Just for the records. NYA is still above its Jan. 22nd lows and # of fresh lows is below Jan. 22nd. This is still just a retest og the lows in my books. However, we have to turn around very soon or it's going much lower. I think that would coincide with whether there will be a recession or not. The jusgement is still out.
Well, the devil is in the details. If they only accept "securities with market prices", then the overcollaterization is probably OK for such a short term. But if they accept securities without market values, then we have a problem. 85% of par for AAA CDOs? Give me a break. Or 80% of ABS non-AAA? I wouldn't touch second-lien backed ABS, either. We know from ABX and from some sales that the true market value is much lower.
Uhh. Theres never been any partial recovery of any kind in the financial crisis. Your confusing the stock market bounces with the financial crisis. When the stock market bounced on rate cut news, the masses wanted to believe the crisis would get better. Informed people always new it wouldnt.
This topic reminds me of what Jim Grant said last month in a column titled "Junk-Grade Central Bank":
"New York's most leveraged financial institution shows capital and surplus of $9.4 Billion against assets of $315.8 billion. S&P, Moody's, Fitch, and even Egan-Jones may sit in silence, but Grant's has reached its decision. We now downgrade the creditworthiness of the Federal Reserve Bank of New York from presumptive triple-A to mid-grade junk. At that, the Fed gets off light."
The column concluded with "Just when you thought you knew every reason to own gold, here's another."
One step too far? What exactly are the increments on this spectrum of favoritism? Should all industries be protected from failure? Moral hazard is a systemic issue. The effects happen at the margin and systematically. It is not about individual cases. It is about the long run effects of favoritism. It biases the natural selection process that healthy capitalism requires. The hidden, marginal favoritism is the very nature of the road to serfdom. It allows power to concentrate, becoming malignant tumors on human liberty. Maybe a little hyperbole is required to illuminate the large-scale, abstract process at work. Certainly, the perpetrators will never admit their own partial culpability for the fragilization of the system. Are they just too naive to understand that they are performing the Devil's handiwork? And so the collective marches onward towards its predestined fate, no man courageous enough to stop it. What's in store for the next cycle? Chuck Prince dancing on my grave?
O-Joe, read Geithner's latest speech. Maybe a better way to think about what is happening is if there was a great population on the savannah. The reputational damage for structured finance will be the equivalent of a hundred-year drought. Either many animals will die of thirst or Ben the rainmaker will cause a flood of biblical proportion. The least probable outcome, in my opinion, is that Bernankilocks gets it "just right". Regardless, this is far beyond the power of charts.
Ok, so the Fed is owed by or is a collection of private banks and is not in the habit of losing money. Sterilized? Good or bad collateral? Over-collateralized?
Sure, but didcha stop to think that it really doesn't matter? The Fed can buy as much bad debt as they want and they will never lose. The Fed prints the currency. And the fed can print as much as the fed wants. The Fed is accountable to no one. Get it?
Normally i like to think I have a pretty good handle on econmic theory, but could someone please explain Walras law to me. Why must the 3rd clear if the first two do?
I just read on NakedCapitalism that The Fed will be accepting manure as collateral, and that Texas has the greatest supply. This will turn around the economy in no time, but the greatest danger is the manure bubble, which Wall Street will pump up and The Fed will support. This is all just a big cycle and garbage in, garbage out!
Just thought everyone would enjoy this little tid-bit from Yahoo Finance for the new home buyer: "Tighter lending standards and see-sawing interest rates abound, but it could still make sense to buy a home right now".
Thank you for those insightful words Mr. P.T. Barnham.
And the fed can print as much as the fed wants. The Fed is accountable to no one. Get it?
No I don't. Please explain to me how the Fed puts that "printed money" into circulation? Ben and they boys get in the Suburban and down the street to HappyBank, stuff it all in an envelope and stuff it through the drive-through while laughing like 6 year old girls?
And while you're at it, explain to me what you mean by "accountable to no one"? Please explain exactly what the Fed can do, and can't. Please also explain to me how the Fed wants to lose money?
It seems that the internet wingnuts are having a field day lately.
As usual, all those steely-eyed, hard-edged Ayn Rand types believe in privatizing the profits and socializing the losses. How dare anyone impose Glass-Steagall or the tiniest bit of oversight on them...
I just read on NakedCapitalism that The Fed will be accepting manure as collateral, and that Texas has the greatest supply. This will turn around the economy in no time, but the greatest danger is the manure bubble, which Wall Street will pump up and The Fed will support.
By depreciating the $ the US is effectively, gradually, defaulting on its debts to the world. Whether the world has awakened to that fact, or whether it can do anything about it is another question. But the idea that the US would never default is nonsense. It is defaulting slow motion.
The market right now is irrational, and I like Krugman's slap in the face analogy. What the fed is doing with the TAF is supplying a temporary way of avoiding a sale of collateral at an irrational price. The reason the term is long is because we all know things can stay irrational longer than we all think.
Say a large bank is having a severe problem. If it has to sell these assets on the open market now, they are going to be in even worse shape and, furthermore, dumping these onto the market is going to make it even more irrational. Fine. It's a very good way to accomplish the slap in the face.
But what happens if the Fed takes the collateral and the bank spirals down to insolvency anyhow? Is the Fed stuck with this? No, because at some point the Fed will either liquidate the assets or will transfer them to whomever is eating the insolvent bank. My last sentence is the quasi-nationalization aspect.
So I think that, in the end, is what the Fed has up its sleeve. From their point of view, it doesn't matter. They're not going to lose money. And the quasi-nationalization is that the Fed has the collateral, the FDIC has the rest in the clean-up.
Now, outside of the banking system lord only knows what will happen. My current thinking is that the IB landscape is about to change drastically. So is the concept of a hedge fund.
Let's see, $100B TAF (35 day term), $100B Repo's (28 day, MBS Ok), and $200B tax prebate stimulus checks. Starting to look like real money. What was that MEW loss estimate, again?
Yes, I know its not enough but it is emergency cash that will have an impact. Might not help at all, we are in uncharted territory and the cross defaults are a real risk. Big question is will the impaired banks, especially the primary dealers (to whom the repo's are specifically targeted), even use the loaned capital sensibly? Maybe their corporate culture is so degenerate they'll just waste it speculating in the markets and setting off that last commodity rocket.
All these event tell me is that the Fed should tighten in accordance with their charter. Well, okay, they also tell me that the Fed won't tighten in defiance of their charter.
I have a feeling that about a year ago or longer, information was transmitted to our trading partners that something had to be done about our unbalanced system. Our guys said you can either help us or you can accept what we have to do to put things back in balance. Our partners most likely said: We will think about it. Our guys said OK we are balancing things be devaluing our currency; are you happy now?
I don't know jack but inflation is one way out of the unbalance that allows our mfgs to compete. It is one way to move 8 million workers from the untraded sector to the traded sector.
Good Luck to Us All.
I'm trying to imagine a situation in which the Fed would issue a margin call against the TAF collateral. Perhaps you can come up with one.
Imagine that the collateral values suffer a steep decline. Would the Fed call for more margin? A margin call would reduce the amount a "client bank" could borrow under the TAF facility, and therefore widespread margin calls by the Fed would reduce system liquidity -- just the opposite of the TAF's intent.
Now imagine that a number of banks are actually thought to be insolvent, and that the TAF loans are unlikely to be repaid. Will the Fed seize the collateral? Of course this would put the banks under, which, again, would run counter to the TAF's intent: to save the banks in the first place.
So the collateral is there, but it can never be touched. The ability to call for more margin is there, but it is unlikely to ever be used. What do you call that lending facility? Preferred stock does not seem that far off.
If you do not like your rating, what the hell, ask not to be rated.
I like this solution actually, provided it would be carried to the logical conclusion: Moody's, Fitch, and the S&P should all lose government monopoly sponsorship. The big three rating agencies are clearly unqualified to rate anything. The conflicts of interest are stunning. They should all stop simultaneously.
We need to move away from a government sponsored monopoly to a system where rating agencies make money based the accuracy of their ratings. That would put the big three out of business in a flash (or cause them to do due diligence for a change).
I am also in favor of removing conflicts of interest that allow rating agencies to conduct other business with the companies they rate. It's Time To Break Up The Credit Rating Cartel.
Gotta Love Mish.
ipodius writes:
Rob Dawg, the Fed should drop .25 at the next meeting but they won't. That would not only be a slap in the face, but a bucket of cold water also.
They can bluff. Cramer already stung them. Let's say the next transcripts show cool and calm and a consensus that they need to pause to see the effects of recent actions.
When the Fed tries to sell the collateral, there will be no buyers. They are effectively giving US dollars to banks in exchange for worthless paper. Who is left holding the bag? The Fed.
The banks are NOT going to default on the Fed unless they go under. In that case the shortfall on the worthless collateral would still be there and would fall on the FDIC. The Fed is just shifting the burden from one arm of the federal government to another. No harm done.
I think, David, that this is the crux of the nationalization issue. If the Fed seizes the collateral, haven't you just set up Nationalizing the bank? The collateral is not supposed to be crap, so what is the likelihood, and what is the mark? If the bank could meet the call, why would it be using the lender of last resort anyhow?
What worries me more is what the banks are doing with the funds. If they are not putting them to work in the right ways, then this is all for naught anyhow.
Krugman is exactly correct. Three times now they have attempted to slap the sense into the markets, each time met with short rallies and vicious selling to lower lows in the fixed income markets with the exception of Treasuries. Agencies have now taken it on the chin, municipals, and auction rates as the crisis continues to spread.
A more permanent fix is needed and this should be a coordinated effort to revive these markets immediately.
My opinion is to dissolve the monolines and create a municipal trust with a government backstop or bring Berkshire back into the picture as reinsurer to the trust. We are in desperate need of a do-over with the monolines due to the total lack of confidence.
As to the GSE's, provide direct government backing and move forward, enough of the half-start, band-aide methods that do not/have not worked, we are entering a much deeper crisis of confidence that should be addressed now.
