The same basic thing was tried in late 1999 and didn't make a bit of difference, except to maybe juice the stock market a bit more. The elephant in the room is depreciating house prices. Nothing can stop the bust at this point.
They were dropping cash from helicopters but the right people weren't picking it up. So now they have to run after the right people with an armload of cash screaming "Take it! Take it!!".
All sound fiscal policy.
The news is huge it will be highly interesting to see what affect it has on the financial system.
ac, sorry, I was off reading other items - and didn't get a chance to post this early. I wasn't really sure from the Fed statement what they were doing ... but Greg Ip at the WSJ explained it well.
Interested to hear take on how this excess collateral helps the hedge complex which has to marke to market (all thes rest of the stuiff sold by the I-banks). by opening the colalteral window, the hedge complex - shadow sysytem - can avoid a year end mark and hence forestall a rush for the exits on redemptions...logical or not?
Amazing that the focus is on the ibanks,, but it is the hedge complex and the prime brokers (a vicous closed loop) that are on the hook for the large portion of the product put to the market. So why are we not seeing all the hedgies fess up?
Also, I think the Fed is in danger of creating a "f**k this sh*t" attitude in the bond market, leading to a longer term sell off and higher rates for several months.
If they keep shocking the bond market and creating the impression that they're going to repeatedly reflate bubbles, the Fed's attempt to help could really backfire.
Of course, I still maintain that ultimately they'll turn to monetizing long bonds if they can get away with it.
But in the end you can't force people to lend out their real capital. They'll just hide it somewhere or not bother developing it.
And by encouraging bubbles and rewarding poor practices you degrade human capital.
You cannot fake wealth.
You cannot fake an economy.
At some point people have to use their brains. There's no way around this.
Meltdowns are to be avoided, both in nuclear reactors and in financial systems. This looks like a reasonable attempt to maintain some stability in the financial system.
ac, I'm not so sure there is a commodity bubble. With the steadily declining dollar and increased world demand for raw materials, it may be that commodities are finally beginning to be priced according to their true value to humanity.
The Bank will accept a wider range of high quality securities as collateral against funds advanced at the 3-month maturity. The additional categories of eligible collateral are: ....
Conventional debt security issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Corporation and the Federal Home Loan Banking system, rated AAA.
AAA-rated tranches of UK, US and EEA asset-backed securities (ABS) backed by credit cards; and AAA-rated tranches of UK and EEA prime residential mortgage-backed securities (RMBS).
Covered bonds rated AAA.
That´s what i call "lowering the bar"...
Now over to Canada
By the end of March 2008, the Bank will expand the list of eligible securities to include certain types of Canadian dollar-denominated ABCP that meet the following general criteria: are bank-sponsored, are covered by a liquidity provision that meets global standards, and are backed by traditional assets of an acceptable credit quality. In addition, higher standards of disclosure and additional credit ratings will be required. Asset-backed commercial paper backed by collateralized debt obligations and other highly-structured assets will not be considered at this time.
The White Stripes with their song "I can smell a rat" comes to mind...
Just let home prices drop. Sure its painful, but do you remember what Paul V had to do to slay inflation in the early 80s?
I think what "Ben" is trying to do is prevent a deeper structural collapse in the credit markets.
That in of itself doesn't seem like such a bad idea to me.
The problem is that this is being done by an institution that has a 10 year track record of screwing things up. Plus they have a fundamentally intractable mandate.
I think when you order somebody to do something they fundamentally can't do (i.e. make the economy better with monetary policy) you'll most likely get an outcome that's worse than doing nothing at all.
This does nothing to address the bogus nature of FASB accounting which allows debts to be swapped for cash equivalents and balance sheet manipulation, i.e, they need to restore trust versus toss more caino chips on the table!
OT
German regulators threaten to close down Sächsische Landesbank if no funding and takeover is agreed upon by Sunday. Saxonia is not willing to guarantee 6 Bill$ (or more) their budget is only 22Bill $
WestLB is searching for funding too.
Here is a link to an opinion piece that ran in the Globe and Mail in Canada today titled "What do we do if the greenback goes into freefall?" Interesting (and ominous) reading...
Less than 3 months ago the Fed's biggest fear was inflation due to gas prices.
I'll go ask my dry cleaner if he can raise his prices because gas prices are higher.
ac, I'm not so sure there is a commodity bubble. With the steadily declining dollar and increased world demand for raw materials, it may be that commodities are finally beginning to be priced according to their true value to humanity.
Well, last I checked (admittedly it's been a while) commodities in general were trading at something like double their cost of production -- a highly unusual situation (someone correct me if I'm wrong).
Even OPEC, for example, says that oil is being artificially bid up by speculators. Wouldn't they be the ones to know?
Also given the existence of the multitrillion dollar asset leveraging industry that we have, it's hard for me to imagine that commodity prices are not artificially inflated.
Why, afterall, would they not do this when it's potentially so profitable and there's so many people out there that are really, really willing to believe.
This is just another finger in the dike (excuse me) being used to stop hedge fund crashes and floods of bets from growing into a flood of redemtions leading to runs on banks... but the hedge funds all need to crash and thus the accounting books and crooked banks have to come clean!
Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).
...
The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned. The OIS rate is a measure of market participants expected average federal funds rate over the relevant term.
So the rates are set by auction, with the minimum being the "expected" fed funds rate over the duration of the loan. If the market is pricing in rate cuts, this could be lower than the current FF rate.
I still think this is not a huge deal; it is not very different than cutting the discount rate. It may help ward off a systemic failure in the real banking system, but the real troubles are in the "shadow" banking system and the CP market...
The loans are fairly short-term, so I am not sure this even qualifies as a "helicopter drop".
Since it is unlikely to fix the problem, this is probably just the first unorthodox step of many.
Does anyone know how the Fed will price the collateral? Not at par I hope.
The press release does not say, but I highly suspect collateral will receive the same "haircut" as it does at the discount window.
(Note again that these auctions are only open to depository institutions; this is not a bail-out of Wall Street. If anything, it is an attempt to avoid that, as ac says. After an initial spike of euphoria, the market seems to be waking up to this.)
How can price drops be shown accurately when there are almost no sales? Until they start to resell at half the previous price, the price drops won't really show.
Paul Volker's era precedes the asset economy that we have generated since. Inflated asset prices have driven this economy for sometime now. Ben's fear of deflation and the consequence of crumbling asset economy is understandable. The whole thing has gone on because there has not been a crisis which forces market participants to look past the financial alchemy of sophisticated models and closely at the real fundamentals. The game will end one day but not at this time when we can still arm twist others to go along.
It wouldn't be any fun if they marked down the collateral.
ac,
If we look back years from now and note that the prices of food and energy never dropped below their current levels then perhaps we can agree that it is (was) not a bubble.
I think the time is drawing near for Congress to consider impeachment articles against this administration. We have the FAHB handing out money to Countrywide with toxic loans as collateral, with the taxpayers as the ultimate bagholders; now we see a Fed that seems to be bent on keeping the free market from following it's natural course.
Today's action will only accomplish one thing - reducing whatever credibility this Fed has left. They are whipsawing the markets around for nothing - this AM's pumpfest seems to be falling apart as I type.
Give the coke whore more blow, let the casino games contiunue with cheaper blow! More rate cuts.....more discounts, more creativity.....more coke for the whores!
All right! So now I can get my Heloc rate dropped to 2 points above this new and special rate, right?
Geez, I guess the markets are finally beginning to understand this is bad, very bad, and the sooner that your leave with your skin intact, the sooner you can pay back your line of credit which is being called. I suspect that hedge fund liquidity will be the next challenge.
Watch that one start to unwind.
The stock market is quite unprepared for the providers of hedge fund liquidity to call those loans that allow the gearing up. But the balance sheets will require capital, and that capital can't be parked in "Upper Fancy Pants Hedge Quant LLC" of the Caymans.
Of course it will be a soft landing.
The foam on the runway, and those fire trucks and rescue vehicles lined up alongside -- just precautions, just precautions ...
ac, clearly commodities have to trade for more than their cost of production or there wouldn't be much more production.
Current prices are probably artifically inflated somewhat because of speculators in the system, but shaking them out should only lessen the rate of price increases, not eliminate them (especially when they are expressed in dollar terms).
There's a finite amount of 'stuff' on this planet. There's an infinite amount of financial 'products' that produce the bubbles. I'm a believer in commodities. I understand others may see it differently.
I'm a believer in commodities. I understand others may see it differently.
You know, in the 1800's, I bet whale oil futures would have looked like a sure thing. I mean, consider the ever-increasing urbanization leading to ever-higher demand for street lamps; the declining whale population...
Oil up 3%, Heating oil up 3%, crude up 2.5%, gasoiline up 3%, the liquidity seems to be working Ben don't know what the bond market sell off is all about though
The whole manner in which the Fed is handling things has a "Keystone Cops" aura to it.
Just yesterday, Federal Reserve policymakers essentially told the market to shove it. They delivered twin quarter-point cuts in the federal funds rate and the discount rate, not the 50-point cuts that many investors were looking for. That caused the Dow Jones Industrial Average to tank by almost 300 points.
Then less than 24 hours later, the Fed skipped the big guns stage and reached right for a monetary policy howitzer. It said that its coordinating with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank (SNB) to flood the banking system with money.
Moreover, the Fed apparently notified reporters "on background" about the second step late yesterday (I heard CNBC's Steve Liesman talking about it on my satellite radio on the drive home).
And as I noted yesterday ...
The Fed failed to raise rates early enough and steeply enough to prevent the housing boom from turning into a housing bubble.
It didn't regulate the mortgage industry aggressively enough to prevent all the abuses we're hearing about now.
Then after the housing bubble popped, it kept assuring us everything was fine and that the mortgage problems were "contained" to a few subprime loans.
And then yesterday, with LIBOR rates going haywire, lenders tightening credit standards, and 2-year T-Notes yielding less than 3%, the Fed decided to go with a timid cut and no strong hint that more cuts are coming? I've been as critical as anyone about the Fed being too loose with monetary policy for some time. But I think a larger move was definitely justified.
Also, don't forget that this is the same Fed that in October apparently felt like its job was done and that everything would go back to being hunky-dory. Aiiiieeeee...
CA budget deficit worse than expected - time to float some more debt:
Tsunami of red ink about to hit California
California is facing a $14 billion state budget deficit, according to unnamed sources cited by the Sacramento Bee today.
The states forecasted deficit previously had been publicly estimated at $9.8 billion.
The Bee says its two sources offered the higher number after speaking with Gov. Arnold Schwarzenegger. The Department of Finance apparently gave the governor the revised estimate on Monday, the newspaper says.
The problem is blamed in part on Californias housing market woes that are contributing to lower projected property tax revenues, and to extraordinary expenses such as those incurred by the Southern California wildfires.
Mid-year spending cuts may be recommended, the Bee says
If we look back years from now and note that the prices of food and energy never dropped below their current levels then perhaps we can agree that it is (was) not a bubble.
I dunno about food and energy longer term.
They may well be up a couple of years from now due to legitmate demands.
I certainly wouldn't be short anything energy or food related.
But I also wouldn't be surprised by an oil bust, for example, in the near term.
Even if there's not enough oil in the ground you can still get too much of it above ground and flood storage capacity for a time.
Give the coke whore more blow, let the casino games contiunue with cheaper blow! More rate cuts.....more discounts, more creativity.....more coke for the whores!
doc holiday,
you forgot that they're transvestite coke whores..
..other than that minor point.. I agree. Cheaper blow for the transvestite coke whores!
Nemo,
BoA and other depository institutions can be a liquidity conduit to CFC and such. They did it, perhaps with implicit guarantee from the FED, a few months back with a 2B infusion, exactly the same day discount rate was lowered.
you would think that at some point during his long tenure in finance, Bernacke would have heard the phrase "throwing good money after bad." Maybe he just never bothered to learn whether it was a good practice or a bad one.
Nobody wants dollars now. Why would anybody want $40B in dollars that nobody wants? The only way they're going to get any takers on this scam is if the "emergency loan" is in euros and the interest is in dollars- that way it would surely pay for itself.
Here's one more "Keystone cops" funny side note: I don't know if this plan was announced sooner than the Fed wanted (because of the Dow swan dive yesterday) or not. But the PDF document with the Federal Register Notice announcing the plan has "XXs" in it. Specifically, it says (as of 1 p.m. EST:
"DATES: The amendments to part 201 (Regulation A) are effective XXX."
and
"By order of the Board of Governors of the Federal Reserve System, XXX."
Actually, that was creative Fed gaming, i.e, they gave the market part of the deal yesterday knowing full well the mkt would fall, then in hedge-fund-like gaming, they play the other side of the coin today to goose stocks back up.
The trouble with playing market games, to toy with wallstreet, just adds to the overall casino-like mentality which is linked to financial engineering failures! Citi said a few days ago they lost more on subprime hedging than they made, and every bank out there is guilty of fraudulent accounting and they all play the same games......so bail out the coke whore and give them another cheaper gram of blow and lets get on with runs on the bank........causing granny and granpa are pulling money out of shitty banks and this Fed baindai doesnt mean zip!
