free tax period ends. yeas austria is heavilly invested in cee, but i think this stocks are just stocks, overall economy is going good, you know we produce goods in cee and its mostly being controlled from austria
sorry, not the rest of the world, but China, OPEC, Africa, South America and in a dirty way Japan.
all that matters - oil and consumer imports.
what does the US import from OZ and Kiwi?
from an email just sent out by CFC's Area Sales Manager (East Coast)
"Fast and Easy available to 95% LTV with 680 or higher FICO, full doc pricing with no income or asset verification!"
Fed had no choice - arguing moral hazard should preclude action when the credit system is shutting down is like worrying about hair loss when on chemo. It's awful, but the alternative is worse.
BTW - hearing that several large credit hedge funds are gambling for redemption and doing stupid things in markets they know nothing about. Just another case of this crisis rhyming with the S&L one.
The effective FF rate has been trading between 4.5 and 4.75 for the past week. Its a stealth rate cut that they did with all their liquidity injections.
I have to say I am really surprised the Fed caved so soon. I would have thought a little more pain for speculators would have been appropriate. Maybe the 800 point drop in the Nikkei coupled with the yen approach 112 forced their hand.
Maybe it gives them 30 days, but so what? It's not like any of the players "in the game" are going to do the right thing and mark to market or anything else. It'll just give them more time to shred documents, make a few more bad deals, maybe get that Cayman Island account fully set up, etc. The key problem with giving people time to "save the system" is assuming that the people who created this mess WANT to save the system. They don't - they'd take the last bit of bread from a starving man just because they can. That's the way they are - predators, and nothing more.
The Fed has lost a lot of credibility with this move, and a rate cut in Sept would be a disaster: massive inflation, or I should say stagflation since salaries will not keep up, along with increasingly crooked financial operations who know that every deal they make can only go right: either they get rich, or the government bails them out.
The point of the discount window is to provide last-resort liquidity, at a high enough penalty rate, to minimize moral hazard. In other words, the interest rate must be high enough so you only take the loan if you believe your collateral will be good enough in the absence of a liquidity crisis.
Now, the discount rate has been cut to an entire half-point below the rate on a 30-year fixed-rate 20% down high-FICO mortgage. In other words, the idiots who hold the toxic sludge crappy mortgages get to put them up as collateral for a loan that charges significantly less than the rate on the highest-quality mortgages.
That totally moves us from last-resort liquidity lending to backdoor bailout.
rcyran - 'rguing moral hazard should preclude action when the credit system is shutting down is like worrying about hair loss when on chemo. It's awful, but the alternative is worse.'
You've been reading Willem Buiter, haven't you?
'The observation that a government intervention creates moral hazard is not the end of the argument, but the beginning of an intelligent discussion.'
Insofar as the rate cut and the equity markets are concerned, market internals remain negative.
Financial earnings are going to be down, and thats 20% of the S&P 500, closer to 40% if you include the financial subsidiaries.
General retail is being clobbered and auto sales are in the tank. Consumer sentiment is falling. Based on Philadelphia results, we can expect the ISM manufacturing index to start falling soon.
On top of that, we're going to have continued credit and liquidity problems, with occasional very public blow-ups along the way, all very confidence-inspiring.
So, these are just some of the reasons this year isn't going to end well, and that's why Conjure Bag and I say Recession Q1-08.
By the way, Tanta, Conjure Bag is thrilled at the notion he might actually receive a SPAM T-shirt if he wins.
Actually, I've just been re-reading my Kindleberger and W. Bagehot
"In a crisis, the lender of last resort should lend freely, at a penalty rate, on good collateral."
So the Fed is doing part of what he prescribed. The questions that need to be asked are, "is the Fed only accepting good collateral?" and "Why reduce the penalty rate?"
They're just now finding out people run out of money at the end of the month? I'll bet these fuck-ups have
yet to figure out that rising gas prices causes inflation.
Almost every product and grocery store item has gone up 10 to 15 percent, just in the past year. Somehow, these "experts" didn't realize until now those kinds
of cost increases will crash the
already fragile economy.
Since Bush took office, millions of jobs have been shipped overseas only to be replaced with lower wage "McJobs." Many people work more than one job at 60+ hours a week
to pay for the basics.
How long will people be able to do this? Maybe you can manage this kind of employment through your 20's and maybe your 30's,but by the time you hit 40, your health is going to be shot, and then you're really fucked because you either have no health insurance or crappy, bare minimum insurance that doesn't cover much. The tip of this iceburg is just starting to melt, just wait to see what another six months of more inflation and more foreclosures
brings!!
I am looking for a house in the DC mSA have been for four years now....prices still high, homes overvalued based on incomes..."
According to the Shiller-Case housing index data on the Washington, D.C. MSA (latest reading from May, 2007), if you had bought a house there 4 years ago it would have appreciated by 55%, even after the recent softening of home prices.
And according to Federal Reserve interest-rate data, if you had gotten a 30-year fixed-rate mortgage at that time it would have been 5.48%.
I agree this only reasserts the moral hazard that caused the underlying inflationary crisis in the first place. Bankruptcy is the orderly method that is available to corporations to continue operations. Bankruptcy should be the preferred solution for every insolvent corporation - none are too big to fail. Defend the dollar!
To some degree we are where we are now and the TINA principal has to apply. Tina=There Is No Alternative.
Welcome to reality.
So far the Fed is only lending to the many desparate institutions. Some are going to fail and some are going to be saved.
If you believe that the Fed can now stand aside and watch mortgage lending go down the drain without destroying your way of life then you are really living on a different planet to me.
Todays Discount window change was a very very minor change. The Fed has already been supplying cash at .5 below the target rate for several days. The whole market of people who know anything about money knew that of course way before today. A tiny amount of money is said to be currently being raised at the discount window. That might increase astronomically but so what? These are so far only temp loans.
Lets get a grip on this.
Doing less than is being done now would be a total world disaster.
Of course that does leave the questions as to why the fuck this was allowed to happen. But for now we have to deal with reality rather than wishful thinking about some pet outcome where people can buy houses for next to nothing in a crash.
Ha, I told you guys this was going to happen earlier this week after revisiting Bernanke's 2002 deflation speech.
At the end of the day BB is betting that liquidity to keep the economic wheels turning does not lead to inflation over time b/c those wheels continue to feed productivity gains that lift all boats. Innovation and invention will save the day, he believes.
He better be right about that b/c otherwise the Marxists are gonna be pissed!!!
Let me get this straight. There is an overnight REPO inter-bank rate, set at 5.25%. There is a Fed discount window that used to be 6.25% and now 5.75%. Why someone in their right mind would pay more if cheaper overnight rate is available? Why any prime broker-dealer would ever use discount window?
Now, REPO apparently requires hard collateral such as US treasuries. Fed now is willing to accept MBS, which other banks refuse to lend against! That means we do not have a liquidity crisis! If that was the case REPO rates must have been higher than Fed discount window rates. We have a crisis of banks not having enough good collateral and not trusting each other with all this MBS junk.
That perfectly explains why effective overnight rate has been well below Fed target rate. There is no demand for the inter-bank funds, demand that can be backed with required collateral!
With that, even if Fed lowers rate to zero it is not going to help at all. Banks will not be willing to lend to each other because there is no collateral to lend against!
I fear this blog is turning into a Koolaide stand.
This too will pass,... like Aunt Mary's fruit cake.