The current attitude in the markets seems to be sit back and wait for the other guy to make a move, but, hurry to the table so that if something happens we are not left out, purely reactive and disgusting actually when you consider that these are some of the best minds in the country-this situation requires our regulators to be proactive.
The 3 mo T-bill is at 144 bps and the 2 yr Treasury at 152 bps, this is representative of one thing, fear, fear of default.
This period is manageable, but it will be a difficult time, and we knew this, what we did not see was the unbridled freezing of the fixed income markets.
The regulators need to get off of their collective rear-ends and take the steps necessary to restore faith in the financial system and provide the back-drop for long-term stability.
The dead bodies will fall along the bottom of the food chain, but, they need to send a clear message that the fear that is prevalent in the municipal and agency market is misplaced.
As to the shadow banking system, it seems, by any measure, everyone including the shadow knows its days are numbered due to margin requirements becoming more difficult.
I remain convinced that the commodity bubble is next due to this ever spreading tightening of credit within the hedge fund space, also, that pricing relief is much needed in the average household across the country.
These over-leveraged, opaque vehicles playing with sophisticated investors money knew the risks, created the bubble, and in my opinion will experience much of the coming pain.
It is also my opinion that in this space, similar to the bid-rigging allegations in the auction rate market and the eventual seizing of the market, that much of the liquidity could have been created through the presence of false market by market participants trading with each other in order to create the aura of a liquid market, one which in our history was fairly illiquid. My contention is that in reality, when all is said and done, nothing will have changed, reversion to the mean will show just how illiquid these markets really are when the bids go away.
I note the third wave is not as bad as the earlier ones, which in turn were not as bad as the credit crunches in the 81-83 and 74-75 recessions. So, it's not yet time to cower in the bunker, at least not yet and not based on this indicator.
I agree with several other posters, and the nationalization thread on HousingWire, that this is defacto (partial) nationalization. The Fed can't pull back the TAF because that will crash the system in a very bad way. So they're effectively holding a substantial equity stake. You could argue it's worse than nationalization because they have an equity stake but no stock voting rights. Privatized profit, socialized risk, as usual (although as I pointed out earlier, this risk was already socialized anyway.)
You could argue it's worse than nationalization because they have an equity stake but no stock voting rights.
Well, perhaps. Then again, Mr. B. could "suggest" that certain banks do certain things or, you know, the collarteral at the next TAF rollover would need to be increased. Those that play ball live to fight another day. Those that don't...
So perhaps in this case, behind the scenes pressure would be more effective than voting rights.
Carl Somers writes:
Let's see, $100B TAF (35 day term), $100B Repo's (28 day, MBS Ok), and $200B tax prebate stimulus checks. Starting to look like real money.
And that's not counting the FHLB, which did something like $600B more lending than usual last year, lending to the like s of CFC (at least $50B). Bet that's some mighty nice colatteral they got there.
Why not? Is it really that unlikely that the collateral turns out to be worth less than the amount the fed lent in exchange? Also, if they do lose money, does it really matter to them? I suppose if it's bad enough they may lose face (and confidence), but given what's happening to the dollar, is it really clear that they're not willing to accept this?
I am of the opinion that we do not need monolines. Once upon a time in a land far away it was possible to do analysis on bonds. Good ones had high prices and bad ones had low prices.
As to the failure of the municipal auction rate markets, perhaps that is more an unwillingness to provide long term financing at short term rates. It happened to GE when their CP was disavowed. They then began to pay long term rates for long term money. Entities issuing municipal bonds should do the same.
David Pearson, it really depends on how ugly this gets. The overcollateralization is substantial - so it will take quite a downturn for this to be viewed as preferred stock (IMO).
Fair Economist, when the Fed finally reduces the size of the TAF (they will some day!), then that will be a good sign for the economy. I just don't see this as partial nationalization - but maybe that is just a definition issue.
Good ol' American "Can Do" attitude. We can do something to fix this.
The Fed can not DO a darn thing to fix this. The Fed created it and the IBs went along with it. It is not fixable. It is a deflationary spiral, feeding on itself, and it will not stop until it stops on it's own.
Is it really that unlikely that the collateral turns out to be worth less than the amount the fed lent in exchange?
If the collateral is worth less, the bank is subject to a margin call, or the next rollover is reduced. Those answers are in the faq's on the fed site for the TAF.
Also, the Fed has a balance sheet and reports, so it is accountable. It could, however, mitigate losses by taking a hit on profit. Yes, the Fed earns a profit by earning interest on holdings against no interest currency. At the end of the day, the Fed is a business.
How can the Fed lose money when the Fed can print as much as the Fed wants?
Here we go again...the Fed has a balance sheet just like any business. Any money printed shows up as a liablity on the balance sheet. So it can't just "print money" without consequence. See my last post for how the Fed earns a profit or look it up.
The Fed just doesn't "print money". And, as a matter of fact, if you follow any of the monetary numbers you will see that the monetary base is actually shrinking. That means that capital is being destroyed faster than it is being created. That is the liquidity problem. It's also called by another word: deflation.
ipodius: If the collateral is worth less, the bank is subject to a margin call, or the next rollover is reduced.
Yes, I should have made clear I was considering the case that the bank becomes insolvent. As far as taking a loss, it seems they could easily take it out of the interest from their enormous holdings of treasuries. Since they usually return (forgive) this interest to the government (minus expenses), the loss would be covered by taxpayers.
Yes, I should have made clear I was considering the case that the bank becomes insolvent.
Well that's what we're talking about with the "nationalization" argument. In fact, the difference between the collateral and the mark (if sufficiently large, although how it gets that way in 28 days is a good question) could be realized if the bank were "nationalized". In other words the bank is insolvent and disposed of, the Fed having the difference returned by the sale/transfer of assets, which would be done by the FDIC.
So I'm not at all sure the taxpayer is as exposed (if at all) here as would be the case with a straight-forward bailout. If the bank were seized the stockholders would take the hit.
Conjure and I have grave doubts about this working.
Since the beginning, the Fed has been behind the power curve and has offered nothing but band aids, albeit very large ones.
Junk is junk. The TAF, which is a well-intentioned effort, simply treats the symptoms. The cancer is still there, and that's why I say they'll have to come back into the market again and again until, for all practical purposes, they own all of it.
IMO, this thing doesn't end unless and until they finally face up to the problem and the boards are cleared.
I'm no macroeconomist but I believe the Fed can in fact print money when it takes Treasuries from the Government and issues cash credits to the corresponding government demand account. These show up as assets on their books, and currently they say they're holding ~$700B of monetized US debt.
Well mp and conjure, you have a point. A lot of crap is out there. How much of this has been pledged in the TAF is a good question. In theory, this could work but as you point out the Fed is generally reactive and not proactive.
I will stand by my prediction that at least one major bank and two IBs are going down. Hedge funds will all but disappear. The collateral damage from that will change the landscape of finance for good.
Mish would be a lot easier to take if he stopped characterizing Bernake and the Fed as a bunch ignorant morons (though I'll give him the latest Bush-Co. frat boy appointee.)
Did you see how much manure is available just in Texas. This entire problem can be solved in just a few months if we start a derivative market and let SIFMA lobby for tax shelters! By summer we could have a global market buying crdir default swaps in manure futures using Euros!
Banks face "systemic margin call," $325 billion hit: JPM
Sat Mar 8, 2008 9:23am EST
By Walden Siew
NEW YORK (Reuters) - Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), said in a report late on Friday.
Ipodius, I certainly agree with you in terms of collateral damage but, in terms of the IBs, I think you're optimistic.
Additionally, I think there's too much moral hazard here, and am not nearly as sanguine about that as CR.
If I was the Fed Chairman, I'd be instructing my lawyers to start with Chuck Prince, and put his balls in a vise. I'd tell them to check the statutes and find something with which to prosecute him. There's always something available.
Frankly, its time to scare the shit out of these guys or, even if this problem is solved, the IBs will soon invent another one.
Troy, the term "printing money" is used facilely by some here. My point was that putting money into the system has consequences, and has to be done in specific ways.
Right now, there are very specific problems that they are trying to deal with. Rather clumsily, but they are smart people and may just muddle through. I have doubts but if they pull it off, who cares if it was an accident or intentional?
According to that "lendable amount sheet" the fed will lend out 85% against AAA debt. But the ABX AAA 07 is already at 53 cents on the dollar. Does this mean the fed takes the losses below 85 cents on the dollar? (or whenever the index cliff dives by 15 percent from whatever value it was loaned at)? Doesn't seem like much protection to me.
Frankly, its time to scare the shit out of these guys or, even if this problem is solved, the IBs will soon invent another one.
Optimistic! Me? Perhaps I am. But I do think that, behind the scenes, the Fed is making sure that the shadow banking system takes it in the shorts. (no pun intended) The IBs are holding a lot of the paper on Hedgies that are now starting to unwind. There will be no joy in any of them for a while.
But I do agree with you, although the legal proceedings will take a long time to come to denouement. Still, I do see a ritual execution of some of the players coming. Another prediction is that Mozillo will be the first to have his head on a pole. It would be somehow appropriate if Prince had to do his dancing behind bars for 10 to 15.
Every day when I drive across the river and see the dome of HBS I think of all the plots that were hatched there. If the peasants were to revolt, they should tear it down brick by brick like the bastile.
"The Fed just doesn't "print money"
Yes. It does. But you were correct otherwise, yet incomplete. The collateral shows up on it's asset side. The monetary base is shrinking, and the Fed is not the monetary base, and the fact that the monetary base is shrinking is testament to just how much control the Fed actually has during a deflationary spiral.
Who do you think the Fed is accountable to? Congress? The executive branch? The GAO? What or who can tell the Fed what to do or instill a consequence of any sort on the Fed? The Fed reports to Congress, and Congress approves or disapproves the president of the districts, but beyond that, their is nothing Congress can do.