I suspect one of the uses that the "facility" will be put to is as long-term storage for asset-backed waste (the stuff that the ratings agencies haven't gotten around to downgrading from AAA yet, that is.) Since it appears that they can swap it at face value, albeit with a haircut, they can push it to the Fed, take the cash, and put the cash with an offsetting future liability on the books. No need to mark-to-market the assets! Sweet!
That game comes to an end when the assets are marked down from AAA and the Fed will no longer take them--but given this development, there will now be tremendous pressure on the ratings agencies to keep AAA rated as such.
The whole manner in which the Fed is handling things has a "Keystone Cops" aura to it.
I think they did a bad job revealing it, but the actual process was very deliberate. This has been in the works for months, and functions as an alternative to slashing the discount rate.
There is essentially no precedent for announcing a new monetary policy tool. Would it have been better to tack it on as a "P.S." on yesterday's statement? Or to announce it the day before? Easy to say in retrospect.
The only problem with the announcement is that it gives the appearance of responding to the market's temper tantrum, even though this was obviously the plan all along.
And it actually looks like a reasonable idea. The rate will be set by auction, so whoever needs the liquidity the most will have to bid for it. That's the "penalty". As long as the collateral is subject to a sufficient haircut, the risk borne by the Fed itself should be minimal. That's the good news.
The bad news is that it probably is not going to change very much, unless it shifts the psychology to where banks are actually willing to make loans again. Time will tell.
as someone wrote today, when push comes to shove in an election year governments are going to print money to avoid a recession and to hell with the consequences.
There may be more steps to come (including more Fed funds cuts), but this isn't the first. T-bill redemptions, term repos, narrowing the discount rate gap vs fed funds. Talk. Lots and lots of talk.
A Fed spokesman said that the overall level of reserves won't be affected by the TAF auctions. Daily operations will be adjusted (reduced, that is) to in order to avoid increasing reserves above target. It is as Cal says. They are trying to get reserves into the hands of the guys at the end of the liquidity line, because the guys earlier in the line are so badly screwed up. Little guys should be getting fed funds treatment, but instead they are getting Libor treatment from the bigger banks. Now, they can go around the bigger banks, get fed funds treatment at the TAF auctions and go about their business.
I'm definitely with Nemo on this - given that we have a Fed, that we have Fractional Reserve Lending and we had the existing discount window this isn't sooooo bad - its not a "any old iron" for pure paper gold type of thing. These points are worth keeping in focus:
its a REPO - no helicopter drop here.
you have to have collateral and (for the US Fed) its the same classes that were previously acceptable.
2a - I assume that the asset classes will be subject to the same haircut as already established.
there is a market set mininum bid per asset offered as collateral set by the market.
it is "only" 2x20 = 40B in the short term - given they pulled out $10B, last week and tomorrow, that's 30B.
There will be BIDDING for this - at least we'll get some price discovery here ( subject to the discount window ceiling ).
We'll now get a better understanding on what classes and how much ( but probably not WHO?? will the results of who won the auction be televised? ) credit crunch there is.
I particularly like the fact that its a poke in the eye to the primary dealers and that cozy, long established old boys club deserved it.
"I think what "Ben" is trying to do is prevent a deeper structural collapse in the credit markets."
Understood... but you don't 'push' credit, you extend it when asked for and safeguards are in place. This looks very much like the Fed is doing what mortgage brokers did in the years before 2007. If securities are unpriceable because risks are thought to be too high, extending loose credit is a really, really poor thing to do.
Regarding commodities, I don't know how you can look at this graph and not be suspicious.
Why is it that the commodity indicies, which were trending down at the time, suddenly went vertical the second that the Fed first cut discount rates?
How does "legitimate supply and demand" relate to discount rates?
It's the whole "bad news bulls" phenomenon over again. It doesn't make sense, unless you view it in the light of an "artifical" asset leveraging industry.
market will crash and there will be runs on banks if bank are not regulated. The bank bailout will just add fuel to the fires of distrust which are in the hearts of my fellow Americans and other various citizens of the globe. They need to address regulation enforcement and start investigations that result with jail time ASAP! This is Enron Squared and ignoring it, in normal Bush fasion aint gonna cut it!
I think not disclosing the financial institutions making use of the facility is a mistake. If their names are published, that concentrates the loss of trust on a few institutions. But if they aren't published, the entire industry loses the trust of investors.
The problem right now is not what we know about the credit crisis, it's what we don't know. More transparency is the answer, and as such this new facility is moving in the wrong direction.
Crude oil for January delivery surged $3.13 to an intraday high of $93.15 a barrel on the New York Mercantile Exchange, the highest since Nov. 29. It was last up $3.01, or 3.3%, at $93.03. It's the first time oil topped $93 in this month.
Surging oil prices. Surging long rates. It's another fist in the face for Joe Sixpack.
Looking at some of my January puts, and the underlying equities, it seems that the larger players are using today's (short-lived) rally to exit their losing long positions.
For example, Capitol One gapped up at the open then sank to near yesterday's close, then attempted a brief secondary rally before falling to longer-term support ($49/share.)
It has broken down to around $48 now; someone put a huge sell order in around 12:30 of around 250K shares.
Probably it was some big hedge fund that knows how to read a chart ...
MikeInFl- "Here's one more "Keystone cops" funny side note: I don't know if this plan was announced sooner than the Fed wanted (because of the Dow swan dive yesterday) or not. But the PDF document with the Federal Register Notice announcing the plan has "XXs" in it. Specifically, it says (as of 1 p.m. EST:"
Conjure Bag says, "Well, they were in kind of a hurry, you know."
Collateral is only risk free in arms length transactions; if our banking regulators add to the confusion and occlusion required for market efficiency, then transactions will be questioned more and more and illiquidity will increase.......
Question: Why wouldn't the rate established at these auctions NOT be nearly identical to the LIBOR rate?
Afterall, unless the Fed provides unlimited liquidity -- something it hasn't promised so far -- all this seems to do is inject cash for "good" collateral. Something you can already get -- albeit at LIBOR.
William Ockham (c. 12851349) is remembered as an influential nominalist, but his popular fame as a great logician rests chiefly on the maxim attributed to him and known as Occam's razor Entia non sunt multiplicanda praeter necessitatem or "Entities should not be multiplied unnecessarily." The term razor refers to the act of shaving away unnecessary assumptions to get to the simplest explanation.
Karl Popper
Karl Popper argues that a preference for simple theories need not appeal to practical or aesthetic considerations. Our preference for simplicity may be justified by his falsifiability criterion: We prefer simpler theories to more complex ones "because their empirical content is greater; and because they are better testable" (Popper 1992). In other words, a simple theory applies to more cases than a more complex one, and is thus more easily falsifiable.
The Fed's own information sheet says established haircut rules apply and that winners will remain nameless. There is also a minimum bid set by the Fed, at the OIS of appropriate duration. I believe it's a one-price auction. And yeah, the big boys don't get to borrow at the funds rate and lend at dreadful Libor rates after this. Either Libor comes down, or stays up, gets small and suffers adverse selection.
With securities including mortgages going (temporarily?) into a "term auction facility", can we look to some future Ohio federal judge to inquire into the paper trail and true ownership?
One common thread thru a lot of these discussions seems to be the 'hedge fund bogey man' in many different disguises. Just as an informal poll, have any of you folks ever invested in one or better yet worked in one? I have a fairly differing view of hedge funds than most here seem to have and am curious as to others experience.
thanks
d
This Fed Hocus Pocus fails to address the fact that there is a massive flight to quality, i.e, Ma & Pa investors, savers, the little guy that fuels the whole casino game, are freaking out about the lack of arms length trust as to what banks are doing and thus the safety of the institutions which they rely on for financial security. The Fed as a whole is not addressing the need for full disclosure and accounting enforcement, thus these little people are going to flee to places they think will have greater safety. Does anyonw feel safe about savings accounts at WaMu today......hell, this is Northern Rock, this is E-trade, this is CITI, this is BAC, this is every bank in the world and people are feaked out......but, the Fed wants to goose the market in Katrina-like style and suggest on Fox news that all is well.......which of course helps hedge funds pump the sound bite.......but, for Gods sake, if they dont want this to explode over night into a run on banks, they better address the reality of corruption -- thus let the runs begin!
Anyone know of a chart that compares Libor (or prime) rate and fed funds rate? Seems to me the divergence between the two is indicative of credit troubles.
I suspect one of the uses that the "facility" will be put to is as long-term storage for asset-backed waste (the stuff that the ratings agencies haven't gotten around to downgrading from AAA yet, that is.) Since it appears that they can swap it at face value, albeit with a haircut, they can push it to the Fed, take the cash, and put the cash with an offsetting future liability on the books. No need to mark-to-market the assets! Sweet!
I have this suspicion as well. Worse yet, I think it's going to be a prime candidate for adverse selection on the part of the banks holding this "No really, it's AAA-rated" stuff.
I have to think that the banks and institutions holding this junk have at least a general notion of what each bundle is worth (or would be, if they could sell them).
And if you have billions in qualifying, err, "collateral" that your in-house accountants have placed into two buckets - a bucket A you think is worth 20 cents on the dollar and a bucket B you think is worth 70 cents - and the same collateral haircut for each, doesn't going after one of those cheap new term auction loans suddenly sound tempting? I mean, hey, here's our billions worth of triple-A-rated collateral right here in this bucket marked "A", Mr. Fed Governor, sir.
they better address the reality of corruption -- thus let the runs begin!
There are trillions in promises that can't be honored. It doesn't matter what the Fed does. Historians will be amazed that they kept the game going for as long as they did.
Somebody is getting screwed, no matter what, and for a substantial amount of money... like, oh, say, YOUR ENTIRE LIFETIME SAVINGS, maybe?
The Fed is still trying short term fixes for a long term problem. How does a one month loan, even repeatedly, save your ass?
The Fed is setting up the equivalent of a payday loan loan operation.
Reminds me of the story by Frank McCourt ("Tis"), where he talked of how they got money to buy food many times when they were so poor growing up in Ireland.
They would wrap up bricks in old clothes and take it to the sympathetic pawn broker who would loan them money based on their representation that there was something of value wrapped in the clothes. The pawn broker never looked in the wrapping, knowing their poverty stricken circumstances.
Great book, but there is a reason why the author left Ireland.
Question: Why wouldn't the rate established at these auctions NOT be nearly identical to the LIBOR rate?
...
Mr. Beach
My thinking is that the discount window rate 4.75% will be the ceiling for the bids since why bid more than that - although if this stigma thing is really that big, who knows? That would be amusing.
I think the objective of this is to bring the LIBOR DOWN to the FFR+alittlebit and if this plan works then your question will sort of answer itself.
(Note again that these auctions are only open to depository institutions; this is not a bail-out of Wall Street.-Nemo
u keep saying that but i don't agree. as we've noted here before, many large banks, BAC, C have brokerage arms that serve as primary dealers for hedge funds. this is a way for them to funnel money to those hedge funds if they so desire.
Over at Naked Capitalism, one of the columns (link below) has this comment. Is this what the Fed is doing?
There is, it seems, one little opening, under "Lending to Non-Depositary Institutions". Apparently, "the Federal Reserve has the authority to lend directly to individuals, partnerships and corporations (IPCs), which could include depositary institutions, under sections 13(3) and 13(13) of the Federal Reserve Act . . . However, lending under these authorities is subject to stringent criteria in law and regulation . . . " This lending, under which, apparently, the Fed assumes the credit risk, can only be done under "unusual and exigent circumstances" and requires the affirmative vote, most of the time, "of not less than five members" of the Federal Reserve board. But section 13(3), Small and Clouse say, "provides virtually no restrictions on the form a written credit instrument must take in order to be eligible for discount".
david in ct- my fear about hedge funds is that they will precipitate the next part of the liquidity crisis and pull a tremendous amount of liquidity out of the markets- all of the markets they have invested in.
Many of the geared hedge funds are holding instruments that currently may or may not have a sufficient depth of market to be sold (pier loans, exotic swaps, anything related to mortgages, etc.) Selling these assets wholesale to meet the desire of the financing provider to recover capital will drain immense amounts of liquidity from the system that can not be readily obtained.
Think about who they would sell to?
Kind of like the old tale about the lady that cornered the rag trade by buying everything in sight, at the end she told her broker: "Sell!", and he replied "To whom? You own all of the rags."
Go read the whole Fed Act, 13 is one of many fed tools, they have massive powers to do anything, they can sell insurance and real estate, they can print money, this was also posted on a thread here last night
Pump it up when you don't really need it.
Pump it up until you can feel it.
Down in the money centre,
hell bent or heaven sent,
listen to the propaganda,
listen to the latest slander.
There's nothing underhand
so don't try to understand.
Pump it up until you can feel it.
Pump it up when you don't really need it.
CR: can you explain what they are trying to achive ?
Do they think they will just roll this short term funding again and again - i.e. banks will not have to sell , will not have to "mark to market" - never ?
Don't they understand that the real issue here is real estate prices ? unless they come down the market will not restart. Why do they prolong the suffering thinking that they can prevent it for ever.
Note that bond market may get it and TNX is creeping back up.
I think people are overreacting somewhat. If the fed kept this program permanently at forecast rates, it's equivalent to a 40 billion permanent operation. The total amount is not that huge by central bank standards, especially considering it's reversible.