For the past two years+ CR and friends have been accurately calling this train wreck. So, my brillient friends, what are the potential ways out of this mess?
CR, thanks for the ideas on modifications for performing borrowers with Alt As.
What I can't figure out is how to profit, or at least cover my 401(k)'s ass, in this pending market. I just not a short seller.
It's unbelievable how the Fed has changed its tune since last week's FOMC meeting. How quickly things change!
What I want to know is what "news" came out between then and now that made the markets move so much? I know that a few rating agencies downgraded mortgage backed securities. But was this enough?
Seems to me that a lot of "insiders" got wind of information (non-public) and started a stampede. Any thoughts?
" In these circumstances,although recent data suggest that the economy has continued to expand at a moderate pace,the Federal Open Market Commitee judges..." I guess this must mean:" We were wrong,but it is NOT our fault."
Bad move. Smacks of panic. US Dollar is down in response. The move will fuel inflation and force the Fed to increase rates later.
Short term gain... long term pain.
first
Calamity!
Though seriously is there any way they can present themselves as having the slightest idea about what's going on?
Dollar falls after Fed announcement...
Dollar Falls Against Euro After Unexpected Discount Rate Cut - Bloomberg.com
BOJ going to buy more $$$$'s?
rt
Told ya so.
You wouldn't listen;
"They can't because of inflation"
"They can't because it will weaken dollar"
"They wont until the economy weakens more"
I Told you this had potential systemic issues and needed to be done.
damm!!! no first for me!
arghhh
The Fed just lost any shred of credibility it had left.
Yeh, 800 odd points off the Nikkei last night and then this. But of course the big boys knew this in advance, made a killing yesterday in the last hour, and today in the first, and now they are already selling out to the suckers. This wont help long term. Does nothing to address the underlying causes of the problem which will continue to keep taking whacks at the foundation of the global financial system and US consumer economy.
Yen is moving back up, rally in financials is already dying. This credibility busting move will backfire in the end.
I'm confused. I thought the rate was 5 1/4. Now with a 50 bps reduction, it's 5 3/4. Huh?
Or what's the difference between the "primary credit rate" and the "federal funds rate"?
Can someone explain? Thanks.
"the Federal Open Market Committee judges that the downside risks to growth have risen appreciably." This change in language is why the markets are gapping up, not the drop in the discount rate. Fed is telegraphing a rate cut. The Greenspan put is alive and well.
Can someone explain? Thanks.
Discount window rate is typically 100bps higher than the Fed Funds target rate.
jb
Dear God, I've discovered slow's secret identity: it's Alan Greenspan!
Agree with the poster above, this smacks of panic. This will only make things worse.
Let's cool our jets people.
This is not a cut of the fed funds rate.
It's a cut of the discount window rate, which is still above the fed funds rate.
If banks borrow from the window they still do at a penalty. They made the penalty less steep to ease credit conditions, but they still borrow at a penalty.
This move eases credit conditions, but still penalizes the banks who made bad bets and use this option.
One can perhaps argue that they will cut the funds rate at or before their next meeting, but that is separate issue.
jus me - the primary credit rate (aka the discount rate) is the rate at which the Fed lends to banks. The FF rate is essentially the rate at which banks lend to each other.
The key rate is the FF rate, and the Fed pretty much told everybody that they will cut it at their next regular meeting on 18 september.
Working title of Cramer's next "Mad Money" show:
"Ben B. and Will P. are my beotches"
On a related note, is it possible to offshore the Federal Reserve Board? I think that their function can be handled by the very well trained and intelligent MBA's in Taiwan or India for probably 90% cost savings.
Or even fully automate the Fed Rates entirely. If the stock market goes down by more than 5%, just automatically drop the rate 50bps. Repeat as necessary (no rate increase software will be required until the next upgrade, apparently).
Seethingly yours,
g
Gary you got it! muhahahahahahahah
Why does the Fed assume that people don't have noses that actually can smell things.
Wilshire 5000 up 1.69% and S&P500 up 2.04%. If they give free money to the market what do you expect?
The growth of the market today is likely to be offset by a fall in the Dollar. Traders might think they're richer, but when compared to the rest of the world the share prices will likely decrease.
While the US market might think this move is a good thing, the international market won't.
Well, that's that. The Fed saved us, and FED apparently (DSL too.)
Countrywide fell further than FED and DSL and they got the same bounce up...
PS- does anyone know if anything special was making the European markets rally at the end or was it just opportunistic buying?
They are also allowing AAA MBA agency paper. This is a lifeline to Countrywide, Thornburg et al.
"Calamity" Ben to the rescue!
Does the 50 basis point reduction in the primary credit rate address this fundamental longer term embedded structural problem ?
Wal-Mart CEO H. Lee Scott Jr. says customers are "running out of money."
Earlier this week, consumer juggernauts Home Depot and Wal-Mart reported softer than expected earnings.
Penned the New York Times, "the sober forecasts reverberated across Wall Street, sending the Dow Jones industrial average and the Standard & Poors 500-stock index down by nearly 2 percent, with the Dow dropping more than 200 points. Shares of both Wal-Mart and Home Depot fell around 5 percent.
"Economists said the sluggish performance of the chains Wal-Mart missed its profit forecast and Home Depots earnings dropped could signal broader troubles in the economy."
Buried in the article was a sobering remark indeed: Many customers are running out of money at the end of the month, said H. Lee Scott Jr., the chief executive of Wal-Mart.
In Los Angeles, economic concerns hit close to home.
Anxious customers of Countrywide Bank jammed its phone lines, branches and website after the nation's largest mortgage lender -- which owns the bank -- announced it was facing problems from a credit meltdown.
"Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable," wrote the LA Times Friday. "And federal regulators said they weren't alarmed by the volume of withdrawals from the bank."
Even though its a different "window", the fact is that the Fed has now officially loosened monetary policy and is injecting more money into the marketplace.
Trust me joe sixpack you don't understand how serious this was (again).
LEt's see, we now have almost a month exactly until the next announced Fed meeting, where it looks like they just basically told us you can expect a rate cut. Does anyone here think we can make it through a month of the kind of crap we've been seeing to even get to that meeting before pure desperation sets in and a cut is enacted anyway? I for one sure don't and I don't believe the Fed is the least bit credible on this, saying everything is just fine one day and then cutting the next. I mean, did one day change things from, no effect on the economy to, downside risks appreciably higher? Give me a friggin break.
Run Forest run!
The bad loans that people made are still there. This is not going to solve any problem. A majority of ARM loans is due to reset from September through April. What are they going to do then, lower the FFR to 1% and watch the dollar turn into Monopoly money and inflation go to 10%. The fact that people cant pay their debt has not changed. This is not going to allow those CDO's and MBS deals to somehow miraculously be solvent because borrowers can now pay their mortgages.
heads up all, the cut was to the discount rate, NOT the target rate.
This is the symbolic Discount Rate, not the Federal Funds rate. But that will happen in September, if not sooner.
"The Federal Reserve, reacting to concerns about the subprime lending crisis and the volatility in the financial markets that have resulted from it, announced Friday that it is cutting its so-called discount rate temporarily by a half percentage point, to 5.75 percent.
The discount rate is the rate the Federal Reserve banks across the country charge qualified lenders - mainly banks - for temporary loans. It is largely symbolic.
The central bank did not change its more closely watched federal funds rate, which affects rates that consumers pay on various types of loans. That rate remains at 5.25 percent.