So what if the printed money goes on the Feds balance sheet. That has never stopped the fed from printing money and it certainly is not slowing the Fed down right now. The Fed can print as much money as it sees fit and answers to nobody.
I am currently generating some formulas for the manure derivatives, which if God is with us all, will be published by SIFMA Monday morning and fast tracked to Treasury and then over to Warsh, who will then rush this to Chicago where we will see a derivatives market up and running by Tuesday morning.. God save the queen as well -- why not, that is axiomatic!
This is all I have so far, but what think?
Specifically, the phase-matching condition requires the group velocity of the manure pump pulse to be equal to the phase
velocity of the generated THz manure radiation.
As mentioned above, however, the energy of THz pulses (even at room temperature) generated using this material was orders of magnitude higher than using ZnTe for the same manure pump energy.
Steven,
You can't do straight calculation from the AAA ABX of a given issue to the value of all AAA. The ABX stuff, from what I have read recently, is calculated from a group of AAA deemed "most likely of the AAA to suffer losses" since that is what is useful to users of the ABX. Most AAA has not actually suffered any losses and much of it never will. But some of it will, and for AAA the fact that ANY will suffer is not normal or good.
awgee, I'm just unclear as to what your point actually is. The Fed's actions have broad ramifications, so the accountability is actually monumental. Are you suggesting that congress can't change the laws regarding the Fed?
The Fed's actions have broad and huge ramifications, but it is naive to think that the ramifications will stop them from creating as much currency as they see fit. But there is no accountability in the sense that the Fed has to answer to anyone for it's actions. The fed reports, but no government or private orgainization has any power other than to change the law as you said. Congress can change the law, but that is about it. Up till then the fed can print as much as it needs to keep it's member banks solvent. My point is the Fed can and does print as much currency as it see fit.
Please explain BB's quote about preventing deflation by printing money. Being more on the wingnut side of things, I do not know whether to believe the head of the fed or some one who makes sense but blogs with a peculiar name. TIA
True mp. There was a time when being a executive meant that you saw yourself as creating something that provided value and wealth to many classes and stakeholders. Something with responsibility. Now the ones I have had the displeasure of working with think that it's all about the liquidity event and buying a 9000 sq ft house with a steamroom and a hummer parked in the drive. It's disgusting. And politicians have enabled it all so they can get elected.
Perhaps the reset button will be hit this time. It was avoided after the dot com bust.
Please explain BB's quote about preventing deflation by printing money.
Please, if I could explain what BB or the Fed meant by anything I wouldn't be posting on a blog, I'd be raking in the cash. I do believe it was the art of hyperbole...what he was saying is that he would act to increase the money supply, thereby creating liquidity faster than it could be destroyed. By the numbers, I'd like to ask him "how's that working out for you Ben?"
My strange name is a sly reference to my having to study Latin for 4 years (that was back in the day before education went to hell), an old BBC series, and a new device that I wonder how I ever lived without.
tg, after all the heli-ben talk, i bet if he could take those words back and replace them with something else, he would.
I don't think the Fed acts irresponsibly, i just think that they are sometimes far too slow to react to what is happening in the street. Typical academics. Right now, the problem is (as I and some others have been saying) deflation. Asset prices are in collapse and the financial system is at 12:00 conjure time. I can monday morning quarterback, but I have to think that they have a plan that is bigger than I can see. At least I hope so.
I hope you have your seatbelts fastened. The ride is about to get a lot more bumpy.
Ipodius said, "Say a large bank is having a severe problem. If it has to sell these assets on the open market now, they are going to be in even worse shape and, furthermore, dumping these onto the market is going to make it even more irrational."
DUDE WHATEVER.
What your justifying is trying to prevent a market from unwinding, and yes that can be irrationally.
What about the irrational upside to a market, debt or equity? Nobody had a problem with the virtuous cycle that arose from ever-rising real estate prices, but god forbid the vicious cycle take course...no no..we can't have that.
You guys make me sick. Everyone wants to enjoy the upside that comes from bubbles but can't stand the downside that comes when they correct.
If we are going to manage markets, then let's do it ALL THE TIME.
"... What makes the quote above especially pertinent, obviously, is that even while recession's clammy hand makes itself felt, inflationary fires are starting to flare in earnest, stirring unfond memories of the 1970s and early 1980s, when the cost of virtually everything from diamonds to doughnuts vaulted into the wild blue yonder. Ray takes due note of the double whammy of recession and inflation back then and points out that the measures of both used at the time were a heap more accurate than those Uncle Sam relies on today. Especially notable, we think, was the calculation he cites of January's 4.3% rise in the consumer-price index (vs. January 2006) by John Williams of Shadow Government Statistics.
Using the degimmicked yardstick that was in use prior to 1980, Williams comes up with a reading of 11.8%, which, to these tired eyes, seems a quantum leap up from the official 4.3%. And, more to the point, it squares a lot more closely with $106-a-barrel crude, not to mention upward leaps just this year of commodities of every kind from 30% or more in aluminum, oats and silver and double-digit gains in coffee, corn, wheat and zinc, among others.
Before 1980 and before fiddling with the CPI became the fashion at the Bureau of Labor Statistics, the reckoning was, as Ray points out, based on "a market basket of goods and services bought and used by the average American family." A measure, in other words, of the cost of living and evidently a good deal closer to the truth than the finagled numbers now in favor. ..."
Robyn posted a link in an earlier thread concerning the fall out to the 80's S&L collapse in the Florida area. Not being familiar with the specifics of the S&L deal (I was busy partying at the time and blew right by that one grin) I started googling... One link lead to another which uncovered some strikingly similar 'moral issues' that we face today.
What stood out was the notion that the early attempts at a bail out were patchwork at best. This lead to later lawsuits filed against the FDIC by some of those 'victims'. It seems that some (many?) of the S&Ls had their asset value initially supported through questionable FDIC assistance programs. Years later some survivors decided that they could have gone it alone with out the 'help' of the FDIC.
They contend that Congress fueled the S&L crisis when it passed the Financial Institutions Reform Recovery and Enforcement Act in 1989. When the FDIC subsequently pulled their 'creative funding' attempts at propping up the affected institutions it placed them in an untenable situation. And this was the root cause of the collapse of those businesses. They put together law suits (apparently more than 150 have been filed against the government over the 1989 law) which in essence said that the FDIC owed them.
Some are now gaining recognition in the courts that they have valid cause to sue and appear to be doing so.
It is interesting to note that American CPI, American GDP, America's housing bubble, recession and systemic collapse is now a matter related more so to global equilibrium.
Fed statistics, bank models, ratings models are all out of balance and not adjusted to match the imbalance of reality with the illusions of outdated models and misinformation.
Perhaps we are in a highly efficient system which is based on realtime or hypertime that explloits the weakness of this dis-connection and inefficiency in our governments, our banks, our societal systems.
Perhaps the internet with its vast amount of porn...I mean, data, has skewed and biased the relationship between the last generation and the evolving quantum leap era of attention deficit retardation. The reason chaos seems to be taking hold, is because we have a changing of the guard and this new brave era is based on laziness, greed, lotto tickets, fast food, a service economy that expands in the form of a one dimensional job opportunity as a walmart greeter and the obvious financial burdens of synthetic fantasy which is like an AIDS epidemic with everyone looking the other way. This highly grotesque financial orgy that is fueled by walmart job creation and a serious lack of liquidity is heading into the brick wall of velocity, where no one will be left standing!
ipodius writes:
"In other words the bank is insolvent and disposed of, the Fed having the difference returned by the sale/transfer of assets, which would be done by the FDIC."
in short, congress thought the regulators were forbearing on large banks; hence, changes were made where the loss would not go to the fdic for failed institutions that were on life support via discount window borrowings. these losses now accrue to fed or taxpayers directly.
today, it is unclear how the the taf borrowings would be treated under the fiicia reforms. should anyone know, please post.
I need help with my speech for Warsh. We are giving this at Harvard in the morning at a champagne brunch; any tips, very appreciated:
It is interesting to note that American CPI, American GDP, America's housing bubble, this recession and this systemic collapse -- is now a matter related more so to global equilibrium than to the failed reality of The American Dream.
Fed statistics, bank models and ratings models are all out of balance and not adjusted to match the imbalance of illusionistic outdated models based upon misinformation which is exploding into chaotic fragments.
The reason The Fed and Wall Street are running in circles like chickens with snapped necks, is because the axe fell and exposed these crooks -- who now have no easy escape route from the slaughter haus! The truth is, the blade needs to continue falling and separate the genetically deficient hens from the retarded roosters. The slaughter should be merciless!
Perhaps we are in a very highly efficient system now, which is based on realtime or hypertime that explloits the weakness of this dis-connection and mass inefficiency in our governments, our banks, our societal systems; our people, our way of life, or the way which the banks wanted things to be.
Perhaps the internet with its vast amount of porn...I mean, data, has skewed and biased the relationship between the previous generation and this evolving quantum leap era of attention deficit retardation scum covered in tattoos.
One reason chaos seems to be taking hold lately, is because we have a changing of the guard and this new brave era mentality is based on laziness, greed, stupidity, lotto tickets, fast food, and a service economy that expands in the form of a one dimensional job opportunity -- which is at walmart as a part time greeter.
The obvious financial burdens of this unraveling synthetic derivative fantasy is like the AIDS epidemic, where everyone is going to be looking the other way for years and not being honest about the overlapping consequences in the future. This highly grotesque financial orgy that is fueled by walmart job creation and a serious lack of liquidity is heading us all into the brick wall with a velocity, where no one will be left standing!
It appears there is a corollary to Keynes, "the market can stay irrational longer than you can stay solvent" observation...
namely that, "the market can stay irrational long after you've exceeded your intrinsic value".
Basically, I'm refering to the fact that the credit markets have been irrationally priced for some time (years) and I'd argue that market participants are finally behaving most rationally (contrary to participant claims).