I think the driver is all the losses and writedowns we're seeing. End of year reporting is coming and I suspect a number of banks have fallen below regulatory capital and would be forced to start withdrawing loans. The Fed doesn't want that because it could pull the whole system down. So they're adopting a policy that will allow the banks to temporarily pump up their reserves so they can continue doing business.
Given that they can reverse this in less than 6 weeks, I don't see this as reflecting inflationary intent. It's a way to temporarily inject a moderate amount of reserve capital to banks with balance sheet problems. The fed probably expects the markets to start flowing again shortly and this will go away or lead to reorganizations for specific problem institutions. If, as many here believe, it's not going away and we a a major solvency crisis, the fed will have to take other actions. But at present they haven't.
Of course, only an idiot wouldn't fear the most powerful financial criminal gang in the world. I doubt that many American fear the Fed; those who do are thought of as kooks.
It would be interesting to see how American dopes, victims of the criminal gangs, some even willingly, fair. We shall find out in next few years.
It is fascinating to watch the system of the crooks in action.
What this says to me is - the credit markets are pretty much irreparably broken, so, let's set up an alternate banking system, some kind of parallel universe, where we can recreate the functions of the broken world, since trust cannot be restored there.
So we have to believe that the FED in its infinite wisdom, and other CBs, by setting this up, are automatically granted the gift of trust. If this is the case, it's not a cash injection. It's a policy injection into the free market wild west which has turned into a ghost town. And the policy is basically one which says go ahead and use any junk collateral you want that the real world wouldn't touch with a barge pole.
So, one or both of two things happen. If no one jumps at this offer they can't refuse, no injection, no change, no effect. If anyone steps up to the FED bar for a drink, they are granted some sort of immunity, and no one knows who they are? So, this brings the worst and most desperate to the bar, and lets them bring their worst junk at 85c on the $. Now, this might make things function for a bit, but it doesnt change the reality of the declingin value of the collateral on this crap. So eventually, we must discover that 85c on the dollar was way more than the value. So, um, who is going to pick up the tab here when we decide to start marking to reality? I just cant see how this changes anything, unless they think that somehow the grease in the system will have some effect on the real world financing and demand for housing. I really cant make that connection at this point.
I'm not sure that there is a "failure" when the Fed does what it can do, and doesn't do what it cannot do. Bernanke has discussed the Fed buying longer-term assets in an effort to overcome disinflation, so I suppose it's possible to consider the purchase of longer-term assets now. But that wouldn't do what the Fed is trying to do.
They don't want to get rid of the risk premium. They like the risk premium. They begged for it. They don't want to resort to the really abnormal when the merely novel will do. Buying debt beyond money market maturities is typically reserved for coupon passes. Otherwise, the Fed sticks to money market stuff. What they want to do, at least for now, is make the system, as it is designed, work again. That means getting reserves onto the books of lenders at all levels. Sky-high Libor rates show there is a problem getting reserves onto bank books. TAF auctions are aimed at getting around the big participants in the Libor market. They are not performing their function, so they get cut out.
A CFO of a public company that would do that (moving resreve from one quarter to another) will go to jail.
But I guess this is leagl: "So they're adopting a policy that will allow the banks to temporarily pump up their reserves so they can continue doing business.
Given that they can reverse this in less than 6 weeks, I don't see this as reflecting inflationary intent. It's a way to temporarily inject a moderate amount of reserve capital to banks with balance sheet problems."
"Well, last I checked (admittedly it's been a while) commodities in general were trading at something like double their cost of production -- a highly unusual situation (someone correct me if I'm wrong)."
I believe the costs of production of an Saudi barrel of oil is about 50 cents so I can assure oil is trading much higher than double their cost of production.
"The price of something is exactly what someone will paid for it" J. D. Rockerfellow (I believe).
u keep saying that but i don't agree. as we've noted here before, many large banks, BAC, C have brokerage arms that serve as primary dealers for hedge funds. this is a way for them to funnel money to those hedge funds if they so desire.
If so, they can already do the same via the discount window. The TAF allows exactly the same participants, and it accepts exactly the same collateral under the same terms, as the existing discount window.
That is why this thing is not a bail-out. It does not provide liquidity to any entity who could not obtain it already.
There may or may not be a bail-out coming, but this is not it.
Don't they understand that the real issue here is real estate prices ?
Yal,
This is wayyyy beyond housing. This blog may be about housing.. but what is happening now is about the derivatives and other sheets of paper that have been written up to artificially inflate the amount of "money" in the system.
The stresses that are being felt now run the risk of testing the numbers written on all these paper contracts.. swaps and other derivatives.
Like I've mentioned.. there are over $300 trillion (US) worth of derivatives out there (mostly swaps and interest rate derivatives though).
There's about $3 - $4 trillion in currency floating around from all the central banks.
Don't they understand that the real issue here is real estate prices ?
RE prices are the visible mechanism, the real issue is debt. Feds can't fix that except a big deflationary collapse or printing lots of money.
It is amazing to me that this has been a ongoing, growing problem for one year now and so few people seem understand what's really happening because they're focused on each tactical eruption.
...the real issue is debt. Feds can't fix that except a big deflationary collapse or printing lots of money.
It is amazing to me that this has been a ongoing, growing problem for one year now and so few people seem understand what's really happening because they're focused on each tactical eruption.
Broward Horne
A lot of commentators on this blog and similar blogs DO understand it - but, to use a cooking analogy, its more fun to watch and point to the bubbles while you wait for the thermometer to hit 100C.
"They need to address regulation enforcement and start investigations that result with jail time ASAP!"
doc holiday
Absolutely! However, if a bunch of drunken teenagers tip their rowboat in the lake, the adults in the Rescue Squad don't sit around debating how much jail time to give them. They fish them out of the water FIRST, then they arrest and prosecute.
ac, not to tweak you, but yesterday you said that you thought Ben was swell and wise for only raising 0.25%. Words to the effect that he was showing his independence, to some degree, of Wall Street.
I hope that you have seen the light this morning.
Schmucks and criminals, literally. Save their banks on the backs of worker bees.
I see a nice big, reverse of the Cross of Gold populism returning (people for gold, Wall Street for fiat). And, those pitchforks will be sharp and those shotguns loaded for bear.
This looks like The Fed is floating out a case of beer to the drunk teens and then parking a truck on the shore that has more beer and the door is open and the keys are in the ignition, and a big fat stack of credit cards is sitting there next to the bikini bottom and the roadmap has a treasure map that points to Washington DC, which is beside a cell phone that has all the casino manager names..... no, you dont bail out somebody who just shot a bunch of people in a church, or on a bus, you take action and snub these bastards out like maggots!
That is why this thing is not a bail-out. It does not provide liquidity to any entity who could not obtain it already.
No, but it does provide anonymous, cut-price liquidity to any entity who could only obtain it previously through the discount window. Oh, and against the same broad range of questionable collateral!
I'm not worried about this new idea working; I'm worried about it working too well.
What's up with the Bank of England? They're mentioned at the beginning of the release... But there's no other mention of their involvment. No swaps or whatever..
Is the BoE going along with these liquidity actions or not?
Reminds me of the classic episode of ER where an expectant mother "went south" on Dr. Green's watch. A chain of minor miscalculations and errors, none of them huge in and of themselves, resulted in a botched caesarian and a dead mom.
At the end of the hour, everyone else had backed away from the body while Dr. Green was still doing manic CPR.
"The European Central Bank said Wednesday it would make as much as $20 billion available to European banks, in part to fill their demand for scarce dollars..."
I thought there were too many dollars floating about. How is it that dollars suddenly are "scarce"?
Maybe this is like a crime scene, where The Fed is buying time and trying to talk some insane coke whore out of doing something "wrong", but the banks are on high octane crack and talking about not hiding debt and playing hedge games is like asking casinos in Vegas to shut down operations that they thrive on. The difference between vegas and The Fed should be clear, i.e, The Fed should be regulating risk and enforcing rules to regulate risk, versus goosing the market like they are part of a collusive hedge fund run by Goldman! Where is the safety net for the little guy that doesnt undertsnad that his or her pension fund is being used in swaps by hedge funds (see Pension Reform Act)!!!
Given that banks have been withdrawing from the term interbank lending market for about 10 years now (it's a horribly inefficient use of balance sheet and capital), this move isn't sinister or cynical, and is really long overdue. It does little to alleviate the underlying credit implosion though, and I'm guessing Libors only decline 20 bps or so next week - better but still incredibly tight. I think the timing of this has more to do with the fact that headline inflation will print above 4% on Friday, meaning we already have near zero real interest rates and the Fed won't want to cut rates below 4% unless inflation starts to decline (unlikely in the near term) or economic conditions become clearly recessionary (which they aren't, yet anyway).
No argument from me that the Fed should have stopped this before it happened. Now, however, it's happened. The drowning teens are grabbing the gunwhales of a boat filled with old ladies, threatening to tip it over, so we have to pull them out of the water. Send the whole crew to jail? Please! But don't take everyone's 401K down with em.
No, but it does provide anonymous, cut-price liquidity to any entity who could only obtain it previously through the discount window. Oh, and against the same broad range of questionable collateral!
...
Mook
The discount window use was anonymous too:
"
Each week, the Board of Governors reports offsite link total borrowing under each lending program for the nation as a whole as well as the sum of borrowing under all programs for each Federal Reserve District. The Federal Reserve does not publish information about individual institution's borrowings.
" The Federal Reserve Bank Discount Window & Payment System Risk Website
So how come there's a stigma you ask ? Beats me - probably because "word gets out", I suppose.
I thought I´d let you know how well contained this thing is from a Scandinavian perspective so please excuse the lack of direct relevance to the article.
Condos (or the closest local equivalent) are down 9% in the last three months in Stockholm and down 20% YTD in Copenhagen.
Oh, and Doc, where's the safety net for the little guy, when his 401 K gets a 20 % haircut? I'm sure you know that "pension" is quaint term from the horse and buggy era and we're all supposed to invest for retirement. So, like it or not, the market is us and we better save it even if that means saving some crooks with it. We can always send them to the Pen when this is over to be Jeff Skilling's cell mates.
A CFO of a public company that would do that (moving resreve from one quarter to another) will go to jail.
Yes, but the fed is the regulator, not the regulatee. They - unlike a private CFO - are allowed to provide liquidity for the system. All systems have bugs and you need somebody like the fed to have a stable banking system.
"It's a way to temporarily inject a moderate amount of reserve capital to banks with balance sheet problems."
The FED action will cause some raise eyebrows from the sheeple, maybe a bit of awaking that a crisis is actually brewing. Rate cuts and discount window talk are common media messages but this situation is new and maybe a cause for concern.
While those that follow the credit markets take these events as part of the plan and not really that big a deal, move along nothing too see here folks, my guess is that folks who have been hearing lots about the mortgage melt down, bank problems, slower economy and other bad news will consider this FED action as maybe something to fear and keep their ear a little closer to the financial media message during this xmas season.
Fair Economist said, "You need somebody like the Fed to have a stable banking system".
The question is, have they made it more stable or less stable with their asymetric policy of inaction in the face of bubbles, while always inflating away any signs of trouble?
I think we're about to discover that our famous "resiliency" over recent years was just an illusion as instability grew and grew.
This makes me think that different communities have different lakes, different laws, different teens, i.e, on a case-by-case basis (no pun) there are levels of risk to be determined and investors that seek less risk shouls live in comunities that are safer, and those that want to be in higher risk fun places, with hedge funds, should go there, but we cant save all the dumbass people that took too much risk.
Our Nation may have to witness great decay in 401ks, because of the actions of a few powerful trading/banking organizations that were drunk with power. The Pension reform Act opened pandoras box and changed a lot of cashflow models, which did not plan on the flight to safety that most people require -- thus the actions of a few drunk retards has resulted in a huge leverage swap that has exploded.
So, yes, how do we deal with these people and the mess?
my guess is that folks who have been hearing lots about the mortgage melt down, bank problems, slower economy and other bad news will consider this FED action as maybe something to fear and keep their ear a little closer to the financial media message during this xmas season.
Most people don't pay attention to the financial news, but they do pay attention to how much a gallon of milk costs, gas prices, tuition, how much f their paycheck goes towards health care each month, etc.
I agree with Broward Horne's comments above re: the Credit Cycle should be the focus. You can't negate the forces of the credit cycle with what he calls "tactical" moves. I think the Fed is nearly powerless at this point.
ac, not to tweak you, but yesterday you said that you thought Ben was swell and wise for only raising 0.25%. Words to the effect that he was showing his independence, to some degree, of Wall Street.
That's just because my portfolio was up at the time.
As a bad example, the Mormons in Ogden want to know why they have to spend tax dollars to bail out the drunk kids in Houston that were taking on excessive risk, in a community that had no relationship to the community they made a choice to live in?
Why should tax payers bail out hedge funds that were retaded and drunk with excess powers?
At 1:50pm, K harris said, "TAF auctions are aimed at getting around the big participants in the Libor market. They are not performing their function, so they get cut out."