The Fed added that "although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably" and that the Fed was prepared to take more action if necessary.
I agree Geoff, seems to me they are sugar coating, or buying time as they say...and the rate are climbing just look on market watch all arrows point up.
brain23-
um, isnt that just the point? if everyone can make their mortgage payments then the MBS market will work the way it should. this all started because people can't make their mortgage payments.
come on people, get with it! debtor nations have one option and one option only....inflation....here it comes...
50 bp cut in sept and another at the next meeting...with perhaps an emergency cut in there somewhere...
FFR to be at 4.25% at least by year end.
market should rally on a pure NPV basis alone
the big question is how does the long end react.
i just can't wait to start raising my prices across the board, keep salaries constant, and pay down my 30 year fixed with inflated money...
yeeehaw!
We were obviously confused about which rate got cut. Do you think the market did as well? The initial jump was huge but things are paring back quite noticeably now.
I'm also beginning to wonder whether the market, now off its adrenaline rush at the beginning of the trading day, is now beginning to question the Fed's credibility.
Shredding credibility is right. For all the people that say we have to re-establish liquidity, here's a modest proposal that the Fed could adopt instead:
Force the offending cash-short financial institutions to issue massive converts rather than repo ACBP trash (AAA-rated by WHOM?). Buy the converts outright.
The bank gets cash, everyone knows the government bailed them out, and the shareholders get screwed with dilution.
Now, what, exactly, is wrong with doing the above rather than tip-toeing around the word bail-out?
All, I added a short explanation of the discount window from the WSJ.
Maybe more important than the cut in the rate was the lengthening the term of the loan from 1 day to 30 days. Banks can now give the Fed some subprime loans - and pay the Fed 5.75% - for 30 days. That seems very attractive.
Best to all.
We must be headed to a red tape at the end of the day for the Dow - we just ticked over >300 visitors!
Brian,
inflation is already 10%.
Yes they will turn USD into monopoly money, because that WILL allow SOME people to pay their debts.
I personally think inflation will hit 50-100% in a couple years, but maybe it's wishful thinking.
OMG...did anybody hear that chick from federeatewd on CNBC say that half the people that own homes own them outright?
LOL!!! What a bunch of crap.
Economists React: ‘Lifting the Wizard’s Curtain’ - Real Time Economics - WSJ
Federated i meant
There's definitely another shoe to drop. Bottom line, is this cut going to fix what's causing the credit squeeze problem. No. Only a return to a stable equilibrium in the housing market will do that, and that's still quite a way off. Today = dead cat bounce. The key with their statement though and the reason why I think the market rallied today is that last sentence in their statement where they acknowledge that growth has weakened appreciably. That's a clear heads up that the more well known target rate will be cut, likely at their next meeting-IMO.
cross post:
Just as the Iraq surge is designed to provide some breathing space and stability to reach a political settlement, todays action by the Fed is designed to give the markets a little bit of breathing room to unstuck the gears of the credit market and work things out. The Fed took the intermediate step of cutting the rate at the discount window by 50 basis points this morning to 5.75%. This is a much more targeted move than lowering the Fed Funds rate. Essentially the Fed will now loan money to banks, and will accept mortgage backed paper as collateral. It will do so at a higher rate than the Fed Funds rate, but less of a penalty than before. It also preserves the Feds credibility much more than a cut in the Fed Funds rate would have. After all it was less than two weeks ago when the Fed came out and said they still had a tightening bias, that the risks of inflation not falling were bigger than the risks to the economy from the tight credit conditions. This is to some extent a bailout of those who made dumb decisions with reckless lending, but less so than a cut in the Fed Funds rate would be. With that statement the Fed had put itself in a bit of a box, but this move is a partial way out of that box. This is also a very important psychological boost to the market. Right now psychology is extremely important. Moves like yesterdays 350 point swing are not driven by changes in economic fundamentals, but by changes in the mood of the currently very bi-polar market. Clearly the move by the Fed has cheered up the mood on the street as witnessed by the market opening sharply (+200 as I write), and up over 500 points in the last 4 trading hours.
The question now is if the banks, investment banks, hedge funds etc will use this window of stability to arrange work outs of lots of the bad paper that is out there. Yes somebody will still have to take the hit as the market starts to clear. But the hit can be done in a more orderly way. It is actually important that there be some that do actually take a hit, or the Feds action will be seen as simply an invitation to disregard risk in the future. However, to the market a bid that is at a price that is not as nice as you would like is better than no bid at all, and the no bid situation is what we have been facing for the last week or so. Lets hope that the market participants use the Fed surge more wisely than the Iraqi government has used the U.S. troop surge. If they dont the conditions we saw over the last week or so will return. If they do, the basic underlying fundamentals of still very strong earnings (out side of the Financial sector where one must assume is where most of the landmines are still hidden) and low interest rates will start to reassert themselves.
Ok so the Discount Window rate got cut and the time to repay got extended from 1 day to 30 days. Now what? Hos exactly is this going to ease the liquidity crunch, how will it stop all the MBS from continuing to devalue and all the pier loans to turn into bridge loans. I just don't get it.
I don't know if I'm comfortable with a bail out. Taking away the risk in a free market capitalist market is like taking away sin in religion. This is not going to help out anything except the big banks. Not the consumer who still cant pay their mortgages. This is just the overnight rate to banks.
I think folks over-estimate what the Fed did today - they didn't rescue anyone... all this little shot does is allow the markets to trade through... it was in effect instituting what has been going on through TOMO for over a week now... the open window is cheaper but FF is still the same - at least for now.
I was thinking about this yesterday but too busy getting a kid ready for a week long wilderness canoe trip to post... wondering what the world will look like when he gets out.... My guess was the Fed could care less if the market is 2000 points higher or lower then as long as it trades through in an 'orderly fashion' and the last few weeks its been anything but orderly - both up and down. Credit markets worse than equities of course...
FWIW - I think it would be pretty hard to be up/down as much as 2000 points on the DOW over a week and have the markets remain orderly... but you follow my drift.
Anyway this action is similar to what the ECB did last week... open the window & say 'have at it boys - now play nice'.
JMHO.
FJR-
I agree. This does not help the mortgages from getting paid. Resets are still going to happen.
I don't know if I'm comfortable with a bail out. Taking away the risk in a free market capitalist market is like taking away sin in religion.
I suppose the move is geared towards that most important of all goals - "The survival of the fattest".
From my link above to the econblog at the wsj
"We can only speculate about this, but the decision to move the primary discount rate rather than the Fed funds rate may indicate that the Fed anticipates some institutional failure as soon as today, probably not a bank, but rather an institution that has substantial bank liabilities that may not be able to clear. Markets should not be calmed by this tactic. Unlike the Fed funds rate which affects all banks cost of funds a discount rate cut only lowers the cost of emergency borrowing by institutions in distress. This move is not going to provide any relief to the overall economy. However, we believe that the Feds action and statement today raise the odds of a reduction in the Fed funds rate at the September FOMC meeting, or perhaps even before."
I believe this about sums up what's going o
jb, carlomagno - thanks.
I'm a bit confused, even after reading the explanation of the discount window. Why is the rate described as "symbolic"? It's an actual rate used for lending money by the Fed, right? What's symbolic about it?
I think folks over-estimate what the Fed did today - they didn't rescue anyone.
It is still a loosening of monetary policy. It will bite them (and us) back.
We are all f**cked.
When our own president gets on the box and says "that all the evidence points to a soft landing" when everything in fact points to cash - where is our credibility as a nation.