Re: TAF
While it may be pointless to second guess their intentions, it appears at face to be an attempt to scuttle bank assets away into the Facility in order to allow the banks to hold onto this paper as long as they can so they won't "have" to accept the market's price for them. In the parlance of our time, I'm not certain this is "sustainable".
I AM wondering how the TAF/FED is pricing this collateral, though. That may be an area of inquiry worth pursuing.
Two general points:
Every security is "liquid" at some price. It's convenient to say an asset class/market is "illiquid" just b/c an owner doesn't "like" the market price. If you don't like the price, don't sell. However, if your business depends on selling that asset to keep the doors open, you may have a problem. See # 2,...
Earnings at banks have been dependent on selling the debt they once tried to hold to maturity. Now that they can't sell it, they want to borrow against it in the hopes that they'll be able to sell it in the future at a higher price.
What's next... Bankers actually hold and service their credit lines to maturity? Never happen.
The lending industry has spent at least 500 years trying to devise ways of squirming out of holding paper long term for the simple reason that they can't manage interest rate risk due to fluctuations in the supply of money.
Bankers are in a constant spot. On the front end they have to offer savers higher rates or better terms. On the back they have to compete w/ one another for business by lending at ever lower rates or more convenient terms. =Recipe for disaster.
On the plus side, they do get to lever the savings (liabilities). Uh oh. There's that leverage thing again.
Fun thread.I finally got to listen to Neal,prince and Mozillo testilying...wunnerful stuff.All three were slicker versions of a man I once worked for who was accurately described as having most of the ethical sense of a weasel in rut.
where p is price, w represents how much you own initially and c represents how much you consume after trade.
A little algebra can show that if supply equals demand in two markets, it has to equal demand in the third no matter how many people there are.
(Of course, these models all assume that every participant takes prices as given -- but I'm not sure the guys at Goldman and the other banks realize that's what they're supposed to be doing.)
mp writes:
"Junk is junk. The TAF, which is a well-intentioned effort, simply treats the symptoms. The cancer is still there, and that's why I say they'll have to come back into the market again and again until, for all practical purposes, they own all of it."
What if that's the plan?
Even if it's purely unintentional, it's still a scary thought.
The underlying economic reality of the Fed's auction facility depends on its specific future actions.
It could end up being "covert nationalization"---but more like "accidental nationalization", the way dumb teenager rooting leads to "accidental" pregnancy.
To make the point: how would it go down differently if the F'ed Banks were getting TAF loans from a truly private rational profit-seeking entity? Let's say the Personal Bank of Sheik Mega al-lo'Did.
Margin calls.
Remember the bond market rules? 1) Don't panic. 2) If you gotta panic, make sure you panic first.
If a private investor thinks they won't get paid a return OF principal, they won't roll over loans. They'll seize collateral and dump it, at whatever impaired price it gets on the market, and sue the borrower for any remainder.
This obviously cascades.
The point of the TAF is that the Fed is going to be the dumbest lender in the room. They won't margin call anybody or fail to roll over, no matter how broke, incompetent or deadbeat the borrower is.
We've seen this story before.
When it happened somewhere else, we called it "crony capitalism".
We tut-tutted the Japanese Ministry of Finance, Thailand, Korea, Indonesia, and of course the Communist Party of China for pulling this sort of stunt.
Today, our mandarins of crony capitalism share the same color: mandarin orange.
For example, between the end of December and the middle of February alone, the money supply M2 has expanded by a compound annual rate of 12%, according to the Federal Reserve Bank of St. Louis. This compares with a growth rate of only 5.5% from the four weeks ending February 19, 2007 through the four weeks ending July 23, 2007.
The rate of growth for highly liquid funds which the St. Louis Fed calls MZM (money zero maturity), is even greater. It soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.
Guess what all this money has accomplished. That's right, Virginia, it has created a whole lot of inflation.
The consumer price index rose 4.3% during the 12 months ending in January -- up from little more than 1% in late 2006. For its part, the 7.4% leap in the producer price index over the most recent 12 months was the most for any 12-month period since October 1981!
"Bankers are in a constant spot. On the front end they have to offer savers higher rates or better terms. On the back they have to compete w/ one another for business by lending at ever lower rates or more convenient terms. =Recipe for disaster."
Poor babies. Competing in a free market ! The horror.
Obviously, their poverty is in evidence by the miserly salaries they pay their employees and managers, as well as the dilapidated, sleepy-town premises in which they toil, in quiet, anonymous profitless service for society's greater benefit.
The point is that the market sets the price of any security. We enjoyed when the market cleared real estate prices at a higher level. The housing bubble fed the consumption bubble (aka HELOC). Everyone knows this, its old news.
Now we must let the market clear, unfortunately at a lower level. People have to take their losses like adults. All parties knew what they were getting into and the risks involved. When a bet goes bad, you lose.
Money of zero maturity is a measure of the money supply. It is equal to M2 less time deposits, plus all money market funds. It measures the supply of financial assets redeemable at par on demand.
MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption. This measurement derives its name from its mixture of all the liquid and zero maturity money found within the three "M's."
The essence of MZM is that it encompasses financial assets with zero maturity. Assets included in MZM are redeemable at par on demand. This definition excludes all securities, which are subject to risk of capital loss, and time deposits, which carry penalties for early withdrawal. In short, MZM includes all types of financial instruments that can be easily converted into money without penalty or risk of capital loss.
M2: M1 + all time-related deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. A key economic indicator used to forecast inflation.
Current Chairman of the U.S. Federal Reserve, Ben Bernanke, has suggested that over the last 10 to 15 years, many modern central banks have become relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon he terms "The Great Moderation
IMHO the Fed playing pawnbroker to the banks can't possibly be expected to end well. It's not like you have a good business in a bad spot; these institutions are currently configured for an economy that no longer exists.
It's akin to a prospective homeseller borrowing against their retirement in a futile attempt to wait out the housing downturn.
dr strangemoney's 'Chuck Prince dancing on my grave' induced an economic orgasim and I screamed Roubini, Roubini, Roubini at the top of my lungs!
Mistah Bonzai - Those are commonly called "Goodwill" cases. I was a 30(b)6 witness for the FDIC in a Goodwill case - deposed in DC at the Dept of Justice on a RTC case out of Jackson, Mississippi that FDIC inherited. It was no fun and I had a half dozen FDIC lawyers there protecting the FDIC's interest. The FDIC has conducted a long costly scorced earth Goodwill defense which rarely gets any press these days. The public is still paying for the S&L/Bank crisis as it rapidly runs into the next bank credit crisis.
surferdude - you can bet the FDIC will fight like hell to keep from taking the TAF losses and it will be interesting to see the new legislation after this crisis. If you learn more about this please blog it.
I dunno why you like Krugman so much - this is ad hominem no doubt but that man is hopelessly compromised - he plays the big con when the Republicans play the little con - he fucks up on the first sentence:
So, in this case, imagine that there are three assets: money (really monetary base), Treasury bills, and private securities (think mortgage-backed).
that is f*ing triple counting you idiot - there is only 1 asset in this context - its money - the rest are.. arghhh I'll stop here.
sk, I agree with you. I lost faith in Krugman several years ago when he reviewed Kotlikoff and Burns' book on the generational problem, and he torched the book quite vociferously -- except the very argument Krugman was using as the thrust of his attack was simply mathematically wrong. I realized he was just a hack at that point.
Tajikistan is in the grip of emergency food shortages, the UN's World Food Programme is warning.
The deteriorating food situation is part of the energy crisis which hit the mountainous nation in the middle of its coldest winter for five decades.
Tajikistan is currently using up its last energy resources, and it may face a total blackout.
The Christian Science Monitor, neweurasia, and other media observers are predicting that a nascent hunger crisis will erupt into a full famine as a consequence of the energy shortages.
An international appeal has been made by the United Nations, NGOs, and the Red Cross and Red Crescent for around US$25 million to assist the government. According to the United Nations, more than two million people could face starvation before the end of winter.
"The market right now is irrational, and I like Krugman's slap in the face analogy. What the fed is doing with the TAF is supplying a temporary way of avoiding a sale of collateral at an irrational price."
Who says the market is irrational? Long term, the Fed is going to have a hell of a time floating IB's that have 35X leverage on MBS. Its not a good idea to prop up highly leveraged balance sheets filled to the brim with fictitious capital. What am I missing here?
Chris writes:
By depreciating the $ the US is effectively, gradually, defaulting on its debts to the world. Whether the world has awakened to that fact, or whether it can do anything about it is another question. But the idea that the US would never default is nonsense. It is defaulting slow motion.
Chris | 03.08.08 - 8:28 pm |
I would not expect the world to be so forgiving much longer. At some point soon the world will dump outright US Govt debt instruments if this kind of cavalier Fed behaviour continues,just as they are doing with the dollar. Then we will see the alarm bells ringing. The Fed and Treasury are smug for now with Bonds still riding high. When that changes you will see it running down their leg.
As Waldman notes, the Fed offers loans only against certain collateral, and requires that loans be overcollateralized.
Overcollateralized... uh huh, just like all those CDOs had "credit enhancements". That makes things pretty safe, right? I mean, everything couldn't all go bad at the same time, could it?
I think if it weren't for the rants and the information calculus of the internet, the bailout would have an entirely different character. While the resolution will eventually probably not be fair with respect to socialization of losses and privatization of profits, we can hope that the collective debate over fairness has had some effect at the margins. I truly believe that the interests in power will attempt to get away with whatever is publicly feasible. If we have reduced their options to those more fair, hopefully we have made a slight difference. While Geithner's speech doesn't step back and look at the bigger picture, it at least seems to be a very accurate, clinical description of the events as they have unfolded. Interpretations will be left to the historians. I agree that it does feel like midnight. The sun has set on the day of mathematical approximations. I think belief in a new system is going to require a new level of mathematical "sophistication". Good luck.
I will be eagerly awaiting the scholarly papers analyzing the current data. The structured finance emperor has no clothes. I think the side effects will have significant secondary effects. The King is dead. Long live the ... oh the King is still dead.