By "their function", I suppose you mean lending money to support malinvestments (or at best opaque investments)?
doc, What you say is fine, except few of us are given a choice of which lake we want our boat on. If someone ncame to workers and said you have the choice between a nice, safe, but modest pension or a risky 401 K with a potential for higher rewards, then you could say those who chose the 401 k should just live with the risk. However, folks are just told, "sorry, we're converting the pension plan to a 401 K. Good luck to you".
So that's the system we have. Bemoan it all you like, but we have to salvage what we can.
If this is truely temporary so that things can be worked out so that the banks and whatnot get .85 on the dollar instead of the .40 they'd probably be getting now, then OK (well not really, but I'd live with it). Thing is, this has been going along for so long, and the amount of effort that has gone in to actually trying to find out the true value of these funky pieces of paper is so miniscule, that I don't think they have any plan other than 'don't realize the losses'. Wile E. Coyote moments all around.
If the Fed really wants to get through this crunch, they need to get to work on a bailout LTCM style. Where they sit all those involved down, get them to put their cards on the table, and then figure out who lives and who dies. Sure it'd be nice if the market could just do it on its own, but it seems that the participants are worried that if they actually run the numbers in the Excel it'll be their neck on the block.
Slightly off topic, but amid all this credit market anxiety -- and the debate about how much the Fed should cut rates -- has anyone noticed what market is loving this Fed move more than anything? The answer is commodities. Many bank and financial shares have given up their early gains or gone negative. Meanwhile, the commoditie markets are going ballistic.
Crude oil is soaring (up around $4 a barrel). Soybeans were recently trading at a fresh 34-year high. Wheat was recently trading limit up (meaning it rose the most permitted by the Chicago Board of Trade). Corn is closing in on its old high of $4.37 a bushel. And so on and so forth. Admittedly, the metals market is more mixed. Some metals, like gold, are up substantially while others, like copper, are down. But the message seems to be that whatever the precise mechanics of this Fed move, the consequence could be to monetize inflation -- or in other words, validate these high price levels. It's only one trading day, of course. But I find the activity noteworthy.
Oh and lost in all the credit hubbub was the fundamental economic news today - namely that import prices jumped 2.7% between October and November and 11.4% year-over-year. That 11.4% rise is the biggest YOY gain in any month on record (the data series goes back to 1982). Ex-petro and ex-all fuels figures were up 3% YOY. And prices of Chinese goods are now rising consistently, month after month. All else being equal, this could keep price pressures elevated (though admittedly, the bond market could really care less about inflation these days -- it has been trading off credit fears)
In today's world, the real measure of what any "money" is worth is measured in oil, the international currency. And whatever the Fed is doing, it depreciated the dollar by 4-5% today alone.
This is the worst possible outcome for U.S. economic growth and corporate profits. CR's red line will cross his black line. GDP will sink. Inflation will keep rising. The recession will come sooner and last longer. More U.S. wealth will disappear permanently overseas, and if the dollar keeps sinking, that wealth won't flow back into U.S. securities.
There can be no sustained prosperity in the U.S. with 16 million barrels a day of imports at $90+ (regardless of Fed policy). Unless oil comes down, within the next year 50,000 independent truckers will park it.
Then, see how many Chinese products make their way into Wal-Mart.
The only way I see of starting salvage is to repeal The Pension Reform Act ASAP! If that Act stays in place as is, you will not have a 401k in 5 years! Ok you will have a 401k, but it may be worth 80% less if a hedge fund bets the wrong way and your high school pension fund manager forgets that your savings account is not part of a game!
I have not read thru the comments. So here goes.
1) Takes away the 50bp penalty for borrowing through the discount window.
2) collaterlized loans.
3) akin to disc window borrowing in other respects
Crude oil is soaring (up around $4 a barrel). Soybeans were recently trading at a fresh 34-year high. Wheat was recently trading limit up (meaning it rose the most permitted by the Chicago Board of Trade). Corn is closing in on its old high of $4.37 a bushel. And so on and so forth. Admittedly, the metals market is more mixed. Some metals, like gold, are up substantially while others, like copper, are down. But the message seems to be that whatever the precise mechanics of this Fed move, the consequence could be to monetize inflation -- or in other words, validate these high price levels.
In as much as these prices rise before incomes, the net effect is to take even more money out of the hands of consumers and businesses.
If I had $ 500 billion to spend and I had to choose between a bailout for even the dumbest crookedest idiots who hold this crap paper OR the Iraq war, I'd choose the bailout in a heartbeat. I'd even throw in whatever it took to house every one of the crooks in Federal pen for the next 5-10 years. It amazes me that anyone would complaim about wasting their hard-earned tax dollars on this mess, when the Iraq war is costing more AND costing lives as well. So, I say bail away and then prosecute away and yes, end the war!
Collateral has to be recorded in some new arms length way to insure its value, and thus any FASB/SEC/GAAP adjusting/spinning hiding off the books, off shore in entities aint gonna cut it.
Then again, why do we trust the US dollar or Treasuries at this point if The Fed is going to be a collusive Goldman hedgefund subsidiary??
Mike_in_Florida - there was an article in this morning's FT about shortages in various crops. Demand from the US may decline for some commodities in a recession, eg copper which is used in housing construction, but when it comes to food, recession or not, people still have to eat.
You know, I have friends in Iraq & just find it ironic that those men & women have greater courage than these bunch of Ivy league scum. Now not only are taxpayers asked to lighten the load for wall street but ask the troops to hand over their wallets to the bankers. So take a bullet & give me your wallet? Also your wifes purse too!
FED....
"What? Your family needs milk ($6 gallon) & formula for the baby? To bad bi$%h, the bankers need their bonuses. Also while your at it any I like to thank your husband for protecting the American way."
I told you, I told you I told you...no economy with the power to print money has ever failed to print more while trying to get itself of debt since Croesus added nickel to his silver coins.
Yes..housing going to take off again, but bread is going to cost $12.50 per loaf.
The crunch comes a few years down the road when inflation has raised the effective minimum wage to $50 per hour and part-time McDonald burger flippers can afford $500,000 houses...oops..now they're 3,000,000 houses..and guess what...the SIV's are saved, foreclosures gone, life is good...for a few more years.
God bless William Jennings Bryan and his Cross of Gold.
BB has stated clearly in his published remarks when he was at Princeton: (paraphrasing) "It only took one correct action to stop the Depression. FDR, unlike HHoover, tried many federal actions. Most failed. One worked."
BB is doing exactly as he has concluded long in the past. His team has tried some ideas. They didn't work. They are trying a new idea, direct lending against "pretend value". If it works, BB will be doing just what he said is the right thing to do...try everything and keep trying until one thing works.
The form of BB's actions will be stupid or brilliant; to him, it does not matter than we see his actions to be foolish...until the "one" idea that saves the economic day.
Obviously, other CB's recognize this is the only logic that portends a reasonable probability of success. So, they're joining the Fed Res at the hip to try everything.
The story now is the FR is not coming to the aid of any single banking entity.
The tragedy here is that justice will never punish the wrongdoers (Hank Paulson being one of the chief leaders who nurtured the financial gamblers, and who now has zero credibility; he is not only above reproach, he is the major ethically bankrupt IBanker who gamed the system).
The desperate public, all the housing gamers, will lap this up. They too are attempting to avoid BK.
Again, we are witnessing the gaming of the system.
Will it work? Gold says no. The shear numbers of upside down HB's say no. And, we will watch one last time to see if the rating agencies, S&P/Moody's/Fitch will also say no.
The gaming goes on. This action is not a surprise. No action will be a surprise. BB wrote about this years ago. He's doing what he believes is the right thing to do.
I withhold judgment because the world has never seen what BB and CB sisters will "try". For them and us, it's an all or nothing game. So, he will bet everything.
I wish him well. Meanwhile, I'll load the boat with more gold and still stand ready to short the US equity market when I see a clear signal.
So I think I've got it - in order to clean up a mess created by banks lending to people with undercollateralized depreciating assets the Fed is going to lend to banks based on undercolleralized depreciating assets - BRILLIANT!
" ac, clearly commodities have to trade for more than their cost of production or there wouldn't be much more production.
Current prices are probably artifically inflated somewhat because of speculators in the system, but shaking them out should only lessen the rate of price increases, not eliminate them (especially when they are expressed in dollar terms).
There's a finite amount of 'stuff' on this planet. There's an infinite amount of financial 'products' that produce the bubbles. I'm a believer in commodities. I understand others may see it differently."
sportsfan
Granted I may not be selling the hoard of physical P.M.'s I recently inherited, but then again they are not "making land anymore either."
I missed out on the big debate. I was trying to sniff this thing out last night. I didn't know what the Fed was going to do, but I had the scent.
What NOBODY seems to see is the reason for this. It's an EXTREMELY short term fix for the banks to avoid a train barreling down the tracks.
Next Friday 12.21 is triple witching day. The banks as of yesterday were pooping their collective pants because of the perfectly reasonable fear that there is not enough cash available in the interbank market to clear those contracts. Do I have proof, nope, just doing some inductive reasoning. Look at LIBOR, look at the fact banks don't trust each other, look at FHLB has basically run out of ammo, and banks hate running to the discount window.
So the Fed created a new and improved discount window. Essentially saying, bring us those level 3 AAA worthless pieces of paper and will give you some cash and not ask for it back until after Christmas.
IMHO. Maybe FFDIC or Banker have some better info than what I've been scanning, I might change my mind. But that's what my nose smells. FWIW.
Thx. And judging by the flood of red ink coming from Asia and Europe this morning, neither do the markets. And Dow futures are firmly in the red at the moment.
Apols to FFDIC, who had posted the link to Fortune/CNN before I did.
What?! When did this happen?!?
(sorry)
The same basic thing was tried in late 1999 and didn't make a bit of difference, except to maybe juice the stock market a bit more. The elephant in the room is depreciating house prices. Nothing can stop the bust at this point.
I have a limited understanding of all this, but apparently so do the major players. It's like watching a train wreck in slow motion.
They were dropping cash from helicopters but the right people weren't picking it up. So now they have to run after the right people with an armload of cash screaming "Take it! Take it!!".
All sound fiscal policy.
The news is huge it will be highly interesting to see what affect it has on the financial system.
Hmm. An auction. Sure sounds like a potential case of the "winner's curse" to me.
BTW, I think part of what the Fed is attempting here is to selectively provide liquidity.
I.E. to keep the money out of the hands of the hedge funds.
If that's the case, then it may be a step in the right direction.
But I think the Fed is making a big mistake in not letting the commodity and stock bubbles collapse.
With each shock the fund managers go back to the war room and make more and more contingency plans having learned from experience.
The bubble blowing industry gets more and more robust and resilient to momentary downturns.
I wonder if the CBs realize yet that they're fighting a war here.
The economy is still being torn down and sold off for profit by big money speculators.
Ask anybody who bought a house in a bubble market in 2005. They can tell you first hand what I mean by "speculators tearing down the economy".
ac, sorry, I was off reading other items - and didn't get a chance to post this early. I wasn't really sure from the Fed statement what they were doing ... but Greg Ip at the WSJ explained it well.
Best Wishes.
Interested to hear take on how this excess collateral helps the hedge complex which has to marke to market (all thes rest of the stuiff sold by the I-banks). by opening the colalteral window, the hedge complex - shadow sysytem - can avoid a year end mark and hence forestall a rush for the exits on redemptions...logical or not?
Amazing that the focus is on the ibanks,, but it is the hedge complex and the prime brokers (a vicous closed loop) that are on the hook for the large portion of the product put to the market. So why are we not seeing all the hedgies fess up?
When does the fish kill occure, now or later?
Ben blinked.
Also, I think the Fed is in danger of creating a "f**k this sh*t" attitude in the bond market, leading to a longer term sell off and higher rates for several months.
If they keep shocking the bond market and creating the impression that they're going to repeatedly reflate bubbles, the Fed's attempt to help could really backfire.
Of course, I still maintain that ultimately they'll turn to monetizing long bonds if they can get away with it.
But in the end you can't force people to lend out their real capital. They'll just hide it somewhere or not bother developing it.
And by encouraging bubbles and rewarding poor practices you degrade human capital.
You cannot fake wealth.
You cannot fake an economy.
At some point people have to use their brains. There's no way around this.
The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window."
What is the rate??
Dear Ben,
Just let home prices drop. Sure its painful, but do you remember what Paul V had to do to slay inflation in the early 80s?
Meltdowns are to be avoided, both in nuclear reactors and in financial systems. This looks like a reasonable attempt to maintain some stability in the financial system.
ac, I'm not so sure there is a commodity bubble. With the steadily declining dollar and increased world demand for raw materials, it may be that commodities are finally beginning to be priced according to their true value to humanity.
Moin from Germany,
read this from the Bank of England
The Bank will accept a wider range of high quality securities as collateral against funds advanced at the 3-month maturity. The additional categories of eligible collateral are: ....
Conventional debt security issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Corporation and the Federal Home Loan Banking system, rated AAA.
AAA-rated tranches of UK, US and EEA asset-backed securities (ABS) backed by credit cards; and AAA-rated tranches of UK and EEA prime residential mortgage-backed securities (RMBS).
Covered bonds rated AAA.
That´s what i call "lowering the bar"...