It may be ok for him with his 100,000 acres of land in Paraguay but what about the rest of us?
Geoff - the run on Countrywide may explain it. Tanta gave her opinion earlier on why Countrywide is too big to fail. First Countrywide, then a few others, and then all hell like no one has seen before breaks loose.
gng:
it's a symbol of Fed's commitment to keeping the financials fed. That's why it's symbolic.
I think MOM is on target.
dryfly, I think this does provide more liquidity - there have been two problems: 1) a credit crunch (no help) and 2) a liquidity crisis (this does help).
Also, the Fed has changed their bias from a rate hike to a rate cut for the Fed Funds rate (skipped the neutral bias stance!). This is part of the communication strategy - tell everyone what you are going to do before you do it - so a rate cut in September is VERY likely now.
Best to all.
Is there any way to find out who is borrowing from the fed with these injections?
because of the servicing headache....Please. that's it?
That's the golden opp in this debacle... someone with credability gets to swoop in an take that liability for a song, and reap the rewards....
Dis - I utterly concur. It's not a positive sign to me. My investor confidence just took a massive drop.
Yep, IMNSHO MOM pretty much nailed it.
Wilshire 5000 now up only 0.92% - it has lost half of its gains already that it made today.
Ever had too much sugar? Massive feel-good rush followed by irritation and regret.
Maybe if the Fed "fed" the market less sugar...
it's either CFC or a top five bank...
What would you choose?
This is not a bailout GEEEEEEEEZ.
This is part of the Federal Reserve's Mandate. It is exactly what they are supposed to do.
I am not for bailouts(from politicians).
This was essential for the stability of the banking system.
My Short is getting creamed though
Also - this reminds me of hockey... I have season tickets to a local college team & go almost every week. One observation - Ben would make a terrible hockey referee.
More fights occur because a referee is too cordial & 'talks' to players too much rather than icing them down in the box early & often. Seriously, bad refereeing causes more fights than goonery. Everybody's a potential goon in hockey if they can get away with it - same with markets.
Message to Ben - its probably too late, you lost control of the game... but 'next time'... blew the whistle early & often, then you won't have to wrestle them to the locker room later.
Now when will my season tickets arrive, its almost September?
cut in sept is 100% certain, if not sooner in an emergency meeting.
here come the helicopters. no doubt about it.
CR:
rate cuts do what to the long end?
long end could explode with inflation expectations...
OR
FCB specifically asia, could double down with GOVT purchases and keep things inline?
a coordinated moved to keep the us consumer consuming?
seems logical for all parties right?
dis, excellent summary!
Thanks for posting.
THis is not a bail out yet, but its heading that way. From now on why dont we give low rates to high risk individuals and companies and high rates to low risk individuals and companies.
"When our own president gets on the box and says "that all the evidence points to a soft landing" when everything in fact points to cash - where is our credibility as a nation."
I thought that too. A complete joke - although what else is he going to say.
Can anyone recommend a good stock that deals in Grease & Lubricants..with the Printing press running full steam ahead I figure there might be a run on such a product.
So , the 11billion cfc was Dip financing>>????
MOM is right.
Big prints in CFC yesterday...rumored PPT intervention, and now the window cut.
The FED couldn't afford to have the hedgies burn CFC down in the short term. Its a huge gamble on Ben's part, but I think that its a good one. We are going into recession, and there is nothing that can be done to save us from that fate. Ben's just trying to make it an orderly entry into the abyss.
gng - it's symbolic because almost nobody will use the discount window, except if the WSJ assessment posted by dis is correct. The key issue is that the Fed has clearly signalled that it has changed its stance on interest rates and that it intends to cut the Federal Funds rate in September (well, maybe not certain but the odds now look much higher than they did yesterday).
USD Dollar now fallen 0.81% against the Euro.
If trouble at CFC is the reason for the discount rate cut, somebody just made a bad call:
http://tinyurl.com/yw7jxr
I don't understand what they mean?
"We can only speculate about this, but the decision to move the primary discount rate rather than the Fed funds rate may indicate that the Fed anticipates some institutional failure as soon as today, probably not a bank, but rather an institution that has substantial bank liabilities that may not be able to clear."
What is an entity that "has bank liabilities"? Are they saying that if a random widget-maker or retailer has a large account in a bank and needs to pull money because they're in distress, that the bank may not be able to return their deposits and therefore needs a discount window to deal with it?
CR said,
"For example, banks may submit mortgage loans, including subprime loans that arent impaired."
CR is that only AAA sub?
Ok, too big to fail:
WellsFargo, Chase, BofA, Merrill, Goldman, MorganStanley, Lehman, Bear, Freddie, Fannie.
I missed the part where Tanta said that CFC should be on the list, so is today's victim WAMU?
Geoff , I think you are right.. yesterday's reversal in the late afternoon , coupled with the premarket action prior to the discount window cut of 50 bps seemed to be known to some folks. I noticed DOW futures move off the lows quite noticeably prior to the announcement . Couple those items with the fact that theFed move was premarket, on Option Ex day no less , and the attempt to manipulate markets and force a short squeeze seems pretty clear at least to me. However , the pullback from the giddy moments of this morning indicate the move isn't working out as planned . Ten year T Bill yields are moving higher and the dollar got hit hard after the surprise move ... I think the Fed panicked , has lost credibility and this doesn't change the real issues for lending or housing. As someone on the board correctly noted "What's next ? " 50 bps move on the Fed Fund rate in Sept ? So what , that won't bring back subprime , Alt A or any other screwy loans products most smaller lenders feasted on in recent years. And it won't bring back First Magnus or AHM either . Nor will the builders benefit from this cut today or 50 on the fed fund in a month... they still won't sell homes b/c buyers are out of the market.... and it doesn't change the ARM reset problem one iota.
Thanks dis - that was exactly what I was trying to say. This action alone is NOT a bailout. There might be bailouts coming but this wasn't it.
This action was providing enough lube to keep the gears rolling. And like MOM's post above it should not be viewed as a 'positive development'.
someguywhoknows said,
The FED couldn't afford to have the hedgies burn CFC down in the short term. Its a huge gamble on Ben's part, but I think that its a good one. We are going into recession, and there is nothing that can be done to save us from that fate. Ben's just trying to make it an orderly entry into the abyss.
Spot on I believe.
If DIS's comment is an accurate reflection of the situation, that kind of move should spark a sell-off not a rally, except of course to the extent that it ensures a rate cut. But wait, if it ensures one rate cut, what exactly is one small cut for mankind going to do? Nothing really. I think that if they are going to go with one, it opens the door to the going with many option, and almost ensures it. If you cut one, and it does nothing, which is what will happen (maybe not to the markets, but nothing to fix the underlying problems) then you either have to go all in, or look like a complete moron who gets caught in between.
So, are we now saying that we are going to go back to a 2.25% FF rate? Good god, that would be madness - did we learn NOTHING from the past few years?
"Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets."
Next they'll start accepting REO's
Ben must have been thinking of this song (adapted from Eric Clapton):
Let It Grow
adapted by Ben B. from Eric Clapton:
Standing at the crossroads, trying to read the signs
To tell me which way I should go to find the answer,
And all the time I know,
Plant your [money] and let it grow.
Let it grow, let it grow,
Let it blossom, let it flow.
In the sun, the rain, the snow,
[Money] is lovely, let it grow.