A collapse in the industrial food production space is the dark horse in the race for Armageddon. Once you realize that egg laying chickens are dying from broken bones, you begin to understand the over-driven capacity of the food system.
"I've been involved in five hedge fund liquidations in just the last few months, says Drew Chapman, chairman of the alternative asset management group at law firm DLA Piper. I'm afraid there's much more to come."
The collateral that the Fed takes for the TAF auctions isn't crap. And let me remind you that most people are paying their mortgages and most mortgage-back paper will not be impaired. The truly bad stuff is sitting in the hands of whomever has it, but, it isn't worth nothing.
The problem here is price discovery, which is different from no price at all. Just as the top of the bubble was an over-reaction on the plus side, so this is an over-reaction on the minus side.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
The banks don't like the price of this over-reaction, and they are taking it in the shorts on the crappy stuff. Fair enough. But there is a lot of paper out there that's AAA and getting scorched with the rest. They need credit right now. The Fed is giving it to them, and taking the cream as collateral, which will be seen as cream when the price discovery phase is over. Will it work? If the crap out there turns out to overwhelm the cream, that's when there is a problem of solvency. As mp alluded to, that's the issue to address.
"The market right now is irrational, and I like Krugman's slap in the face analogy. What the fed is doing with the TAF is supplying a temporary way of avoiding a sale of collateral at an irrational price."
I'm sure that's the way Wall Street wants people to see it. Sure some markets have gotten irrational recently, but what's really happening is that markets which have been irrational since 1995 are finally becoming rational again.
People are waking up to the fact that there's been this massive abuse of trust, and now they don't want to do business with each other.
In the end there's only so much the Fed can do about this except threaten a worse abuse of trust by the government to get people lending again.
But in the end you can't build an economy out of abuse, intimidate, and deception... at least not one we'd recognize.
Misean - it is one thing to be partisan (most all of us are biased in one way or another) its a whole other thing to be 'right' in the partisan criticism. Just because Krugman is Dem leaning doesn't make him 'wrong' in this case... GOPers try to paint the criticism as 'wrong' just because he's somewhat partisan. I think Krugman is mostly right here.
The GOPers better get used to it - more criticism - they'll have at least four more years of this under the next (McCain) administration. Maybe even eight years if McCain lives that long (I believe he will be the oldest to ever take the oath of office).
DrChaos makes an excellent point about the possibility of "accidental nationalization," and that seems quite possible to me. It's the path of least resistance and offers a way out, a way to postpone the inevitable.
The fact that the TAF "protocol" makes this possible is why I object to the approach, and consider it fraught with moral hazard. It bears repeating that, although the Fed has issued a lendable amount sheet, they can still negotiate "individual" deals. So, if the pressure rises high enough, anything goes. It can happen.
It also bears repeating that Bernanke might be able to save the banking system, but Mr. and Mrs. Smith's problem will remain.
So, where will we stand if all of this meets Bernanke's expectations? Well, the banks will be back in business again, but the distribution of wealth will skew even more. As Dr Strangemoney pointed out, the profits will be privatized and the losses will be socialized.
why do people keep saying Fed cannot print money? Sure it can, it is called outright purchase of treasury bonds. What it means, Ben walks over to the next cubicle and says 'hey Frank, I gotta print some fresh dollars, do you want twenties or hundreds?'
Essentially, every dollar that government spends can be spent from freshly printed dollar made today. Doesn't have to be from debt, as some people imply. And yes, we should be able to see that immediately as a spike in reported M1 - that is why government is loath to do that.
Please explain to me how the Fed puts that "printed money" into circulation?
Well, what the Fed can do is enable limitless spending by the Federal government through monetization of treasury debt. So indirectly the Fed with the help of the Federal government could put together the first in a series of "one time annual $20,000 tax rebate checks" for every man woman child and domestic animal in the US.
Please explain to me how the Fed puts that "printed money" into circulation?
Fed doesn't have to - just make it 'available'. then th eother branches of gov't provide the traction via 'fiscal stimulus'.
It really isn't that big of a problem to re-inflate IF they target the right mechanism... Oh and saying the Japanese couldn't do it isn't an excuse. Japanese COULD HAVE had they target the right fiscal stimulus - it was politically unpopular to do so (they save and don't punish spenders - we do the opposite).
Fed alone can't do this - fed & federal gov't together can.
R,
High liquidity in HK banking system implies inflow of funds.
Historically, the plentiful and cheap supply of money is closely correlated to stock market performance.
I would expect HK stocks to turn around and move up in the coming weeks.
Jeremy,
Historically, the plentiful and cheap supply of money is closely correlated with price inflation.
I would expect HK prices to turn around and move up in the coming weeks.
Jusy got through all the posts, been up half the night...
I'm a bit rattled. Need some digest time.
I'll hold off posting till my brain comes on line and I digest some of the mess I'm seeing.
ac,
"Well, what the Fed can do is enable limitless spending by the Federal government through monetization of treasury debt."
And what happens outside the US? You can't increase M1 by like $5T and not have a dollar revolt. And FRB monetization of that much debt would require it. M1 and M3 are different.
And what happens outside the US? You can't increase M1 by like $5T and not have a dollar revolt. And FRB monetization of that much debt would require it. M1 and M3 are different.
M3? M3 doesn't exist, filed away in the historical archives next to fiscal restraint, gold standards and GAAP.
A more permanent fix is needed and this should be a coordinated effort to revive these markets immediately.
The fix is to make borrowers trustworthy again. IMO there's no "immediate" way to do this and any solution that proposes to do this is just another ruse that perpetuates the problem.
Our markets are built on false promises and illusory wealth. There are ways to mitigate some of the damage as people wake up to this fact, but solving the "problem" is going to require rebuilding trust in the markets' ability to value assets and the ability of borrowers to make good on their obligations. A legitimate fix might take 20 years.
Missed,
"Historically, the plentiful and cheap supply of money is closely correlated with price inflation.
I would expect HK prices to turn around and move up in the coming weeks"
I think we're making the same point about price bubbles.
HK is an interesting case as it has a dollar-pegged currency.
This means monetary policy has been `outsourced' to the Fed.
While the Fed's rate-slashing campaign has not yet had the desired effect at home, it is creating bubbles elsewhere.
We all know about commodities, I was just pointing to another potential one in the making.
"I'm referring to a back and forth in the middle of this thread between Awgee & Ipodius as to whether or not the Fed can print at will;
Isn't it so that the Fed doesn't literally print? Isn't the actual printing done by the Treasury? Is it public information how much is printed?"
Middyfeek - When we refer to the Fed "printing" money, we are not talking about the federal reserve notes you carry in your wallet. Printed currency is some iota of a fraction of the either M1, M2, M3, MZM, or any other measure of money in circulation. The Fed "prints" money by typing a few keystrokes on a computer. Most folks response to this knowledge is, "Well, they can't just type up as much money as they want, can they?" Adn the answer is Yes, they can and are doing it right now. The Fed takes collateral in the form of Tbils or other paper, but there is no limit to how much collateral the Fed can take and how much money they can print. All fiat currency is actually debt.
Not really. In an outright purchase of treasury bonds, which Fed has to do now and then, Fed buys some bonds with freshly printed money and then destroys them, i.e. they never get called back. So it true printed money, and not debt. But it becomes immediately visible in M1, which is the real bummer. Since doing this on large scale is equivalent to torpedoing the economy, they will only do this when economy has already sunk.
OT, Global food and global warming are becoming a very real immediate threat; thanks Bush!
Glaciers of Tajikistan occupy about 6% of the national territory and play an essential role in the formation of Amu Darya River flow the largest water system of Central Asia and Aral Sea basin shared by Tajikistan, Afghanistan, Uzbekistan, Kyrgyzstan and Turkmenistan. Significant retreat of many other glaciers is observed. By the end of 20th century, Saukdara glacier in the Pamirs and Zeravshan glacier in central Tajikistan shrank by 2 km. Hundreds of small glaciers, such as Diahandara glacier (area less 1 sq.km) totally disappeared only dust and moraine indicate their former existence. Glaciers of Tajikistan impacted by global warming
A Chinese official says harsh winter weather is threatening food production and adding to inflationary pressures. Political pressure is also building on the government for its failure to anticipate and solve the problems.
A top Chinese disaster relief official was quoted by Hong Kong's South China Morning Post newspaper Thursday as calling it the worst natural disaster since the People's Republic was founded in 1949.
Tens of millions of Chinese have been affected by the snowstorms across the central and southern parts of the country.
Severe weather warnings have been issued for much of the UK, with England, Waled and Northern Ireland subject to weather warnings. Much of Scotland was also subject to a weather warning earlier today, although they have now been removed.
It has been forecasted that winds of up to 130 km/h will hit the southern and western areas of the United Kingdom in what has been predicted by some to be the worst storm this Winter.
What is confusing me is that some people, like Mish, claim that credit is being quickly destroyed now and Fed is actually contracting.
But this is in complete contradiction to SGS plot which shows runaway growth in M3.
Someone is not looking at the data right.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
Or, to put it another way...
If some of the prices we've seen on the ABX and CBMX index are rational then bend over and kiss your butt good-bye. Once losses move past a certain point the rules of the game changes.
It's fun to play Armageddon until you realize that "them" has become "us" and nobody is really "off-grid".
Personally, I think the Federal Reserve needs to shock some of the speculation out of the commodities market. It's almost impossible to confidently invest in longer term securities of any kind if you make a reasonable assumption about long term inflation.
There are only a couple of ways that I can see out of this mess without a nasty down turn...
The first is a spontaneous return of assets into the shadow banking system (ABCP, ARS/VRDOs, etc). I doubt this is going to happen without a Federal guarantee. And, I can't see that happening since the shadow banking system was created mostly to get around banking regulations.