Now over to Canada
By the end of March 2008, the Bank will expand the list of eligible securities to include certain types of Canadian dollar-denominated ABCP that meet the following general criteria: are bank-sponsored, are covered by a liquidity provision that meets global standards, and are backed by traditional assets of an acceptable credit quality. In addition, higher standards of disclosure and additional credit ratings will be required. Asset-backed commercial paper backed by collateralized debt obligations and other highly-structured assets will not be considered at this time.
The White Stripes with their song "I can smell a rat" comes to mind...
Re:said a senior Federal Reserve official who briefed reporters on condition of anonymity because of the sensitive nature of the actions.
Did anyone see those late night emails here last night; that was the briefing
Just let home prices drop. Sure its painful, but do you remember what Paul V had to do to slay inflation in the early 80s?
I think what "Ben" is trying to do is prevent a deeper structural collapse in the credit markets.
That in of itself doesn't seem like such a bad idea to me.
The problem is that this is being done by an institution that has a 10 year track record of screwing things up. Plus they have a fundamentally intractable mandate.
I think when you order somebody to do something they fundamentally can't do (i.e. make the economy better with monetary policy) you'll most likely get an outcome that's worse than doing nothing at all.
We may be witnessing that now.
This does nothing to address the bogus nature of FASB accounting which allows debts to be swapped for cash equivalents and balance sheet manipulation, i.e, they need to restore trust versus toss more caino chips on the table!
I can't can't surf at low tide, I wish someone would make it high tide all the time.
jmf, Floyd Norris at the NY Times Smells the Fear
Best to all.
OT
German regulators threaten to close down Sächsische Landesbank if no funding and takeover is agreed upon by Sunday. Saxonia is not willing to guarantee 6 Bill$ (or more) their budget is only 22Bill $
WestLB is searching for funding too.
Here is a link to an opinion piece that ran in the Globe and Mail in Canada today titled "What do we do if the greenback goes into freefall?" Interesting (and ominous) reading...
What do we do if the greenback goes into freefall? - The Globe and Mail
Just how bad are things under the surface? And of more importance to the popcorn crowd, where?
Saxonia, i.e. the state "Sachsen"
Less than 3 months ago the Fed's biggest fear was inflation due to gas prices.
I'll go ask my dry cleaner if he can raise his prices because gas prices are higher.
Does anyone know how the Fed will price the collateral? Not at par I hope.
ac, I'm not so sure there is a commodity bubble. With the steadily declining dollar and increased world demand for raw materials, it may be that commodities are finally beginning to be priced according to their true value to humanity.
Well, last I checked (admittedly it's been a while) commodities in general were trading at something like double their cost of production -- a highly unusual situation (someone correct me if I'm wrong).
Even OPEC, for example, says that oil is being artificially bid up by speculators. Wouldn't they be the ones to know?
Also given the existence of the multitrillion dollar asset leveraging industry that we have, it's hard for me to imagine that commodity prices are not artificially inflated.
Why, afterall, would they not do this when it's potentially so profitable and there's so many people out there that are really, really willing to believe.
This is just another finger in the dike (excuse me) being used to stop hedge fund crashes and floods of bets from growing into a flood of redemtions leading to runs on banks... but the hedge funds all need to crash and thus the accounting books and crooked banks have to come clean!
Say Amen!
crispy&cole --
What is the rate??
From the FRB press release
:
Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).
...
The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned. The OIS rate is a measure of market participants expected average federal funds rate over the relevant term.
So the rates are set by auction, with the minimum being the "expected" fed funds rate over the duration of the loan. If the market is pricing in rate cuts, this could be lower than the current FF rate.
I still think this is not a huge deal; it is not very different than cutting the discount rate. It may help ward off a systemic failure in the real banking system, but the real troubles are in the "shadow" banking system and the CP market...
The loans are fairly short-term, so I am not sure this even qualifies as a "helicopter drop".
Since it is unlikely to fix the problem, this is probably just the first unorthodox step of many.
When are they going to open up the discount window for used vehicles? I would really like to trade in my ten-year-old car for a brand new one.
Why do i get the feeling that this "term auction facility" is just som post office box in Bumfuk Egypt?
I can't can't surf at low tide, I wish someone would make it high tide all the time.
That Guy Drinks Beer
Brilliant.
UPDATE: Floyd Norris smells Fear at the Fed
I dunno, that smells more like Old Spice to me.
RThomas --
Does anyone know how the Fed will price the collateral? Not at par I hope.
The press release does not say, but I highly suspect collateral will receive the same "haircut" as it does at the discount window.
(Note again that these auctions are only open to depository institutions; this is not a bail-out of Wall Street. If anything, it is an attempt to avoid that, as ac says. After an initial spike of euphoria, the market seems to be waking up to this.)
How can price drops be shown accurately when there are almost no sales? Until they start to resell at half the previous price, the price drops won't really show.
Paul Volker's era precedes the asset economy that we have generated since. Inflated asset prices have driven this economy for sometime now. Ben's fear of deflation and the consequence of crumbling asset economy is understandable. The whole thing has gone on because there has not been a crisis which forces market participants to look past the financial alchemy of sophisticated models and closely at the real fundamentals. The game will end one day but not at this time when we can still arm twist others to go along.
RThomas,
It wouldn't be any fun if they marked down the collateral.
ac,
If we look back years from now and note that the prices of food and energy never dropped below their current levels then perhaps we can agree that it is (was) not a bubble.
I think the time is drawing near for Congress to consider impeachment articles against this administration. We have the FAHB handing out money to Countrywide with toxic loans as collateral, with the taxpayers as the ultimate bagholders; now we see a Fed that seems to be bent on keeping the free market from following it's natural course.
Today's action will only accomplish one thing - reducing whatever credibility this Fed has left. They are whipsawing the markets around for nothing - this AM's pumpfest seems to be falling apart as I type.
Give the coke whore more blow, let the casino games contiunue with cheaper blow! More rate cuts.....more discounts, more creativity.....more coke for the whores!
Coffee Break
I'd say that the other central banks are going to find a way to have the Londoners drop rates and inflate their currency as well.
If they don't do it on their own, all of the outstanding swaps contracts will possibly force them to move with the other central banks.
Maybe it's a good time to speculate on a drop in the british pound?
no! must... fight.. urge... to.. lose.. more... money! no! more! speculating!
All right! So now I can get my Heloc rate dropped to 2 points above this new and special rate, right?
Geez, I guess the markets are finally beginning to understand this is bad, very bad, and the sooner that your leave with your skin intact, the sooner you can pay back your line of credit which is being called. I suspect that hedge fund liquidity will be the next challenge.
Watch that one start to unwind.
The stock market is quite unprepared for the providers of hedge fund liquidity to call those loans that allow the gearing up. But the balance sheets will require capital, and that capital can't be parked in "Upper Fancy Pants Hedge Quant LLC" of the Caymans.
Someday this war's gonna end...
Of course it will be a soft landing.
The foam on the runway, and those fire trucks and rescue vehicles lined up alongside -- just precautions, just precautions ...
ac, clearly commodities have to trade for more than their cost of production or there wouldn't be much more production.
Current prices are probably artifically inflated somewhat because of speculators in the system, but shaking them out should only lessen the rate of price increases, not eliminate them (especially when they are expressed in dollar terms).
There's a finite amount of 'stuff' on this planet. There's an infinite amount of financial 'products' that produce the bubbles. I'm a believer in commodities. I understand others may see it differently.
Holy crap, foreclosures up 31% over October?!?
U.S. foreclosures up 31.8% in November from previous month - MarketWatch
I'm a believer in commodities. I understand others may see it differently.
You know, in the 1800's, I bet whale oil futures would have looked like a sure thing. I mean, consider the ever-increasing urbanization leading to ever-higher demand for street lamps; the declining whale population...
How could you lose?
Oil up 3%, Heating oil up 3%, crude up 2.5%, gasoiline up 3%, the liquidity seems to be working Ben don't know what the bond market sell off is all about though
The whole manner in which the Fed is handling things has a "Keystone Cops" aura to it.
Just yesterday, Federal Reserve policymakers essentially told the market to shove it. They delivered twin quarter-point cuts in the federal funds rate and the discount rate, not the 50-point cuts that many investors were looking for. That caused the Dow Jones Industrial Average to tank by almost 300 points.
Then less than 24 hours later, the Fed skipped the big guns stage and reached right for a monetary policy howitzer. It said that its coordinating with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank (SNB) to flood the banking system with money.
Moreover, the Fed apparently notified reporters "on background" about the second step late yesterday (I heard CNBC's Steve Liesman talking about it on my satellite radio on the drive home).
And as I noted yesterday ...
The Fed failed to raise rates early enough and steeply enough to prevent the housing boom from turning into a housing bubble.
It didn't regulate the mortgage industry aggressively enough to prevent all the abuses we're hearing about now.
Then after the housing bubble popped, it kept assuring us everything was fine and that the mortgage problems were "contained" to a few subprime loans.
And then yesterday, with LIBOR rates going haywire, lenders tightening credit standards, and 2-year T-Notes yielding less than 3%, the Fed decided to go with a timid cut and no strong hint that more cuts are coming? I've been as critical as anyone about the Fed being too loose with monetary policy for some time. But I think a larger move was definitely justified.
Also, don't forget that this is the same Fed that in October apparently felt like its job was done and that everything would go back to being hunky-dory. Aiiiieeeee...
CA budget deficit worse than expected - time to float some more debt:
Tsunami of red ink about to hit California
California is facing a $14 billion state budget deficit, according to unnamed sources cited by the Sacramento Bee today.
The states forecasted deficit previously had been publicly estimated at $9.8 billion.
The Bee says its two sources offered the higher number after speaking with Gov. Arnold Schwarzenegger. The Department of Finance apparently gave the governor the revised estimate on Monday, the newspaper says.
The problem is blamed in part on Californias housing market woes that are contributing to lower projected property tax revenues, and to extraordinary expenses such as those incurred by the Southern California wildfires.
Mid-year spending cuts may be recommended, the Bee says
Central Valley Business Times
Ooh boy, almost all of this mornings 250 pt gap up on the DOW has been erased. Look out below ...
ac,
If we look back years from now and note that the prices of food and energy never dropped below their current levels then perhaps we can agree that it is (was) not a bubble.
I dunno about food and energy longer term.
They may well be up a couple of years from now due to legitmate demands.
I certainly wouldn't be short anything energy or food related.
But I also wouldn't be surprised by an oil bust, for example, in the near term.
Even if there's not enough oil in the ground you can still get too much of it above ground and flood storage capacity for a time.
Give the coke whore more blow, let the casino games contiunue with cheaper blow! More rate cuts.....more discounts, more creativity.....more coke for the whores!
doc holiday,
you forgot that they're transvestite coke whores..
..other than that minor point.. I agree. Cheaper blow for the transvestite coke whores!
Wow, take a look at the path of the markets today. Looks to be about 45% straight down - matbe the markets are smelling the fear too?
Nemo,
BoA and other depository institutions can be a liquidity conduit to CFC and such. They did it, perhaps with implicit guarantee from the FED, a few months back with a 2B infusion, exactly the same day discount rate was lowered.
Here's one more "Keystone cops" funny side note: I don't know if this plan was announced sooner than the Fed wanted (because of the Dow swan dive yesterday) or not. But the PDF document with the Federal Register Notice announcing the plan has "XXs" in it. Specifically, it says (as of 1 p.m. EST:
"DATES: The amendments to part 201 (Regulation A) are effective XXX."
and
"By order of the Board of Governors of the Federal Reserve System, XXX."
See for yourself:
http://www.federalreserve.gov/newsevents/press/monetary/monetary20071212a1.pdf
The whole manner in which the Fed is handling things has a "Keystone Cops" aura to it.
I keep imagining Ben Bernanke chasing other Fed governors and hedge fund managers in a sped up set piece, with Yakety Sax playing in the background.
Actually, that was creative Fed gaming, i.e, they gave the market part of the deal yesterday knowing full well the mkt would fall, then in hedge-fund-like gaming, they play the other side of the coin today to goose stocks back up.
The trouble with playing market games, to toy with wallstreet, just adds to the overall casino-like mentality which is linked to financial engineering failures! Citi said a few days ago they lost more on subprime hedging than they made, and every bank out there is guilty of fraudulent accounting and they all play the same games......so bail out the coke whore and give them another cheaper gram of blow and lets get on with runs on the bank........causing granny and granpa are pulling money out of shitty banks and this Fed baindai doesnt mean zip!
I suspect one of the uses that the "facility" will be put to is as long-term storage for asset-backed waste (the stuff that the ratings agencies haven't gotten around to downgrading from AAA yet, that is.) Since it appears that they can swap it at face value, albeit with a haircut, they can push it to the Fed, take the cash, and put the cash with an offsetting future liability on the books. No need to mark-to-market the assets! Sweet!
That game comes to an end when the assets are marked down from AAA and the Fed will no longer take them--but given this development, there will now be tremendous pressure on the ratings agencies to keep AAA rated as such.
Mike_in_FL --
The whole manner in which the Fed is handling things has a "Keystone Cops" aura to it.
I think they did a bad job revealing it, but the actual process was very deliberate. This has been in the works for months, and functions as an alternative to slashing the discount rate.