Looking for a reason to check out of my mind,
Trying hard to get a friend that I can count on,
But there's nothing left to show,
Plant your [money] and let it grow.
Chorus
Time is getting shorter and there's much for you to do.
Only ask and you will get what you are needing,
The rest is up to you.
Plant your [money] and let it grow.
If the dollar weakens it will cause a monstrous trade imbalance. Inflation will roar ahead and the fed will HAVE to increase rates. Are we going to go back to the early 80's with 20% loans?
This whole situation is deflationary. Chances of re-inflating the RE market are slim and none and slim just left town.
Are we going to go back to the early 80's with 20% loans?
Ya but the house will be a lot cheaper...hopefully ..either way..Our Banker China will be calling us soon Guaranteed.
f the dollar weakens it will cause a monstrous trade imbalance. Inflation will roar ahead and the fed will HAVE to increase rates.
My point exactly. The Fed may have to increase rates again even before the end of the year. That sort of action can't be good for people's confidence in the Fed's intelligence.
Too little, too late.
The sentiment is set--investors' eyes have been opened. No amount of FED tinkering will help at this point.
Didn't Japan's central bank have neg interest for a time, to absolutely no measurable effect?
A market based upon speculative glee rather than underlying value is doomed to crash--the later the harder.
Wal-Mart CEO H. Lee Scott Jr. says customers are "running out of money A snider person than I would say that they ran out of money quite awhile ago. Now they're running out of credit.
From the WSJ:
At the risk of lifting the wizards curtain and ruining this gesture, I need to point out that a cut in the discount rate is not an ease, and in fact from the standpoint of mechanics is barely relevant, as borrowing at the window was minimal through Wednesday. The Fed is no doubt hoping to capitalize on the past. Prior to 2003, when the discount rate was lower than the funds rate, cutting the discount rate was the most powerful tool in the monetary policy toolbelt. Indeed, prior to 1994, when the Fed began announcing changes in the funds rate target, a discount rate move was the ONLY move that was explicitly announced. Many market participants will think of the discount rate cut in those terms, which is not the correct way to consider it. Instead, this should be thought of as another (indeed, probably the last) intermediate step short of an ease. Stephen Stanley, RBS Greenwich Capital
"The eurozone's economic recovery has lost significant momentum according to weaker-than-expected growth figures released yesterday."
Follow the leader anyone?
This whole situation is deflationary.
Yes and no. All things being equal the subprime meltdown is deflationary. But things aren't equal. Overseas investors are going to take their money away. This move will reduce the value of the dollar and cause inflation.
Imagine - America is in recession and the Fed has to increase rates to battle inflation. Not good.
Brian23 THis is not a bail out yet, but its heading that way. From now on why dont we give low rates to high risk individuals and companies and high rates to low risk individuals and companies.
Look, I understand your feelings, but they are not in fact rational. The Fed is doing what it must do.
A run on funds is survivable - the money is going to end up in FDIC-insured bank accounts. A bank run is not survivable; the result would be the 80's. It only takes one bank shutting down in these circs to spark more bank runs.
I want to remind you that a bank holiday now would be a red flag that would produce runs on multiple banks as soon as they reopen. The Fed is doing what it has said it will do - maintain liquidity. If it doesn't, you are going to see something worse than the 80's.
I think a more appropriate song is Quicksilver Messenger Service 'Fresh Air'
have another hit of fresh air...
So again, if CFC is on the brink, how does putting up collatoral of subprime loans to the fed for some emergency money save them? There are no more new loans in their market, they hold a ton of forclosures and many more are headed that way. I am not sure how they will be able to escape the inevitable. But I guess now they have 30 days of the discount window to figure it out.
To clarify (I crack myself up when I write things like that):
I wasn't saying that Countrywide Bank was too big to fail.
I was suggesting that CFC mortgage servicing operations are too big to fail. Or, perhaps, too big to be digested by anyone else in a big hurry. Welcome to the part of reality were mortgage loan servicing ain't tradable like stocks.
I know what the Fed is doing is a necessary evil, but its just looks like its headed for a bail out. It would be terrible.
Didn't Japan's central bank have neg interest for a time, to absolutely no measurable effect?
I remember that. The Japanese central bank was stupid since it was supposed to ensure price stability. Deflation isn't price stability.
With interest rates at zero they still had other options - like printing money - but they didn't act.
Our Banker China will be calling us soon Guaranteed. - Bork
China knew in advance as did ECB & BoJ... had to have known. I would bet money there were late night discussions.
China doesn't look at their reserves as 'savings'... its ammunition. BB just confirmed to them how damned good their position is (they really got us by the short ones for sure).
Anyone thinking there will be protectionist actions taken against China - think again.
Repeated from previous post:
Mr. Poole, meet Mr. Paulson
(quote)
Aug. 17 (Bloomberg) -- Goldman Sachs Group Inc. said the Federal Reserve will cut the overnight target interest rate to 4.5 percent from 5.25 percent this year, citing ``sharp tightening in financial conditions'' and expectations the economy will slow.
The Fed will reduce the rate by at least 0.25 point on or before policy makers meet on Sept. 18, economists led by Jan Hatzius and Ed McKelvey in New York forecast in a note today before the central bank reduced its discount rate.
The Fed will cut another 50 basis points after that, possible at the next two meetings in October and December, McKelvey said in an interview. The Fed today cut the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.
(end quote)
Japan has structural problems in the banking system, it was not CB interest rate policy that caused deflation, but a long term credit shutdown in all domains (retail, real estate, manufacturing, construction).
Japanese bank's loans outstanding decreased almost 30% since 1997.
Savings didn't change.
Banks replaced loans with government bonds on which the Japanese Ministry of Finance bought US T bills and Agency MBS.
come on, analyzing japan's neg interest rates by saying it did nothing is bad analysis - who is to say that without that their economy would have been the same? oh wait, maybe it would have completely collapsed instead of muddled through.
somebody please stop the madness on this topic:
falling dollar = inflation
yes i know thats what macro econ 101 says.
but we've had nearly a 50% drop in the dollar vis a vis the euro over the last few years and where is the inflation in imports ex. oil?
it hasn't happened so why will it happen now?
Mike Englund, chief economist at Action Economics, said: I think it is a brilliant move. It will appease those who want the Fed to do something and those who want it to do nothing.
"With interest rates at zero they still had other options - like printing money - but they didn't act."
Yes they did, they were, at least til recently, essentially printing money. But what happened is that the money wasn't going to domestic Consumption or investment, but was borrowed and invested just about everywhere else, from New Zealand to Iceland...
Tanta - on the subject of CFC servicing. That servicing may not be profitable at the rates in the contracts. Might the only way out be BK for CFC, with a sale of the servicing infrastructure, so that the bankruptcy allows the servicing contracts to be renegotiated with higher fees? I can't imagine the nightmare of trying to negotiate with a bunch of SPVs to increase the servicing fees in order to keep CFC a going concern. I would think that a BK voiding the old contracts, and the purchaser of the platform setting a new rate, would be a heck of a lot easier.
I know what the Fed is doing is a necessary evil
I don't believe so. The Fed has little "wiggle room" with a tanking Dollar and inflationary pressures.
I think a better remedy would be to let companies go bankrupt and for the sharemarkets to fall as far as they should go.
It wouldn't be pretty, but it would work.
Imagine - America is in recession and the Fed has to increase rates to battle inflation. Not good.