The second would be a direct equity injection into the banking system by Congress to allow the banks balance sheets to increase enough to absorb the collapse of the shadow banking system. Even knowing that the banks had that ability would slow much of the run to "bank-money" and Treasuries.
Every other scenario that I've been able to think of either leads to 30's or 70's style deflationary/inflationary over-shoot that would take a decade or more to recover from.
No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
Fun analogy.. though, if the Fed was really creative, they could inflate quite rapidly.
Money is just numbers on computer screens.. if you got to a truly systemic meltdown point, just issue a patch from the Federal Reserve website.. once a bank downloads it.. their reserve cash quadruples.
I don't think that will happen.. my stance remains..
Sudden "Deflationary" shock. (Declines in all asset prices dependent on margin). That's just about everything.
"Inflationary" sorta-shock (money pumped back into the system as the Federal Reserve catches up). Happens more gradually since people have to relax first. But, they'll eventually realize the Fed is sprinkling money on them so best put it to use.
In the end, I like the idea of banks magically having some multiple of their current reserves. And, their reserve requirement increases so that they must keep that cash on hand.
I think the basic idea is that debt is just a promise to deliver wealth at some point in the future. In that regard currency is just such a promise.
As Bernanke describes it, a dollar is like a bond that yields no (nominal) interest and has infinite maturity. It has the advantage of being the most liquid form of debt so people accept the lack of interest payments.
We are very busy here at Goldman working on these manure futures and the embedded derivatives. This morning we realized that we can take most of our debt and warp it into a new package, which Paulson is looking at right now (under the table):
What we have in regard to theory so far, is the relationship between negative vacuum energy density and positive pressure related to the "second quantization" procedure that takes a set of single-particle quantum manure states as a starting point, from there, all we need is the thumbs up from The Fed and we can write off most of this subprime problem and start packaging Cayman derivatives. We think Warren is on board to rate these as well! Yippy!
RE: Marking to market
In baseball if some GM gets conned into paying a mediocre pitcher way too much this raises the bar for similar mediocre pitchers and has pushed salaries into the sky.
I read that an accounting rule (127??)on marking to market has a similar effect in dropping values of SIVs. If a hedgie has to meet a margin call and has to dump at fire sale prices, these prices then become the "market" against which similar issues are marked.
Is this true and is what the Fed is doing perhaps to give a more realistic
evaluation of assets?
Would using something instead of the spot price as a valuation say a moving average make any sense??
No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
It will if dropped from an airplane.
And Kicker ... could you please explain the shadow banking to this newcomer?
I think the basic idea is that debt is just a promise to deliver wealth at some point in the future. In that regard currency is just such a promise.
While I cannot disagree with this, let's not be anal. In some sense any wealth you own is 'fiat' because someone out there always has a bigger gun and can take it from you. Gold-backed dollar is still not gold-backed, but backed by a government who can screw you at any moment, gold backed or not. So I think calling all currency debt is not helping, because then we don't have a word for what to call my credit card debt.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
One of many insightful comments by ipodius on this thread.
It's refreshing to read some of the commenters here that aren't standing on the sidelines and cheering while the train rushes over the collapsed bridge.
The TAF is providing much needed liquidity into the (visible, not shadow) banking system while absorbing some of those (not worthless, just not marketable today) assets that have been frozen by fear.
There are those who get their kicks from criticizing Bernake, but he's not a deer in the headlights. He's acting in the way he thinks best and obviously is willing to extend or modify his actions as things change.
One thing we know for certain, as Don Ameche said (with an Italian accent) in the movie by the same name, Things Change.
We think in addition to making subprime go away, we can make The Iraq war and all US debt go away, but right now, we are not how long it will go away, but very exciting news for us all here! We have found a way to use glueballs with MZM (Money of Zero Maturity is a measure of the money supply. It is equal to M2 less time deposits, plus all money market funds.) This is related to Ben Bernanke and his wonderful ideas related to his theory of "The Great Moderation". Very wonderful morning indeed!!
Here is some bits on glueballs: In particle physics, a glueball is a strongly interacting particle containing no valence quarks. It is composed entirely of gluons. Such a state is possible because gluons carry color charge and experience the strong interaction. Glueballs are extremely difficult to identify in particle accelerators, because they mix with ordinary meson states.
Theoretical calculations show that glueballs should exist at energy ranges accessible with current collider technology. However, due to the mentioned difficulty, they have so far not been observed and identified with certainty.
What we have in regard to theory so far, is the relationship between negative vacuum energy density and positive pressure related to the "second quantization" procedure that takes a set of single-particle quantum manure states as a starting point, from there, all we need is the thumbs up from The Fed and we can write off most of this subprime problem and start packaging Cayman derivatives.
Hey, if you're going to try to build a financial system out of cheap parlour tricks you might as well do it with some style.
According to the lendable amout sheet, the Fed can loan 80% of par on CDOs that have not market price. This sounds generous given the collapse of the ABX idexes that provide insight into the underlying value of the MBSs in the CDOs.
On the surface, I am not reassured by what I've read.
Misean has it right. Inflation is no longer a tool in the Fed's control. If they don't catch inflation real soon the flight from the dollar is going to cause worldwide dislocations. Anybody with a bank account and internet can be in Krone denominated CDs in 24 hours. I mentioned here long ago that inflation can't help the distressed homemoaners anyway. They have adjustables and now find themselves stuck in the loan they have unable to refinance. Thus a partial explanation for the criminally low Fed Fund Rate, to give a few more minutes for a few more people to get into the lifeboats. A lot of us here at CR are probably carrying 5% 30yr fixeds or similar. No way am I paying that baby down, I see what's coming.
For reference, if you fund a repo with a bank on the street, they will haircut market value, not par value.
The one interesting point is that the repo desks are usually pretty poor at marking things to market. You'll get margin calls, but usually really late, and there are somewhat wide margins of error on the collateral you post. They don't argue with a price if you are in some reasonable ballpark.
The repo desks are usually pretty far removed from the trading desks, more back-office than at the market. That's my experience anyway.
But this is in complete contradiction to SGS plot which shows runaway growth in M3.
Someone is not looking at the data right
Wall Street created a lot of "money-like" securities in the last couple of decades that aren't reflected in M1-M3. Asset backed commercial paper (ABCP) and auction rate securities (ARS) are two examples.
If you were to define "M4" as M3 + ABCP + ARS + VRDO's and all the other "money-like" securities and graph that you'd see a sharp drop in M4 and a sharp rise in M3. But the increase in M3 wouldn't exactly offset the decrease in "M4".
In other words, the market is narrowing its definition of what is "money".
But, it's also important to remember that this isn't a credit crisis it's also a solvency crisis. And one persons "money" is another persons "debt" there isn't as much money out there as people think. Most of the increase in M3 is the result of large increases in Money Market Funds. I'd bet that some of those funds will be in trouble.
The point is that they can't. Foreign holders of the debt would revolt. That's my point.
Misean,
It's fair for you to make that assumption.. but it isn't impossible. Highly unlikely.. sure. I think foreign entities may hold a larger amount of other types of debt than Treasuries..
So, who will revolt more? We owe $9trillion or something of that sort? The global debt markets appear to be more than 5 times that.. so..
while Treasuries may lose value.. this other stuff could just disappear if margin calls force it to be dumped. Or.. well, that is a possibility.
Fiat creation in Asia - lots of it - and their failure to continue to 'sterilize' it effectively. It will be looking for a home - somewhere.
dryfly | 03.09.08 - 11:34 am | #
Yep, and of important note, it is still part of the dollar zone at this time. A fact that a lot of people love to ignore when they look at money supply.
Anybody with a bank account and internet can be in Krone denominated CDs in 24 hours.
Not Chinese and Japanese sitting on trillions of USD. They may try to sell those dollars but who will buy?
They will have to revolt, but I wonder what the 'revolt' will actually look like.
Anyway, point is moot, Misean is right in that US will not do that. I am just a bit irked that he won't acknowledge that they theoretical have the means to print money.
I saw nothing on the subject on the Fed site, but it makes sense that the owner of the bond continues to collect the interest, i.e., that there is no assignment of interest on the pledging of collateral.
Also, the Fed is already getting the interest rate on the TAF funds, i.e., 3.08% on the last auction, so it wouldn't make sense for the Fed to collect the income on the collateral at the same time.
Kicker - Great point about M4. I had never thought about it in those terms. I do not think there is any way to know exactly how much credit is diappearing, so there is no way to know if credit deflation is offsetting the increase in M3.
Misean - Maybe foreign holders of t notes and even domestic holder will end up revolting, but that so far it has not stopped the fed from monetizing. What choice does the Fed have? What is Bernenke's history? What did he say he would do in such a case? And why don't you believe him? Hope? Reality does not care what any of us want or hope.
And Kicker ... could you please explain the shadow banking to this newcomer?
The shadow banking system was a term coined by Paul McCully of PIMCO to describe all the "liquidity creators" that operate outside the US banking system.
They are just like banks in that the create "liquidity" but since they are outside the banking system they operate without the safety net of the Federal Reserve. As such they are especially vulnerable to bank runs (avoiding which is the entire reason central banks were created in the first place). The "run" on the shadow banking system has been one of the two central themes of the credit crisis (the other being solvency).
The ABCP market was one of the first "runs" and then the ARS was the next to fall. The VRDO market also had a "run" but VRDO's are backed by banks so I don't believe they are part of the shadow banking system.
I would include Money Market Funds (not accounts) as part of the shadow banking system because they operate without a bank guarantee and can't access the discount window and the TAF. But many people believe that they have an "implicit" bank guarantee which is good enough. Since banks don't have enough capital to absorb a run on money market funds I don't believe an implicit guarantee is enough.
It's interesting to note that most of the increase in M3 has been the increase in Money Market Funds and not in savings deposits. There have already been a couple of institutional and "enhanced" money market funds that have run into trouble. There have also one retail fund that had to be back-stopped by its sponsoring bank to keep its AAA rating.