There is essentially no precedent for announcing a new monetary policy tool. Would it have been better to tack it on as a "P.S." on yesterday's statement? Or to announce it the day before? Easy to say in retrospect.
The only problem with the announcement is that it gives the appearance of responding to the market's temper tantrum, even though this was obviously the plan all along.
And it actually looks like a reasonable idea. The rate will be set by auction, so whoever needs the liquidity the most will have to bid for it. That's the "penalty". As long as the collateral is subject to a sufficient haircut, the risk borne by the Fed itself should be minimal. That's the good news.
The bad news is that it probably is not going to change very much, unless it shifts the psychology to where banks are actually willing to make loans again. Time will tell.
as someone wrote today, when push comes to shove in an election year governments are going to print money to avoid a recession and to hell with the consequences.
Nemo,
There may be more steps to come (including more Fed funds cuts), but this isn't the first. T-bill redemptions, term repos, narrowing the discount rate gap vs fed funds. Talk. Lots and lots of talk.
A Fed spokesman said that the overall level of reserves won't be affected by the TAF auctions. Daily operations will be adjusted (reduced, that is) to in order to avoid increasing reserves above target. It is as Cal says. They are trying to get reserves into the hands of the guys at the end of the liquidity line, because the guys earlier in the line are so badly screwed up. Little guys should be getting fed funds treatment, but instead they are getting Libor treatment from the bigger banks. Now, they can go around the bigger banks, get fed funds treatment at the TAF auctions and go about their business.
I'm definitely with Nemo on this - given that we have a Fed, that we have Fractional Reserve Lending and we had the existing discount window this isn't sooooo bad - its not a "any old iron" for pure paper gold type of thing. These points are worth keeping in focus:
2a - I assume that the asset classes will be subject to the same haircut as already established.
I particularly like the fact that its a poke in the eye to the primary dealers and that cozy, long established old boys club deserved it.
-K
The Roots of the Mortgage Crisis - WSJ.com
Greenspan is at it again with his Berlin Wall/savings glut excuse.
"I think what "Ben" is trying to do is prevent a deeper structural collapse in the credit markets."
Understood... but you don't 'push' credit, you extend it when asked for and safeguards are in place. This looks very much like the Fed is doing what mortgage brokers did in the years before 2007. If securities are unpriceable because risks are thought to be too high, extending loose credit is a really, really poor thing to do.
Regarding commodities, I don't know how you can look at this graph
and not be suspicious.
Why is it that the commodity indicies, which were trending down at the time, suddenly went vertical the second that the Fed first cut discount rates?
How does "legitimate supply and demand" relate to discount rates?
It's the whole "bad news bulls" phenomenon over again. It doesn't make sense, unless you view it in the light of an "artifical" asset leveraging industry.
market will crash and there will be runs on banks if bank are not regulated. The bank bailout will just add fuel to the fires of distrust which are in the hearts of my fellow Americans and other various citizens of the globe. They need to address regulation enforcement and start investigations that result with jail time ASAP! This is Enron Squared and ignoring it, in normal Bush fasion aint gonna cut it!
"DATES: The amendments to part 201 (Regulation A) are effective XXX."
and
"By order of the Board of Governors of the Federal Reserve System, XXX."
That's so they can keep doing the same thing, once a week, until it starts to work!
I think not disclosing the financial institutions making use of the facility is a mistake. If their names are published, that concentrates the loss of trust on a few institutions. But if they aren't published, the entire industry loses the trust of investors.
The problem right now is not what we know about the credit crisis, it's what we don't know. More transparency is the answer, and as such this new facility is moving in the wrong direction.
Oil continues blasting higher:
Crude oil for January delivery surged $3.13 to an intraday high of $93.15 a barrel on the New York Mercantile Exchange, the highest since Nov. 29. It was last up $3.01, or 3.3%, at $93.03. It's the first time oil topped $93 in this month.
Surging oil prices. Surging long rates. It's another fist in the face for Joe Sixpack.
Great job Fed peoples!!!!
Looking at some of my January puts, and the underlying equities, it seems that the larger players are using today's (short-lived) rally to exit their losing long positions.
For example, Capitol One gapped up at the open then sank to near yesterday's close, then attempted a brief secondary rally before falling to longer-term support ($49/share.)
It has broken down to around $48 now; someone put a huge sell order in around 12:30 of around 250K shares.
Probably it was some big hedge fund that knows how to read a chart ...
MikeInFl- "Here's one more "Keystone cops" funny side note: I don't know if this plan was announced sooner than the Fed wanted (because of the Dow swan dive yesterday) or not. But the PDF document with the Federal Register Notice announcing the plan has "XXs" in it. Specifically, it says (as of 1 p.m. EST:"
Conjure Bag says, "Well, they were in kind of a hurry, you know."
Collateral is only risk free in arms length transactions; if our banking regulators add to the confusion and occlusion required for market efficiency, then transactions will be questioned more and more and illiquidity will increase.......
Amen
How exactly is this an "injection"? Why do they keep using that term?
Question: Why wouldn't the rate established at these auctions NOT be nearly identical to the LIBOR rate?
Afterall, unless the Fed provides unlimited liquidity -- something it hasn't promised so far -- all this seems to do is inject cash for "good" collateral. Something you can already get -- albeit at LIBOR.
I did not think garage sales were allowed in DC. There goes the neighborhood.
[OT, and apologies for linking to my own blog]
Did any of you catch Kudlow&Company last night? Alice Rivkin was on, and she was awesome.
Wake up coke whores!
William Ockham (c. 12851349) is remembered as an influential nominalist, but his popular fame as a great logician rests chiefly on the maxim attributed to him and known as Occam's razor Entia non sunt multiplicanda praeter necessitatem or "Entities should not be multiplied unnecessarily." The term razor refers to the act of shaving away unnecessary assumptions to get to the simplest explanation.
Karl Popper
Karl Popper argues that a preference for simple theories need not appeal to practical or aesthetic considerations. Our preference for simplicity may be justified by his falsifiability criterion: We prefer simpler theories to more complex ones "because their empirical content is greater; and because they are better testable" (Popper 1992). In other words, a simple theory applies to more cases than a more complex one, and is thus more easily falsifiable.
sk,
The Fed's own information sheet says established haircut rules apply and that winners will remain nameless. There is also a minimum bid set by the Fed, at the OIS of appropriate duration. I believe it's a one-price auction. And yeah, the big boys don't get to borrow at the funds rate and lend at dreadful Libor rates after this. Either Libor comes down, or stays up, gets small and suffers adverse selection.
With securities including mortgages going (temporarily?) into a "term auction facility", can we look to some future Ohio federal judge to inquire into the paper trail and true ownership?
100 comments and still not a word about the Credit Cycle, just a lot of focus on the tactical aspects of the "auction" and "markets".
Dudes.
Wake up.
Toast is served!
As the smoke clears, this appears to be another fine example of "form over substance" executed by the BB Fed.
The TAF FAQ is pretty informative.
http://www.frbdiscountwindow.org/discountmargins.pdf
Quincy
sure, auto loans accepted
One common thread thru a lot of these discussions seems to be the 'hedge fund bogey man' in many different disguises. Just as an informal poll, have any of you folks ever invested in one or better yet worked in one? I have a fairly differing view of hedge funds than most here seem to have and am curious as to others experience.
thanks
d
This Fed Hocus Pocus fails to address the fact that there is a massive flight to quality, i.e, Ma & Pa investors, savers, the little guy that fuels the whole casino game, are freaking out about the lack of arms length trust as to what banks are doing and thus the safety of the institutions which they rely on for financial security. The Fed as a whole is not addressing the need for full disclosure and accounting enforcement, thus these little people are going to flee to places they think will have greater safety. Does anyonw feel safe about savings accounts at WaMu today......hell, this is Northern Rock, this is E-trade, this is CITI, this is BAC, this is every bank in the world and people are feaked out......but, the Fed wants to goose the market in Katrina-like style and suggest on Fox news that all is well.......which of course helps hedge funds pump the sound bite.......but, for Gods sake, if they dont want this to explode over night into a run on banks, they better address the reality of corruption -- thus let the runs begin!
Anyone know of a chart that compares Libor (or prime) rate and fed funds rate? Seems to me the divergence between the two is indicative of credit troubles.
I suspect one of the uses that the "facility" will be put to is as long-term storage for asset-backed waste (the stuff that the ratings agencies haven't gotten around to downgrading from AAA yet, that is.) Since it appears that they can swap it at face value, albeit with a haircut, they can push it to the Fed, take the cash, and put the cash with an offsetting future liability on the books. No need to mark-to-market the assets! Sweet!
I have this suspicion as well. Worse yet, I think it's going to be a prime candidate for adverse selection on the part of the banks holding this "No really, it's AAA-rated" stuff.
I have to think that the banks and institutions holding this junk have at least a general notion of what each bundle is worth (or would be, if they could sell them).
And if you have billions in qualifying, err, "collateral" that your in-house accountants have placed into two buckets - a bucket A you think is worth 20 cents on the dollar and a bucket B you think is worth 70 cents - and the same collateral haircut for each, doesn't going after one of those cheap new term auction loans suddenly sound tempting? I mean, hey, here's our billions worth of triple-A-rated collateral right here in this bucket marked "A", Mr. Fed Governor, sir.
Or am I missing something here?
Nemo
thanks from Germany for the great clip!
they better address the reality of corruption -- thus let the runs begin!
There are trillions in promises that can't be honored. It doesn't matter what the Fed does. Historians will be amazed that they kept the game going for as long as they did.
Somebody is getting screwed, no matter what, and for a substantial amount of money... like, oh, say, YOUR ENTIRE LIFETIME SAVINGS, maybe?
The Fed is still trying short term fixes for a long term problem. How does a one month loan, even repeatedly, save your ass?
The Fed is setting up the equivalent of a payday loan loan operation.
Reminds me of the story by Frank McCourt ("Tis"), where he talked of how they got money to buy food many times when they were so poor growing up in Ireland.
They would wrap up bricks in old clothes and take it to the sympathetic pawn broker who would loan them money based on their representation that there was something of value wrapped in the clothes. The pawn broker never looked in the wrapping, knowing their poverty stricken circumstances.
Great book, but there is a reason why the author left Ireland.
Question: Why wouldn't the rate established at these auctions NOT be nearly identical to the LIBOR rate?
...
Mr. Beach
My thinking is that the discount window rate 4.75% will be the ceiling for the bids since why bid more than that - although if this stigma thing is really that big, who knows? That would be amusing.
I think the objective of this is to bring the LIBOR DOWN to the FFR+alittlebit and if this plan works then your question will sort of answer itself.
-K
(Note again that these auctions are only open to depository institutions; this is not a bail-out of Wall Street.-Nemo
u keep saying that but i don't agree. as we've noted here before, many large banks, BAC, C have brokerage arms that serve as primary dealers for hedge funds. this is a way for them to funnel money to those hedge funds if they so desire.
Over at Naked Capitalism, one of the columns (link below) has this comment. Is this what the Fed is doing?
There is, it seems, one little opening, under "Lending to Non-Depositary Institutions". Apparently, "the Federal Reserve has the authority to lend directly to individuals, partnerships and corporations (IPCs), which could include depositary institutions, under sections 13(3) and 13(13) of the Federal Reserve Act . . . However, lending under these authorities is subject to stringent criteria in law and regulation . . . " This lending, under which, apparently, the Fed assumes the credit risk, can only be done under "unusual and exigent circumstances" and requires the affirmative vote, most of the time, "of not less than five members" of the Federal Reserve board. But section 13(3), Small and Clouse say, "provides virtually no restrictions on the form a written credit instrument must take in order to be eligible for discount".
Is the Fed Using the Wrong Playbook? « naked capitalism
david in ct- my fear about hedge funds is that they will precipitate the next part of the liquidity crisis and pull a tremendous amount of liquidity out of the markets- all of the markets they have invested in.
Many of the geared hedge funds are holding instruments that currently may or may not have a sufficient depth of market to be sold (pier loans, exotic swaps, anything related to mortgages, etc.) Selling these assets wholesale to meet the desire of the financing provider to recover capital will drain immense amounts of liquidity from the system that can not be readily obtained.
Think about who they would sell to?
Kind of like the old tale about the lady that cornered the rag trade by buying everything in sight, at the end she told her broker: "Sell!", and he replied "To whom? You own all of the rags."
Someday this war's gonna end...
calvert,
Re: 13(3) and 13(13) of the Federal Reserve Act
Go read the whole Fed Act, 13 is one of many fed tools, they have massive powers to do anything, they can sell insurance and real estate, they can print money, this was also posted on a thread here last night
Pump it up when you don't really need it.
Pump it up until you can feel it.
Down in the money centre,
hell bent or heaven sent,
listen to the propaganda,
listen to the latest slander.
There's nothing underhand
so don't try to understand.
Pump it up until you can feel it.
Pump it up when you don't really need it.
YouTube -
CR: can you explain what they are trying to achive ?
Do they think they will just roll this short term funding again and again - i.e. banks will not have to sell , will not have to "mark to market" - never ?
Don't they understand that the real issue here is real estate prices ? unless they come down the market will not restart. Why do they prolong the suffering thinking that they can prevent it for ever.
Note that bond market may get it and TNX is creeping back up.