One Salient Oversight | Homepage | 08.17.07 - 11:09 am
FWIW, I concur and have thought that same thing for over a year now....
It seems that Helen from FT Alphaville reads these comments.
She nicely summarised them at:
FT Alphaville » Blog Archive » The Fed steps in….
Overseas investors are going to take their money away. This move will reduce the value of the dollar and cause inflation.
counter intuitive
the RACE for CASH acatually increases the value of the Physical dollar in the short term...
Asset's and credit market's contract, while CASH has another day in the sun(been awhile)...just MO
but we've had nearly a 50% drop in the dollar vis a vis the euro over the last few years and where is the inflation in imports ex. oil?
RE, healthcare, schools, stocks? ever heard of those?
inflation is not what the government tells you, its what you see in shops.
inm germany the milk is going to increase 50% in price and bread 20% during the next year, yet government says it just comprise 1,4% of the CPI so everything is fine
Several consumer deal sites had information that Countrywide was in trouble. A lot of people on those sites had opened money market accounts and CDs for the premium yields offered by Countrywide Bank. My guess is the amount of withdrawls was going t create a run on Countrywide bank and the Fed had to bail them out to stop the fear from spreading.
Mike Englund, chief economist at Action Economics, said: I think it is a brilliant move. It will appease those who want the Fed to do something and those who want it to do nothing.
In other words, no one is actually AT the wheel here.
revro,
since when do you IMPORT health care, real estate and schools??
personanongrata
The reason inflation hasn't reared its ugly head is because the Fed raised rates to combat it.
When I talk about the danger of inflation, what I'm really talking about is the danger of high interest rates.
dollar has to fall against not the EUR but rest of the world - OPEC, China, Japan to cause inflation.
thats absolutely political.
salient:
perhaps, but the dollar fell regardless. thats the basis of these discussions, is that lower dollar = inflation NO MATTER WHAT.
well folks, thats not true as wonderful shown here by the last four years.
as well, interest rate differentials mean nothing in terms of currency values do they?
I use the Euro as a benchmark because it is now the second largest currency in the world.
If the Dollar falls against the Euro, then it is pretty much falling against all currencies.
The confidence is gone.
Confidence.
As in, "Confidence Game."
As in, the jig is up. Lower the interest boom, and buyers still won't drive up housing prices. The MEW and HELOC conveyor rusts away, and the local big-box stores shut down, selling commercial space to Liquidators and Dollar Stores.
Domestic demand for autos and fuel declines as well. Deflation occurs.
Or that might all be wrong, because maybe there is some stealthy value-producing industry propping the economy up, providing employment and existential security to millions of people without us being able to observe it directly. Maybe it's the same industry that has kept construction employment high in spite of decade-low housing starts and completions.
Maybe, but I don't think so.
First thing I thought of was Countrywide (MOM on target I think), then next thing I thought of was that scene in pulp fiction when uma thurman gets and adrenaline revival shot in her chest after she OD'd...
Well there is one way for the currency to fall and for little inflation to occur.
It's called a recession.
Question? Could a hedge fund in distress run to the discount window put up a Ton of Mark to Model CDO's as colateral, buy S&P 500 stocks at the opening and then sell them at the close as in 2:30 and make a few bucks. Can they improve their bottom lines by doing this every day hoping to be more on the upside of tades than on the downside in hopes of improving their bottom line before all of those redemptions hit in Mid September? Is this a possible bail out scenario? I am not sure how this game works but somebody is loosing a ton of money and they fed must be hoping to minimize the loss with lucky trades. Real in the little guy and then fry him on the grill. How many unsepecting 401k holders are on the dinner menue?
"this is not a bail out yet", is very similar to 'I am not over the hill yet, but I can see the other side'.
That servicing may not be profitable at the rates in the contracts.
If that is the case, it would behoove us to ask why that is.
And this crappola about how that's all due to deliquencies we didn't see comin' isn't the right answer.
CFC buys servicing rights from everyone else in the universe because it has had a competitive bid. It had that because it's an 800 pound gorilla with these famous economies of scale and efficiencies and Next Generation Holodeck servicing software and blah blah blah.
So you're right, if CFC can't make money servicing $1.43 trillion, nobody else can take it over and do so.
But many, many billions of that servicing is for Fannie and Freddie. Fixed-rate GSE paper at 0.25% per month.
We're going to renegotiate the servicing fee on that? I think not.
since when do you IMPORT health care, real estate and schools??
but you know, the RE guys, doctors and proffessors, want to make vacation in paris, or buy bmw and mercedes, or just simply have income increase covering the fall of usd
btw. a lot of medical equipment is from europe, ever heard of siemens?. its not just GE.
there was an article about european companies having good bussiness since their high precision and quality equipment is in high demand from all over the world despite the increase in euro
salient "If the Dollar falls against the Euro, then it is pretty much falling against all currencies."
Incorrect. Rest of the world is pegging against dollar, so they are plunging together with the dollar against the EUR
This isn't a bailout, a calamity, or an early warning of calamity. It's also not mysterious, sinister or unexpected.
During a recession the Fed eases to stimulate the economy (started easing in 2001). Done.
Once the Fed is satisfied that the economy can move forward under its own power again the Fed removes the excess easing (started 2004, finished in 2006). Done.
The Fed always overdoes a little on the tightening and winds-up easing a bit in mid-cycle...like now.
If you look at the market-controlled short-term rates you can see that the Fed funds rate is too high, so it's completely normal for the Fed to ease. Not as part of a "rescue" but simply as a response to the level that market participants have established for short-term interest rates.
On this point I tend to agree with CR that the Fed is likely to lower the Fed funds rate sometime soon. I just disagree with him on the outcome, since the effect of lower rates will stimulate housing and relieve a lot of the pressure resulting from ARM resets.
Sebastia
Well, I must bid you all goodnight. It is 1.25am on Saturday morning here in Australia. I hope to wake up in the morning to the news of another market meltdown.
I remember that. The Japanese central bank was stupid since it was supposed to ensure price stability. Deflation isn't price stability.
With interest rates at zero they still had other options - like printing money - but they didn't act.
Since the Japanese seem inable to allow any business to fail, the logical step would have been for the government to step in an assume banks non-performing loans. The BOJ should have then monitized enough government debt to offset the NPL's.
It would have been much better for regulators to not allow the scale of NPL's in the first place. But, instead the government decided to deficit spending. Now household balance sheets are better, banks still have the NPL's on their books, and Japanese public debt has grown to the point that it can never be paid back.
NPL's are deflationary and they are a sticky problem to solve once they pile up in the financial system. By allowing credit to grow faster than the incomes needs to support the growth of credit pretty much guarantees NPLs.
Is there anything to be read into the fact that the Fed statement mentioned that the rates were dropped at the request of the New York (as you would expect) and the SAN FRANCISCO banks? Should I loosen my tinfoil, or is there something to be read into the fact that SF was one of the requesting banks?
servicing is the best thing CFC's got going for it right now.
This is basically a 30 day lifeline to Countrywide . . . . . . for urgent liquidity needs, they can present AAA rated mortgage paper to the Fed and pay a 50 bp penalty over FF for the money.
Have a couple of feelers out and it's not clear whether or not the Fed will accept AAA rated tranches of subprime paper, or not, but supposedly they're not accepting anything and everything.
The 30 days rather than 1-3 days is significant, and speculation is out there that the Fed did this and only this without a cut in FF because they didn't have any degree of consensus on the FOMC to cut the FF (maybe Mr. Poole is long his office pool on the odds of the nascent Cramer head explosion?).