The first sign on a run on money market funds would be increasing interest rate spreads between money market funds and bank savings deposits.
Can anyone here tell me what the hell is keeping ten year treasuries at 3.5% yield? I understand the short end of the curve is a hideout as the credit markets shut down but why is the long end attracting any bids? That seems like the worst place to hide as inflation rips our society apart and the dollar gets shredded daily.
but, they need to send a clear message that the fear that is prevalent in the municipal and agency market is misplaced.
From riskC
i can't figure how you come to the conclusion that the fear is misplaced.
lower tax inflows, political fear of raising tax rates, skyrocketing benefits and input costs, heavy underfunded pension burden, and overoptimistic RoR. The prices are voted on by the guys at the desks whose income depends on getting the price right. how is that misplaced?
when I said immediate I meant immediate coordinated effort to restore long-term trust in the financial system. The results will no question take time, thus my prediction for a lengthy period of subpar growth and returns.
as to the shadow banking system, I believe that McCulley was referring more to the hedge community and the lack of oversight.
Make no mistake, tough period, absolutely, dead bodies, absolutely, volatility, absolutely, hedge funds blowing up, absolutely, armeggedon, many here are wayyyy ahead of themselves. We have dealt with crisis previosly and will this time as well, would many including myself prefer a proactive response, of course.
Can anyone here tell me what the hell is keeping ten year treasuries at 3.5% yield? I understand the short end of the curve is a hideout as the credit markets shut down but why is the long end attracting any bids? That seems like the worst place to hide as inflation rips our society apart and the dollar gets shredded daily.
Well, either you or the bond market have it wrong. If you're sure about 10 year inflation trends you can always short the 10 year and buy an oil stock like BP (5.10% yield).
The trade would have a positive carry and inflation would shred Treasuries and boost BP.
At the end of the day, the success or failure of the TAF will depend on millions of homeowners and how they react to being underwater. The people at the bottom of the food chain are providing the money. If they throw in the towel in large enough numbers--including people with conventional mortgages that back GSE bond--then even the "best" bonds could take a hit. Then
a. some banks could fail, many banks will shrivel up, with much less lending capacity and bringing on a severe economic "slowdown;"
b. the gse system could collapse and Uncle Sam will have to decide what "implicit" means
This explains all the sudden concern in high places for the "plight" of the homeowner.
Do the smart people among you accept my grasshopper's understanding of these matters?
Kicker, that's my point. IF the market is being manipulated by the Fed and they're supplying the bid at every tick down in price the party has to end there sometime. Way too many fires to fight right here and something's got to give. Think about it if the SWFs start SELLING the TY.
Thinking about shorting it through an ETF Monday, ahead of all the economic reports starting Tues... with the - Grande Finale Friday's CPI.
Can anyone here tell me what the hell is keeping ten year treasuries at 3.5% yield? I understand the short end of the curve is a hideout as the credit markets shut down but why is the long end attracting any bids? That seems like the worst place to hide as inflation rips our society apart and the dollar gets shredded daily.
It is not a question about losing to inflation over the long run, investors don't want to lose principal in stocks, real estate, or bonds that are not backed by USA. A 3.5% guaranteed return beats possibly losing 10-75% a year.
fireinthehole - "investors don't want to lose principal in stocks, real estate, or bonds"
Who ever wrote the rule it's not possible to LOSE 10% buying the TYr?
Yield could shoot to 10% as bid vanishes. All you need is sellers. The 3month seems like a safe place if you're worried. The TY is far from safe. Check out the early '80s. Anyone selling then lost... BIG.
Kicker, that's my point. IF the market is being manipulated by the Fed and they're supplying the bid at every tick down in price the party has to end there sometime. Way too many fires to fight right here and something's got to give. Think about it if the SWFs start SELLING the TY.
Sorry, I'm a little slow.....
The Federal Reserve is actually selling Treasuries to sterilize the impact of the TAF and REPO operations. You can see the impact on the SOMA account (which only holds Treasuries) here:
Since the Federal Reserve is taking mostly MBS through its TAF and REPO operations the effect should be to lower the spread between MBS and Treasuries (raise Treasury yields and lower MBS yields). The public data shows that the Federal Reserve is doing the exact opposite of what you are suggesting.
While the 10Y isn't predicting run-away inflation the TIPS market isn't predicting run-away deflation either. Currently, the best thing that you can say about the bond market is that it expects a period of very low to negative real yields ahead (as in Japan, 1989).
If you look at that lendable list, gee, how come you find that
(a) agency tier 3 paper is worth 85% of face or balance?
(b) cmo is lendable only if AAA
and so on...gee doesn't this mean that the Fed's whole TAF is now dependent on the ratings agency whores and incompetents, and i don't have to believe in black helicopters to believe that there's real or perceived arm twisting to get these things propped up at AAA to avoid margin calls by the TAF
i think its obvious this can be gamed and what can be gamed will be gamed
Barely, no investment is completely safe. US treasury bonds have been, and are still considered the safest place to park your money.
That has been the case during my lifetime.
The problem here is price discovery, which is different from no price at all. Just as the top of the bubble was an over-reaction on the plus side, so this is an over-reaction on the minus side.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
The banks don't like the price of this over-reaction, and they are taking it in the shorts on the crappy stuff. Fair enough. But there is a lot of paper out there that's AAA and getting scorched with the rest. They need credit right now. The Fed is giving it to them, and taking the cream as collateral, which will be seen as cream when the price discovery phase is over. Will it work? If the crap out there turns out to overwhelm the cream, that's when there is a problem of solvency. As mp alluded to, that's the issue to address.
Say amen, somebody.
And, just to complete the thought--that ultimate issue is how many people can't or won't pay off some or all of their mortgage. That's the base of the pyramid, right? And that's the big unknown. That's what's spooking the market. How soon will we know the answer? My guess is it could take many months--the answer will come bit by bit, based on millions of individual financial decisions. Will a trickle of defaults and foreclosures become a torrent that brings it all down? We would like to know that right now, but we don't know and we can't know--not yet.
"I note the third wave is not as bad as the earlier ones, which in turn were not as bad as the credit crunches in the 81-83 and 74-75 recessions. So, it's not yet time to cower in the bunker, at least not yet and not based on this indicator." - Fair Economist
uH....The 3rd leg is just starting....and looks like a vertical wall. Do not make such pronouncements till it is over.
If they don't catch inflation real soon the flight from the dollar is going to cause worldwide dislocations. Anybody with a bank account and internet can be in Krone denominated CDs in 24 hours.
In my opinion I would expect the housing situation to continue to worsen. In a best-case scenario I would say for 8 months. My personal estimate is for at least another two years. Wake up folks, the politicians have been making promises they could not keep for the last two decades. Here it is: greed and ignorance. What was the grand plan? Guess what, there never was one, other than re-election. If you at least want to know why this has happened, I would recommend digging up a copy of the old book by Thomas Malthus, "Essay on the Principle of Population". I think youmigt then understand where we are today. Don't get me wrong, I'm no doomsayer and I think we may be able to fix this thing. But it is going to take some sacrifice on the part of everyone. Yes it sucks, but welcome to reality.
First wonk.
The FED is a private group of banks and not in the business of losing money.
Paddles.... Clear....
Paddles.... Clear....
Paddles.... Clear....
Call it... Time of Death?
Just for the records. NYA is still above its Jan. 22nd lows and # of fresh lows is below Jan. 22nd. This is still just a retest og the lows in my books. However, we have to turn around very soon or it's going much lower. I think that would coincide with whether there will be a recession or not. The jusgement is still out.
O-Joe
So . . . the Fed is loaning money to banks, taking 'toxic waste' as collateral?
When the Fed tries to sell the collateral, there will be no buyers. They are effectively giving US dollars to banks in exchange for worthless paper.
Who is left holding the bag? The Fed.
But if the Fed is holding the bag, and the Fed regulates the value of the currency . . . The US Dollar drops.
Perhaps I'm way off, but it seems like the Fed is destroying the currency, whether intentionally or not.
Meanwhile back at the Hall of Justice Aquaman makes a peanut butter sandwich because he can't do crap.
Meanwhile back at the FED Ben Bernacke makes a peanut butter sandwich because he can't do crap.
Sterilized. . .hhhmmmmmmm
Is this like achieving a measurement in quantum mechanics that doesn't actually perturb what you are measuring?
Is sterilized intervention actually possible?
"Krumgan"?
I think the Fed is pretty well protected
Well, the devil is in the details. If they only accept "securities with market prices", then the overcollaterization is probably OK for such a short term. But if they accept securities without market values, then we have a problem. 85% of par for AAA CDOs? Give me a break. Or 80% of ABS non-AAA? I wouldn't touch second-lien backed ABS, either. We know from ABX and from some sales that the true market value is much lower.
Uhh. Theres never been any partial recovery of any kind in the financial crisis. Your confusing the stock market bounces with the financial crisis. When the stock market bounced on rate cut news, the masses wanted to believe the crisis would get better. Informed people always new it wouldnt.
This topic reminds me of what Jim Grant said last month in a column titled "Junk-Grade Central Bank":
"New York's most leveraged financial institution shows capital and surplus of $9.4 Billion against assets of $315.8 billion. S&P, Moody's, Fitch, and even Egan-Jones may sit in silence, but Grant's has reached its decision. We now downgrade the creditworthiness of the Federal Reserve Bank of New York from presumptive triple-A to mid-grade junk. At that, the Fed gets off light."
The column concluded with "Just when you thought you knew every reason to own gold, here's another."
One step too far? What exactly are the increments on this spectrum of favoritism? Should all industries be protected from failure? Moral hazard is a systemic issue. The effects happen at the margin and systematically. It is not about individual cases. It is about the long run effects of favoritism. It biases the natural selection process that healthy capitalism requires. The hidden, marginal favoritism is the very nature of the road to serfdom. It allows power to concentrate, becoming malignant tumors on human liberty. Maybe a little hyperbole is required to illuminate the large-scale, abstract process at work. Certainly, the perpetrators will never admit their own partial culpability for the fragilization of the system. Are they just too naive to understand that they are performing the Devil's handiwork? And so the collective marches onward towards its predestined fate, no man courageous enough to stop it. What's in store for the next cycle? Chuck Prince dancing on my grave?