I think people are overreacting somewhat. If the fed kept this program permanently at forecast rates, it's equivalent to a 40 billion permanent operation. The total amount is not that huge by central bank standards, especially considering it's reversible.
I think the driver is all the losses and writedowns we're seeing. End of year reporting is coming and I suspect a number of banks have fallen below regulatory capital and would be forced to start withdrawing loans. The Fed doesn't want that because it could pull the whole system down. So they're adopting a policy that will allow the banks to temporarily pump up their reserves so they can continue doing business.
Given that they can reverse this in less than 6 weeks, I don't see this as reflecting inflationary intent. It's a way to temporarily inject a moderate amount of reserve capital to banks with balance sheet problems. The fed probably expects the markets to start flowing again shortly and this will go away or lead to reorganizations for specific problem institutions. If, as many here believe, it's not going away and we a a major solvency crisis, the fed will have to take other actions. But at present they haven't.
Just what we need, a little more hot air in the balloon.
--
"Fear at the Fed"
Of course, only an idiot wouldn't fear the most powerful financial criminal gang in the world. I doubt that many American fear the Fed; those who do are thought of as kooks.
It would be interesting to see how American dopes, victims of the criminal gangs, some even willingly, fair. We shall find out in next few years.
It is fascinating to watch the system of the crooks in action.
Jas
What this says to me is - the credit markets are pretty much irreparably broken, so, let's set up an alternate banking system, some kind of parallel universe, where we can recreate the functions of the broken world, since trust cannot be restored there.
So we have to believe that the FED in its infinite wisdom, and other CBs, by setting this up, are automatically granted the gift of trust. If this is the case, it's not a cash injection. It's a policy injection into the free market wild west which has turned into a ghost town. And the policy is basically one which says go ahead and use any junk collateral you want that the real world wouldn't touch with a barge pole.
So, one or both of two things happen. If no one jumps at this offer they can't refuse, no injection, no change, no effect. If anyone steps up to the FED bar for a drink, they are granted some sort of immunity, and no one knows who they are? So, this brings the worst and most desperate to the bar, and lets them bring their worst junk at 85c on the $. Now, this might make things function for a bit, but it doesnt change the reality of the declingin value of the collateral on this crap. So eventually, we must discover that 85c on the dollar was way more than the value. So, um, who is going to pick up the tab here when we decide to start marking to reality? I just cant see how this changes anything, unless they think that somehow the grease in the system will have some effect on the real world financing and demand for housing. I really cant make that connection at this point.
doc h (and others),
I'm not sure that there is a "failure" when the Fed does what it can do, and doesn't do what it cannot do. Bernanke has discussed the Fed buying longer-term assets in an effort to overcome disinflation, so I suppose it's possible to consider the purchase of longer-term assets now. But that wouldn't do what the Fed is trying to do.
They don't want to get rid of the risk premium. They like the risk premium. They begged for it. They don't want to resort to the really abnormal when the merely novel will do. Buying debt beyond money market maturities is typically reserved for coupon passes. Otherwise, the Fed sticks to money market stuff. What they want to do, at least for now, is make the system, as it is designed, work again. That means getting reserves onto the books of lenders at all levels. Sky-high Libor rates show there is a problem getting reserves onto bank books. TAF auctions are aimed at getting around the big participants in the Libor market. They are not performing their function, so they get cut out.
A CFO of a public company that would do that (moving resreve from one quarter to another) will go to jail.
But I guess this is leagl: "So they're adopting a policy that will allow the banks to temporarily pump up their reserves so they can continue doing business.
Given that they can reverse this in less than 6 weeks, I don't see this as reflecting inflationary intent. It's a way to temporarily inject a moderate amount of reserve capital to banks with balance sheet problems."
"Well, last I checked (admittedly it's been a while) commodities in general were trading at something like double their cost of production -- a highly unusual situation (someone correct me if I'm wrong)."
I believe the costs of production of an Saudi barrel of oil is about 50 cents so I can assure oil is trading much higher than double their cost of production.
"The price of something is exactly what someone will paid for it" J. D. Rockerfellow (I believe).
idoc --
u keep saying that but i don't agree. as we've noted here before, many large banks, BAC, C have brokerage arms that serve as primary dealers for hedge funds. this is a way for them to funnel money to those hedge funds if they so desire.
If so, they can already do the same via the discount window. The TAF allows exactly the same participants, and it accepts exactly the same collateral under the same terms, as the existing discount window.
That is why this thing is not a bail-out. It does not provide liquidity to any entity who could not obtain it already.
There may or may not be a bail-out coming, but this is not it.
Don't they understand that the real issue here is real estate prices ?
Yal,
This is wayyyy beyond housing. This blog may be about housing.. but what is happening now is about the derivatives and other sheets of paper that have been written up to artificially inflate the amount of "money" in the system.
The stresses that are being felt now run the risk of testing the numbers written on all these paper contracts.. swaps and other derivatives.
Like I've mentioned.. there are over $300 trillion (US) worth of derivatives out there (mostly swaps and interest rate derivatives though).
There's about $3 - $4 trillion in currency floating around from all the central banks.
Don't they understand that the real issue here is real estate prices ?
RE prices are the visible mechanism, the real issue is debt. Feds can't fix that except a big deflationary collapse or printing lots of money.
It is amazing to me that this has been a ongoing, growing problem for one year now and so few people seem understand what's really happening because they're focused on each tactical eruption.
Market will turn
FRB: Federal Reserve Board: Error Page sect13.htm
FEDERAL RESERVE ACT
SECTION 13Powers of Federal Reserve Banks
...the real issue is debt. Feds can't fix that except a big deflationary collapse or printing lots of money.
It is amazing to me that this has been a ongoing, growing problem for one year now and so few people seem understand what's really happening because they're focused on each tactical eruption.
Broward Horne
A lot of commentators on this blog and similar blogs DO understand it - but, to use a cooking analogy, its more fun to watch and point to the bubbles while you wait for the thermometer to hit 100C.
-K
Does Jas make that stuff up or does he use a random insult generator?
"They need to address regulation enforcement and start investigations that result with jail time ASAP!"
doc holiday
Absolutely! However, if a bunch of drunken teenagers tip their rowboat in the lake, the adults in the Rescue Squad don't sit around debating how much jail time to give them. They fish them out of the water FIRST, then they arrest and prosecute.
The patient is being taken to the ICU. It doesn't look good.
ac, not to tweak you, but yesterday you said that you thought Ben was swell and wise for only raising 0.25%. Words to the effect that he was showing his independence, to some degree, of Wall Street.
I hope that you have seen the light this morning.
Schmucks and criminals, literally. Save their banks on the backs of worker bees.
I see a nice big, reverse of the Cross of Gold populism returning (people for gold, Wall Street for fiat). And, those pitchforks will be sharp and those shotguns loaded for bear.
bio,
This looks like The Fed is floating out a case of beer to the drunk teens and then parking a truck on the shore that has more beer and the door is open and the keys are in the ignition, and a big fat stack of credit cards is sitting there next to the bikini bottom and the roadmap has a treasure map that points to Washington DC, which is beside a cell phone that has all the casino manager names..... no, you dont bail out somebody who just shot a bunch of people in a church, or on a bus, you take action and snub these bastards out like maggots!
That is why this thing is not a bail-out. It does not provide liquidity to any entity who could not obtain it already.
No, but it does provide anonymous, cut-price liquidity to any entity who could only obtain it previously through the discount window. Oh, and against the same broad range of questionable collateral!
I'm not worried about this new idea working; I'm worried about it working too well.
What's up with the Bank of England? They're mentioned at the beginning of the release... But there's no other mention of their involvment. No swaps or whatever..
Is the BoE going along with these liquidity actions or not?
Reminds me of the classic episode of ER where an expectant mother "went south" on Dr. Green's watch. A chain of minor miscalculations and errors, none of them huge in and of themselves, resulted in a botched caesarian and a dead mom.
At the end of the hour, everyone else had backed away from the body while Dr. Green was still doing manic CPR.
"The European Central Bank said Wednesday it would make as much as $20 billion available to European banks, in part to fill their demand for scarce dollars..."
I thought there were too many dollars floating about. How is it that dollars suddenly are "scarce"?
Is the BoE going along with these liquidity actions or not?
btw, Norway raised.
Bio,
Maybe this is like a crime scene, where The Fed is buying time and trying to talk some insane coke whore out of doing something "wrong", but the banks are on high octane crack and talking about not hiding debt and playing hedge games is like asking casinos in Vegas to shut down operations that they thrive on. The difference between vegas and The Fed should be clear, i.e, The Fed should be regulating risk and enforcing rules to regulate risk, versus goosing the market like they are part of a collusive hedge fund run by Goldman! Where is the safety net for the little guy that doesnt undertsnad that his or her pension fund is being used in swaps by hedge funds (see Pension Reform Act)!!!
Given that banks have been withdrawing from the term interbank lending market for about 10 years now (it's a horribly inefficient use of balance sheet and capital), this move isn't sinister or cynical, and is really long overdue. It does little to alleviate the underlying credit implosion though, and I'm guessing Libors only decline 20 bps or so next week - better but still incredibly tight. I think the timing of this has more to do with the fact that headline inflation will print above 4% on Friday, meaning we already have near zero real interest rates and the Fed won't want to cut rates below 4% unless inflation starts to decline (unlikely in the near term) or economic conditions become clearly recessionary (which they aren't, yet anyway).
@Nemo Thanks for your posts today. That TAF_FAQ link was a real daisy. It helped a lot.
doc,
No argument from me that the Fed should have stopped this before it happened. Now, however, it's happened. The drowning teens are grabbing the gunwhales of a boat filled with old ladies, threatening to tip it over, so we have to pull them out of the water. Send the whole crew to jail? Please! But don't take everyone's 401K down with em.
Biotech guru
No, but it does provide anonymous, cut-price liquidity to any entity who could only obtain it previously through the discount window. Oh, and against the same broad range of questionable collateral!
...
Mook
The discount window use was anonymous too:
"
Each week, the Board of Governors reports offsite link total borrowing under each lending program for the nation as a whole as well as the sum of borrowing under all programs for each Federal Reserve District. The Federal Reserve does not publish information about individual institution's borrowings.
"
The Federal Reserve Bank Discount Window & Payment System Risk Website
So how come there's a stigma you ask ? Beats me - probably because "word gets out", I suppose.
-K
Hi all,
Long time lurker first time poster.
I thought I´d let you know how well contained this thing is from a Scandinavian perspective so please excuse the lack of direct relevance to the article.
Condos (or the closest local equivalent) are down 9% in the last three months in Stockholm and down 20% YTD in Copenhagen.
Best,
Lefou
Oh, and Doc, where's the safety net for the little guy, when his 401 K gets a 20 % haircut? I'm sure you know that "pension" is quaint term from the horse and buggy era and we're all supposed to invest for retirement. So, like it or not, the market is us and we better save it even if that means saving some crooks with it. We can always send them to the Pen when this is over to be Jeff Skilling's cell mates.
A CFO of a public company that would do that (moving resreve from one quarter to another) will go to jail.
Yes, but the fed is the regulator, not the regulatee. They - unlike a private CFO - are allowed to provide liquidity for the system. All systems have bugs and you need somebody like the fed to have a stable banking system.
Lefou, what's a 2 bedroom flat go for today in Stockholm?
All systems have bugs and you need somebody like the fed to have a stable banking system.
All the Fed is is a bunch of rich guys with a big printing press.
How about we use money that's actually worth something instead of Monopoly money?
"It's a way to temporarily inject a moderate amount of reserve capital to banks with balance sheet problems."
The FED action will cause some raise eyebrows from the sheeple, maybe a bit of awaking that a crisis is actually brewing. Rate cuts and discount window talk are common media messages but this situation is new and maybe a cause for concern.
While those that follow the credit markets take these events as part of the plan and not really that big a deal, move along nothing too see here folks, my guess is that folks who have been hearing lots about the mortgage melt down, bank problems, slower economy and other bad news will consider this FED action as maybe something to fear and keep their ear a little closer to the financial media message during this xmas season.
Fair Economist said, "You need somebody like the Fed to have a stable banking system".
The question is, have they made it more stable or less stable with their asymetric policy of inaction in the face of bubbles, while always inflating away any signs of trouble?
I think we're about to discover that our famous "resiliency" over recent years was just an illusion as instability grew and grew.
Bio,
This makes me think that different communities have different lakes, different laws, different teens, i.e, on a case-by-case basis (no pun) there are levels of risk to be determined and investors that seek less risk shouls live in comunities that are safer, and those that want to be in higher risk fun places, with hedge funds, should go there, but we cant save all the dumbass people that took too much risk.
Our Nation may have to witness great decay in 401ks, because of the actions of a few powerful trading/banking organizations that were drunk with power. The Pension reform Act opened pandoras box and changed a lot of cashflow models, which did not plan on the flight to safety that most people require -- thus the actions of a few drunk retards has resulted in a huge leverage swap that has exploded.
So, yes, how do we deal with these people and the mess?
my guess is that folks who have been hearing lots about the mortgage melt down, bank problems, slower economy and other bad news will consider this FED action as maybe something to fear and keep their ear a little closer to the financial media message during this xmas season.