My read is that this guarantees that no mortgage company gets sucked under in the liquity crunch in the next 30 days SOLELY because of the liquidity crisis, which is pretty much what the Fed's supposed to do, IMHO. Beyond that it doesn't do very much . . . . . . wonder how long it will take the markets to figure this out, if in fact this is correct?
Imagine, walking into good ole Wal-Mart with a pocket full of cash, AND YOU CAN"T AFFORD A DAMN THING!
Thanks be
One last thing:
gaborka Rest of the world is pegging against dollar.
That makes no sense. The rest of the world isn't pegging against the dollar. The entire forex market involves the buying and selling of Yen, Euro, USD, Australian Dollars, Swiss Francs, etc etc etc.
You don't need to respond to my response here. I'm off to bed.
Every time the Dow approaches up 100 a big buy program kicks in to run it up. Could it be the PPT?
btw. bourse in prague is falling, us retrieving its investments from eastern europe. the sooner this poison capitol leaves, the earlier RE here will start to fall, its all just debt
is holding gold in us stil illegal? how about jewels?
revro - I noticed that Vienna is one of the few in the red in W Europe, it is also heavily exposed to CEE. Coincidence?
Does the question of propping up prices versus letting them fall depend on your view of the global economy?
If so, I can understand how you can look at the potential in developing markets and how this will have a positive impact on earnings. But, I don't know how you can say this optimism hasn't already been priced into the markets. And, considering our exports I don't see how the US is positioned to take advantage of this. It will just increase the competition.
If you see bumps in the road for the global economy isn't it better to let things deflate some now. Don't worry we'll blow the balloon back up again later. But, if we keep filling it up now it's sure to pop and we'll all be crying.
On this point I tend to agree with CR that the Fed is likely to lower the Fed funds rate sometime soon. I just disagree with him on the outcome, since the effect of lower rates will stimulate housing and relieve a lot of the pressure resulting from ARM resets.
Sebastian
SebASStion,
I am looking for a house in the DC mSA have been for four years now....prices still high, homes overvalued based on incomes...
I have good credit, and cash, no debt.
They could drop the rate to 1% and i wouldnt buy still. Because i do not believe that a reduction in rates will help the following:
ARMs given to unqualified people
I/O given to UQP
UQP cant refi and still afford
many prime have maxed out MEW
many houses still yet to be foreclosed on with the really toxic stuff and that hits 09-10.
So its about house prices.
And if folks are not lowering now, they wont if rates go down.
It will take buyers not refis
and buyers will not buy
and those that do want too probably cant meet the criteria now anyway..
i dont see a help
Lance McDude
seb,
though i do believe I have lost confidence in the fed today even with the meeningl;ess to the public cut..
i do believe now that the fed will cut rates..this 30 day easing will give the CFC's the chance to work something before sept 18..
when i too think it will drop rates.
but the dollar will really tank...and we will head towrd inflation because consumer spending has stopped.
inflation is the answer here people. its the way out.
who cares about a million dollar mortgage when you now make 600k a year?
Ladies and Gentlemen, the Bernanke Put is now in place. Everyone please return to your seats and continue consuming and getting in debt. Do your duty. Buy debt. No, no - don't ask questions about the debt or if you'll get your money back. Just buy it.
Lovely. I look forward to being paid in pesos - I mean dollars. Can't wait for $5 a gallon gas or when Wal-mart becomes unaffordable. I assume salaries will keep up with hyperinflation because the economy is so strong, right? Hahaha - oh, yeah, that's right: the extra money will let the wealthy buy a spare weekend yacht or something. Whatever!
At least Countrywide was upgraded. All those bank runs must be good for business! "Sir, please be calm! I know you want your money back, but we don't have it. We DO have debt for you, sir. Lots of it. Would like an Option Arm? How about helping bailout a hedge fund? Debt for all!"
i heard some rumors about british liquidating their RE investments in slovakia even before 5 year free tax period ends. yeas austria is heavilly invested in cee, but i think this stocks are just stocks, overall economy is going good, you know we produce goods in cee and its mostly being controlled from austria
but the dollar will really tank...and we will head towrd inflation because consumer spending has stopped.
????
salient,
sorry, not the rest of the world, but China, OPEC, Africa, South America and in a dirty way Japan.
all that matters - oil and consumer imports.
what does the US import from OZ and Kiwi?
forgot to mention Southeast Asia as dollar peggers
devalue dollar against foreign currencies
and seperate consumer spending will stop (unless with credit cards)
US imports pelts and shiny rocks from OZ and Kiwi. And sometimes those cool hollow ostrich eggs.
Saving CFC
.. So they can do this??
from an email just sent out by CFC's Area Sales Manager (East Coast)
"Fast and Easy available to 95% LTV with 680 or higher FICO, full doc pricing with no income or asset verification!"
w,
Don't forget Nicole Kidman and Russell Crowe
10 days !! ago the predominant concern was inflation and now it suddenly is recession.WHERE is the CREDIBILITY ??
fjr, those are some mighty fine actors. Put them in the same movie and there's a little eye candy for both spouses.
Fed had no choice - arguing moral hazard should preclude action when the credit system is shutting down is like worrying about hair loss when on chemo. It's awful, but the alternative is worse.
BTW - hearing that several large credit hedge funds are gambling for redemption and doing stupid things in markets they know nothing about. Just another case of this crisis rhyming with the S&L one.
The Fed has already cut the Fed Funds rate.
The effective FF rate has been trading between 4.5 and 4.75 for the past week. Its a stealth rate cut that they did with all their liquidity injections.
I have to say I am really surprised the Fed caved so soon. I would have thought a little more pain for speculators would have been appropriate. Maybe the 800 point drop in the Nikkei coupled with the yen approach 112 forced their hand.
Maybe it gives them 30 days, but so what? It's not like any of the players "in the game" are going to do the right thing and mark to market or anything else. It'll just give them more time to shred documents, make a few more bad deals, maybe get that Cayman Island account fully set up, etc. The key problem with giving people time to "save the system" is assuming that the people who created this mess WANT to save the system. They don't - they'd take the last bit of bread from a starving man just because they can. That's the way they are - predators, and nothing more.
The Fed has lost a lot of credibility with this move, and a rate cut in Sept would be a disaster: massive inflation, or I should say stagflation since salaries will not keep up, along with increasingly crooked financial operations who know that every deal they make can only go right: either they get rich, or the government bails them out.
What a lousy decision.
The point of the discount window is to provide last-resort liquidity, at a high enough penalty rate, to minimize moral hazard. In other words, the interest rate must be high enough so you only take the loan if you believe your collateral will be good enough in the absence of a liquidity crisis.
Now, the discount rate has been cut to an entire half-point below the rate on a 30-year fixed-rate 20% down high-FICO mortgage. In other words, the idiots who hold the toxic sludge crappy mortgages get to put them up as collateral for a loan that charges significantly less than the rate on the highest-quality mortgages.
That totally moves us from last-resort liquidity lending to backdoor bailout.
rcyran - 'rguing moral hazard should preclude action when the credit system is shutting down is like worrying about hair loss when on chemo. It's awful, but the alternative is worse.'
You've been reading Willem Buiter, haven't you?
'The observation that a government intervention creates moral hazard is not the end of the argument, but the beginning of an intelligent discussion.'