Most people don't pay attention to the financial news, but they do pay attention to how much a gallon of milk costs, gas prices, tuition, how much f their paycheck goes towards health care each month, etc.
Anything else is abstraction.
I agree with Broward Horne's comments above re: the Credit Cycle should be the focus. You can't negate the forces of the credit cycle with what he calls "tactical" moves. I think the Fed is nearly powerless at this point.
Speed,
All figures are based on price per m2 here and the latest figure is around 8100$ per m2.
The statistics are from around 70% of deals and are calculated by a company actually owned by the largest real estate companies in Sweden.
ac, not to tweak you, but yesterday you said that you thought Ben was swell and wise for only raising 0.25%. Words to the effect that he was showing his independence, to some degree, of Wall Street.
That's just because my portfolio was up at the time.
Bio,
As a bad example, the Mormons in Ogden want to know why they have to spend tax dollars to bail out the drunk kids in Houston that were taking on excessive risk, in a community that had no relationship to the community they made a choice to live in?
Why should tax payers bail out hedge funds that were retaded and drunk with excess powers?
At 1:50pm, K harris said, "TAF auctions are aimed at getting around the big participants in the Libor market. They are not performing their function, so they get cut out."
By "their function", I suppose you mean lending money to support malinvestments (or at best opaque investments)?
doc, What you say is fine, except few of us are given a choice of which lake we want our boat on. If someone ncame to workers and said you have the choice between a nice, safe, but modest pension or a risky 401 K with a potential for higher rewards, then you could say those who chose the 401 k should just live with the risk. However, folks are just told, "sorry, we're converting the pension plan to a 401 K. Good luck to you".
So that's the system we have. Bemoan it all you like, but we have to salvage what we can.
psychodave --
My pleasure. One more before I get back to work:
Everything You Want to Know About Todays Fed Move But Didnt Know Who to Ask
(Shouldn't that be "whom"? Also, he writes "discrete" when he means "discreet". When did they stop teaching journalists English?)
If this is truely temporary so that things can be worked out so that the banks and whatnot get .85 on the dollar instead of the .40 they'd probably be getting now, then OK (well not really, but I'd live with it). Thing is, this has been going along for so long, and the amount of effort that has gone in to actually trying to find out the true value of these funky pieces of paper is so miniscule, that I don't think they have any plan other than 'don't realize the losses'. Wile E. Coyote moments all around.
If the Fed really wants to get through this crunch, they need to get to work on a bailout LTCM style. Where they sit all those involved down, get them to put their cards on the table, and then figure out who lives and who dies. Sure it'd be nice if the market could just do it on its own, but it seems that the participants are worried that if they actually run the numbers in the Excel it'll be their neck on the block.
Slightly off topic, but amid all this credit market anxiety -- and the debate about how much the Fed should cut rates -- has anyone noticed what market is loving this Fed move more than anything? The answer is commodities. Many bank and financial shares have given up their early gains or gone negative. Meanwhile, the commoditie markets are going ballistic.
Crude oil is soaring (up around $4 a barrel). Soybeans were recently trading at a fresh 34-year high. Wheat was recently trading limit up (meaning it rose the most permitted by the Chicago Board of Trade). Corn is closing in on its old high of $4.37 a bushel. And so on and so forth. Admittedly, the metals market is more mixed. Some metals, like gold, are up substantially while others, like copper, are down. But the message seems to be that whatever the precise mechanics of this Fed move, the consequence could be to monetize inflation -- or in other words, validate these high price levels. It's only one trading day, of course. But I find the activity noteworthy.
Oh and lost in all the credit hubbub was the fundamental economic news today - namely that import prices jumped 2.7% between October and November and 11.4% year-over-year. That 11.4% rise is the biggest YOY gain in any month on record (the data series goes back to 1982). Ex-petro and ex-all fuels figures were up 3% YOY. And prices of Chinese goods are now rising consistently, month after month. All else being equal, this could keep price pressures elevated (though admittedly, the bond market could really care less about inflation these days -- it has been trading off credit fears)
In today's world, the real measure of what any "money" is worth is measured in oil, the international currency. And whatever the Fed is doing, it depreciated the dollar by 4-5% today alone.
This is the worst possible outcome for U.S. economic growth and corporate profits. CR's red line will cross his black line. GDP will sink. Inflation will keep rising. The recession will come sooner and last longer. More U.S. wealth will disappear permanently overseas, and if the dollar keeps sinking, that wealth won't flow back into U.S. securities.
There can be no sustained prosperity in the U.S. with 16 million barrels a day of imports at $90+ (regardless of Fed policy). Unless oil comes down, within the next year 50,000 independent truckers will park it.
Then, see how many Chinese products make their way into Wal-Mart.
bio,
The only way I see of starting salvage is to repeal The Pension Reform Act ASAP! If that Act stays in place as is, you will not have a 401k in 5 years! Ok you will have a 401k, but it may be worth 80% less if a hedge fund bets the wrong way and your high school pension fund manager forgets that your savings account is not part of a game!
Cramer nearly melts down again today! Nice.
Re: High School Hedge Managers/Pension mgrs: See Orange County and muni losses
I have not read thru the comments. So here goes.
1) Takes away the 50bp penalty for borrowing through the discount window.
2) collaterlized loans.
3) akin to disc window borrowing in other respects
Crude oil is soaring (up around $4 a barrel). Soybeans were recently trading at a fresh 34-year high. Wheat was recently trading limit up (meaning it rose the most permitted by the Chicago Board of Trade). Corn is closing in on its old high of $4.37 a bushel. And so on and so forth. Admittedly, the metals market is more mixed. Some metals, like gold, are up substantially while others, like copper, are down. But the message seems to be that whatever the precise mechanics of this Fed move, the consequence could be to monetize inflation -- or in other words, validate these high price levels.
In as much as these prices rise before incomes, the net effect is to take even more money out of the hands of consumers and businesses.
Not very effective inflationary policy so far.
BB : Inflation? F*&k inflation! I'm trying to prevent deflation.
Funny thing is, this is much more a real possibility now than it was when Greenspan was openly talking about fighting it.
If I had $ 500 billion to spend and I had to choose between a bailout for even the dumbest crookedest idiots who hold this crap paper OR the Iraq war, I'd choose the bailout in a heartbeat. I'd even throw in whatever it took to house every one of the crooks in Federal pen for the next 5-10 years. It amazes me that anyone would complaim about wasting their hard-earned tax dollars on this mess, when the Iraq war is costing more AND costing lives as well. So, I say bail away and then prosecute away and yes, end the war!
ac, if your only inflation metric is wages, yes.
If your inflation metric is costs of goods and services, well, no.
Like my answer? I am an economist!
Someday this war's gonna end...but it sure is nice to have a ringside seat into the destabilization of our entire fiscal and monetary system.
what the hell just happened?
Im on the newer thread Gary - just asked the same thing.
ac,
Perhaps the only prices that will go up are the prices of food and energy. Inflationary? No. Painful? Yes.
thx geoff . . . skipped two threads up!
Bye bye, sucker's rally ... hope you didn't go long.
Where will banks make cash in a recession, besides Fed discount swaps?
which they term a "cramdown," would force lenders to charge higher rates
No kidding? You mean they were lending too loosely?
Collateral has to be recorded in some new arms length way to insure its value, and thus any FASB/SEC/GAAP adjusting/spinning hiding off the books, off shore in entities aint gonna cut it.
Then again, why do we trust the US dollar or Treasuries at this point if The Fed is going to be a collusive Goldman hedgefund subsidiary??
In God we Trust, Truth is the bottom line and truth will set Bush, Paulson, SEC, DOJ, FASB, FTC Free.....free and justice for all
Ame
Mike_in_Florida - there was an article in this morning's FT about shortages in various crops. Demand from the US may decline for some commodities in a recession, eg copper which is used in housing construction, but when it comes to food, recession or not, people still have to eat.
FT.com / Commodities - Concerns over food inflation as harvests fail
You know, I have friends in Iraq & just find it ironic that those men & women have greater courage than these bunch of Ivy league scum. Now not only are taxpayers asked to lighten the load for wall street but ask the troops to hand over their wallets to the bankers. So take a bullet & give me your wallet? Also your wifes purse too!
FED....
"What? Your family needs milk ($6 gallon) & formula for the baby? To bad bi$%h, the bankers need their bonuses. Also while your at it any I like to thank your husband for protecting the American way."
if The Fed is going to be a collusive Goldman hedgefund subsidiary??
you probably wanted to say Goldman SIV xD
Revro,
Yah, I guess SIVs are intended to stay in business as long as they dont go belly up, versus shorter term CMOs, etc that go belly up faster
I told you, I told you I told you...no economy with the power to print money has ever failed to print more while trying to get itself of debt since Croesus added nickel to his silver coins.
Yes..housing going to take off again, but bread is going to cost $12.50 per loaf.
The crunch comes a few years down the road when inflation has raised the effective minimum wage to $50 per hour and part-time McDonald burger flippers can afford $500,000 houses...oops..now they're 3,000,000 houses..and guess what...the SIV's are saved, foreclosures gone, life is good...for a few more years.
God bless William Jennings Bryan and his Cross of Gold.
NO SURPRISES HERE...
BB has stated clearly in his published remarks when he was at Princeton: (paraphrasing) "It only took one correct action to stop the Depression. FDR, unlike HHoover, tried many federal actions. Most failed. One worked."
BB is doing exactly as he has concluded long in the past. His team has tried some ideas. They didn't work. They are trying a new idea, direct lending against "pretend value". If it works, BB will be doing just what he said is the right thing to do...try everything and keep trying until one thing works.
The form of BB's actions will be stupid or brilliant; to him, it does not matter than we see his actions to be foolish...until the "one" idea that saves the economic day.
Obviously, other CB's recognize this is the only logic that portends a reasonable probability of success. So, they're joining the Fed Res at the hip to try everything.
The story now is the FR is not coming to the aid of any single banking entity.
The tragedy here is that justice will never punish the wrongdoers (Hank Paulson being one of the chief leaders who nurtured the financial gamblers, and who now has zero credibility; he is not only above reproach, he is the major ethically bankrupt IBanker who gamed the system).
The desperate public, all the housing gamers, will lap this up. They too are attempting to avoid BK.
Again, we are witnessing the gaming of the system.
Will it work? Gold says no. The shear numbers of upside down HB's say no. And, we will watch one last time to see if the rating agencies, S&P/Moody's/Fitch will also say no.
The gaming goes on. This action is not a surprise. No action will be a surprise. BB wrote about this years ago. He's doing what he believes is the right thing to do.
I withhold judgment because the world has never seen what BB and CB sisters will "try". For them and us, it's an all or nothing game. So, he will bet everything.
I wish him well. Meanwhile, I'll load the boat with more gold and still stand ready to short the US equity market when I see a clear signal.
So I think I've got it - in order to clean up a mess created by banks lending to people with undercollateralized depreciating assets the Fed is going to lend to banks based on undercolleralized depreciating assets - BRILLIANT!
Fortune - Why the Fed bailout might not work
Why the Fed bailout might not work - Dec. 12, 2007
" ac, clearly commodities have to trade for more than their cost of production or there wouldn't be much more production.
Current prices are probably artifically inflated somewhat because of speculators in the system, but shaking them out should only lessen the rate of price increases, not eliminate them (especially when they are expressed in dollar terms).
There's a finite amount of 'stuff' on this planet. There's an infinite amount of financial 'products' that produce the bubbles. I'm a believer in commodities. I understand others may see it differently."
sportsfan
Granted I may not be selling the hoard of physical P.M.'s I recently inherited, but then again they are not "making land anymore either."
Note to self: buy more SMN!
Roubini is not impressed:
RGE - Coordinated Central Banks Liquidity Injections: Too Little Too Late To Address the Fundamental Problems of the Financial System
Neither is this guy writing for Fortune/CNN.com:
Why the Fed bailout might not work - Dec. 12, 2007
OK,
I missed out on the big debate. I was trying to sniff this thing out last night. I didn't know what the Fed was going to do, but I had the scent.
What NOBODY seems to see is the reason for this. It's an EXTREMELY short term fix for the banks to avoid a train barreling down the tracks.
Next Friday 12.21 is triple witching day. The banks as of yesterday were pooping their collective pants because of the perfectly reasonable fear that there is not enough cash available in the interbank market to clear those contracts. Do I have proof, nope, just doing some inductive reasoning. Look at LIBOR, look at the fact banks don't trust each other, look at FHLB has basically run out of ammo, and banks hate running to the discount window.
So the Fed created a new and improved discount window. Essentially saying, bring us those level 3 AAA worthless pieces of paper and will give you some cash and not ask for it back until after Christmas.
IMHO. Maybe FFDIC or Banker have some better info than what I've been scanning, I might change my mind. But that's what my nose smells. FWIW.
Cheers,
Carlomango,
FWIW, niether does Mish:
Mish's Global etc.
Cheers,
Misean,
What about Pension Reform Act? What do you think?
Misean,
Thx. And judging by the flood of red ink coming from Asia and Europe this morning, neither do the markets. And Dow futures are firmly in the red at the moment.
Apols to FFDIC, who had posted the link to Fortune/CNN before I did.
It wasn't exactly what we had expected.