Maverecon - Willem Buiter's Blog: Central banks as market makers of last resort 2
inflation is the answer here people. its the way out.
who cares about a million dollar mortgage when you now make 600k a year?
personanongrata
Perhaps YOUR employer is giving you monthly 20% raises.
In case you haven't noticed (and obviously you haven't), rising costs have not been accompanied by rising wages.
Insofar as the rate cut and the equity markets are concerned, market internals remain negative.
Financial earnings are going to be down, and thats 20% of the S&P 500, closer to 40% if you include the financial subsidiaries.
General retail is being clobbered and auto sales are in the tank. Consumer sentiment is falling. Based on Philadelphia results, we can expect the ISM manufacturing index to start falling soon.
On top of that, we're going to have continued credit and liquidity problems, with occasional very public blow-ups along the way, all very confidence-inspiring.
So, these are just some of the reasons this year isn't going to end well, and that's why Conjure Bag and I say Recession Q1-08.
By the way, Tanta, Conjure Bag is thrilled at the notion he might actually receive a SPAM T-shirt if he wins.
thoth- thats why i'm lucky. i'm the boss and i get to set prices.
Carlomagno-
Actually, I've just been re-reading my Kindleberger and W. Bagehot
"In a crisis, the lender of last resort should lend freely, at a penalty rate, on good collateral."
So the Fed is doing part of what he prescribed. The questions that need to be asked are, "is the Fed only accepting good collateral?" and "Why reduce the penalty rate?"
They're just now finding out people run out of money at the end of the month? I'll bet these fuck-ups have
yet to figure out that rising gas prices causes inflation.
Almost every product and grocery store item has gone up 10 to 15 percent, just in the past year. Somehow, these "experts" didn't realize until now those kinds
of cost increases will crash the
already fragile economy.
Since Bush took office, millions of jobs have been shipped overseas only to be replaced with lower wage "McJobs." Many people work more than one job at 60+ hours a week
to pay for the basics.
How long will people be able to do this? Maybe you can manage this kind of employment through your 20's and maybe your 30's,but by the time you hit 40, your health is going to be shot, and then you're really fucked because you either have no health insurance or crappy, bare minimum insurance that doesn't cover much. The tip of this iceburg is just starting to melt, just wait to see what another six months of more inflation and more foreclosures
brings!!
it s an indefinate loan daily for CFC
The 30 days is renewable at borrowers request....
lance McD
Lance McDude said: "SebASStion,
I am looking for a house in the DC mSA have been for four years now....prices still high, homes overvalued based on incomes..."
According to the Shiller-Case housing index data on the Washington, D.C. MSA (latest reading from May, 2007), if you had bought a house there 4 years ago it would have appreciated by 55%, even after the recent softening of home prices.
And according to Federal Reserve interest-rate data, if you had gotten a 30-year fixed-rate mortgage at that time it would have been 5.48%.
And I'm the ass?
Sebastia
Sorry, "Case-Shiller", not "Shiller-Case."
S.
I agree this only reasserts the moral hazard that caused the underlying inflationary crisis in the first place. Bankruptcy is the orderly method that is available to corporations to continue operations. Bankruptcy should be the preferred solution for every insolvent corporation - none are too big to fail. Defend the dollar!
everything in fact points to cash
indeed...
~
Doesn't this seem like a stetch? Banks are taking advantage of the cheaper credit so they can loan out more jumbos?
http://money.cnn.com/2007/08/17/real_estate/Fed_move_help_for_borrowers/index.htm?postversion=2007081712
Isn't it expensive to use this facility?
The Feds are taking this junk as collateral?! Un-freaking believable!
You guys are seeing this incorrectly i believe.
To some degree we are where we are now and the TINA principal has to apply. Tina=There Is No Alternative.
Welcome to reality.
So far the Fed is only lending to the many desparate institutions. Some are going to fail and some are going to be saved.
If you believe that the Fed can now stand aside and watch mortgage lending go down the drain without destroying your way of life then you are really living on a different planet to me.
Todays Discount window change was a very very minor change. The Fed has already been supplying cash at .5 below the target rate for several days. The whole market of people who know anything about money knew that of course way before today. A tiny amount of money is said to be currently being raised at the discount window. That might increase astronomically but so what? These are so far only temp loans.
Lets get a grip on this.
Doing less than is being done now would be a total world disaster.
Of course that does leave the questions as to why the fuck this was allowed to happen. But for now we have to deal with reality rather than wishful thinking about some pet outcome where people can buy houses for next to nothing in a crash.
Ha, I told you guys this was going to happen earlier this week after revisiting Bernanke's 2002 deflation speech.
At the end of the day BB is betting that liquidity to keep the economic wheels turning does not lead to inflation over time b/c those wheels continue to feed productivity gains that lift all boats. Innovation and invention will save the day, he believes.
He better be right about that b/c otherwise the Marxists are gonna be pissed!!!
u nerdz need these guys in ur feedz:
<a href="http://longorshortcapital.com/bernanke-in-pictures.htm>http://longorshortcapital.com/bernanke-in-pictures.htm
Let me get this straight. There is an overnight REPO inter-bank rate, set at 5.25%. There is a Fed discount window that used to be 6.25% and now 5.75%. Why someone in their right mind would pay more if cheaper overnight rate is available? Why any prime broker-dealer would ever use discount window?
Now, REPO apparently requires hard collateral such as US treasuries. Fed now is willing to accept MBS, which other banks refuse to lend against! That means we do not have a liquidity crisis! If that was the case REPO rates must have been higher than Fed discount window rates. We have a crisis of banks not having enough good collateral and not trusting each other with all this MBS junk.
That perfectly explains why effective overnight rate has been well below Fed target rate. There is no demand for the inter-bank funds, demand that can be backed with required collateral!
With that, even if Fed lowers rate to zero it is not going to help at all. Banks will not be willing to lend to each other because there is no collateral to lend against!
Thanks, Worried for the post.
I fear this blog is turning into a Koolaide stand.
This too will pass,... like Aunt Mary's fruit cake.
For the past two years+ CR and friends have been accurately calling this train wreck. So, my brillient friends, what are the potential ways out of this mess?
CR, thanks for the ideas on modifications for performing borrowers with Alt As.
What I can't figure out is how to profit, or at least cover my 401(k)'s ass, in this pending market. I just not a short seller.
Lee in Santa Rosa, CA
It's unbelievable how the Fed has changed its tune since last week's FOMC meeting. How quickly things change!
What I want to know is what "news" came out between then and now that made the markets move so much? I know that a few rating agencies downgraded mortgage backed securities. But was this enough?
Seems to me that a lot of "insiders" got wind of information (non-public) and started a stampede. Any thoughts?
I know it's only the discount rate, blah, blah, blah, but this still smacks of a de facto bailout for the stock market.
The Fed said, How can we end the stock-market sell-off panic without looking like we're giving in to Cramer and all of his Wall Street buddies?
Easy, cut the discount rate and signal to stock investors that we're paying attention to their pain and we'll throw them a bone.
Today was shaping up as Black Friday. Instead, market manipulation rules the day and keeps Wall Street propped up once again.
All of these sonsofbeetchs can burn in hell, from Helicopter Ben on down. These miserable ccksckers.
-- Judge Smales
"You'll get nothing and like it"
" In these circumstances,although recent data suggest that the economy has continued to expand at a moderate pace,the Federal Open Market Commitee judges..." I guess this must mean:" We were wrong,but it is NOT our fault."