O-Joe, read Geithner's latest speech. Maybe a better way to think about what is happening is if there was a great population on the savannah. The reputational damage for structured finance will be the equivalent of a hundred-year drought. Either many animals will die of thirst or Ben the rainmaker will cause a flood of biblical proportion. The least probable outcome, in my opinion, is that Bernankilocks gets it "just right". Regardless, this is far beyond the power of charts.
Do you know what time it is?
the ultimate sell signal? )
O-Joe "However, we have to turn around very soon or it's going much lower."
When O-Joe starts talking "much lower" something significant has changed. Who would be left to buy and hold?
Ok, so the Fed is owed by or is a collection of private banks and is not in the habit of losing money. Sterilized? Good or bad collateral? Over-collateralized?
Sure, but didcha stop to think that it really doesn't matter? The Fed can buy as much bad debt as they want and they will never lose. The Fed prints the currency. And the fed can print as much as the fed wants. The Fed is accountable to no one. Get it?
Normally i like to think I have a pretty good handle on econmic theory, but could someone please explain Walras law to me. Why must the 3rd clear if the first two do?
"Krumgan"?
HE SAID THE FINANCIAL CRISIS SEEMS TO HAVE ENTERED A THIRD WAVE.
sheesh. you should think about getting your hearing checked...
And the fed can print as much as the fed wants. The Fed is accountable to no one. Get it?
Ya, the GAO is as worthless as the SEC, which is as worthless as the DOJ, which is as worthless as the FBI, which is as worthless as tits on a bull.
I just read on NakedCapitalism that The Fed will be accepting manure as collateral, and that Texas has the greatest supply. This will turn around the economy in no time, but the greatest danger is the manure bubble, which Wall Street will pump up and The Fed will support. This is all just a big cycle and garbage in, garbage out!
Better get in now, on the ground floor!!
Just thought everyone would enjoy this little tid-bit from Yahoo Finance for the new home buyer: "Tighter lending standards and see-sawing interest rates abound, but it could still make sense to buy a home right now".
Thank you for those insightful words Mr. P.T. Barnham.
And the fed can print as much as the fed wants. The Fed is accountable to no one. Get it?
No I don't. Please explain to me how the Fed puts that "printed money" into circulation? Ben and they boys get in the Suburban and down the street to HappyBank, stuff it all in an envelope and stuff it through the drive-through while laughing like 6 year old girls?
And while you're at it, explain to me what you mean by "accountable to no one"? Please explain exactly what the Fed can do, and can't. Please also explain to me how the Fed wants to lose money?
It seems that the internet wingnuts are having a field day lately.
As usual, all those steely-eyed, hard-edged Ayn Rand types believe in privatizing the profits and socializing the losses. How dare anyone impose Glass-Steagall or the tiniest bit of oversight on them...
I just read on NakedCapitalism that The Fed will be accepting manure as collateral, and that Texas has the greatest supply. This will turn around the economy in no time, but the greatest danger is the manure bubble, which Wall Street will pump up and The Fed will support.
ETF: CRP
By depreciating the $ the US is effectively, gradually, defaulting on its debts to the world. Whether the world has awakened to that fact, or whether it can do anything about it is another question. But the idea that the US would never default is nonsense. It is defaulting slow motion.
The market right now is irrational, and I like Krugman's slap in the face analogy. What the fed is doing with the TAF is supplying a temporary way of avoiding a sale of collateral at an irrational price. The reason the term is long is because we all know things can stay irrational longer than we all think.
Say a large bank is having a severe problem. If it has to sell these assets on the open market now, they are going to be in even worse shape and, furthermore, dumping these onto the market is going to make it even more irrational. Fine. It's a very good way to accomplish the slap in the face.
But what happens if the Fed takes the collateral and the bank spirals down to insolvency anyhow? Is the Fed stuck with this? No, because at some point the Fed will either liquidate the assets or will transfer them to whomever is eating the insolvent bank. My last sentence is the quasi-nationalization aspect.
So I think that, in the end, is what the Fed has up its sleeve. From their point of view, it doesn't matter. They're not going to lose money. And the quasi-nationalization is that the Fed has the collateral, the FDIC has the rest in the clean-up.
Now, outside of the banking system lord only knows what will happen. My current thinking is that the IB landscape is about to change drastically. So is the concept of a hedge fund.
12th percentile,
Buy a Browning 10 gauge pump and hold on tight they kick like a mule.
Let's see, $100B TAF (35 day term), $100B Repo's (28 day, MBS Ok), and $200B tax prebate stimulus checks. Starting to look like real money. What was that MEW loss estimate, again?
Yes, I know its not enough but it is emergency cash that will have an impact. Might not help at all, we are in uncharted territory and the cross defaults are a real risk. Big question is will the impaired banks, especially the primary dealers (to whom the repo's are specifically targeted), even use the loaned capital sensibly? Maybe their corporate culture is so degenerate they'll just waste it speculating in the markets and setting off that last commodity rocket.
All these event tell me is that the Fed should tighten in accordance with their charter. Well, okay, they also tell me that the Fed won't tighten in defiance of their charter.
Rob Dawg, the Fed should drop .25 at the next meeting but they won't. That would not only be a slap in the face, but a bucket of cold water also.
Two points:
First, I believe Wall Street has cornered the market on manure.
And: "maybe the markets arent hysterical maybe theyre just facing reality."
At some point it does go from buyers strike to recoginition of reality.
I have a feeling that about a year ago or longer, information was transmitted to our trading partners that something had to be done about our unbalanced system. Our guys said you can either help us or you can accept what we have to do to put things back in balance. Our partners most likely said: We will think about it. Our guys said OK we are balancing things be devaluing our currency; are you happy now?
I don't know jack but inflation is one way out of the unbalance that allows our mfgs to compete. It is one way to move 8 million workers from the untraded sector to the traded sector.
Good Luck to Us All.
CR,
I'm trying to imagine a situation in which the Fed would issue a margin call against the TAF collateral. Perhaps you can come up with one.
Imagine that the collateral values suffer a steep decline. Would the Fed call for more margin? A margin call would reduce the amount a "client bank" could borrow under the TAF facility, and therefore widespread margin calls by the Fed would reduce system liquidity -- just the opposite of the TAF's intent.
Now imagine that a number of banks are actually thought to be insolvent, and that the TAF loans are unlikely to be repaid. Will the Fed seize the collateral? Of course this would put the banks under, which, again, would run counter to the TAF's intent: to save the banks in the first place.
So the collateral is there, but it can never be touched. The ability to call for more margin is there, but it is unlikely to ever be used. What do you call that lending facility? Preferred stock does not seem that far off.
If you do not like your rating, what the hell, ask not to be rated.
I like this solution actually, provided it would be carried to the logical conclusion: Moody's, Fitch, and the S&P should all lose government monopoly sponsorship. The big three rating agencies are clearly unqualified to rate anything. The conflicts of interest are stunning. They should all stop simultaneously.
We need to move away from a government sponsored monopoly to a system where rating agencies make money based the accuracy of their ratings. That would put the big three out of business in a flash (or cause them to do due diligence for a change).
I am also in favor of removing conflicts of interest that allow rating agencies to conduct other business with the companies they rate. It's Time To Break Up The Credit Rating Cartel.
Gotta Love Mish.
I did not realize that the Fed and agencies did not mark to market the securities that they buy. If not, then they are already buying manure.
ipodius writes:
Rob Dawg, the Fed should drop .25 at the next meeting but they won't. That would not only be a slap in the face, but a bucket of cold water also.
They can bluff. Cramer already stung them. Let's say the next transcripts show cool and calm and a consensus that they need to pause to see the effects of recent actions.
When the Fed tries to sell the collateral, there will be no buyers. They are effectively giving US dollars to banks in exchange for worthless paper. Who is left holding the bag? The Fed.
The banks are NOT going to default on the Fed unless they go under. In that case the shortfall on the worthless collateral would still be there and would fall on the FDIC. The Fed is just shifting the burden from one arm of the federal government to another. No harm done.
I think, David, that this is the crux of the nationalization issue. If the Fed seizes the collateral, haven't you just set up Nationalizing the bank? The collateral is not supposed to be crap, so what is the likelihood, and what is the mark? If the bank could meet the call, why would it be using the lender of last resort anyhow?
What worries me more is what the banks are doing with the funds. If they are not putting them to work in the right ways, then this is all for naught anyhow.
CR-
Krugman is exactly correct. Three times now they have attempted to slap the sense into the markets, each time met with short rallies and vicious selling to lower lows in the fixed income markets with the exception of Treasuries. Agencies have now taken it on the chin, municipals, and auction rates as the crisis continues to spread.
A more permanent fix is needed and this should be a coordinated effort to revive these markets immediately.
My opinion is to dissolve the monolines and create a municipal trust with a government backstop or bring Berkshire back into the picture as reinsurer to the trust. We are in desperate need of a do-over with the monolines due to the total lack of confidence.
As to the GSE's, provide direct government backing and move forward, enough of the half-start, band-aide methods that do not/have not worked, we are entering a much deeper crisis of confidence that should be addressed now.
The current attitude in the markets seems to be sit back and wait for the other guy to make a move, but, hurry to the table so that if something happens we are not left out, purely reactive and disgusting actually when you consider that these are some of the best minds in the country-this situation requires our regulators to be proactive.
The 3 mo T-bill is at 144 bps and the 2 yr Treasury at 152 bps, this is representative of one thing, fear, fear of default.
This period is manageable, but it will be a difficult time, and we knew this, what we did not see was the unbridled freezing of the fixed income markets.
The regulators need to get off of their collective rear-ends and take the steps necessary to restore faith in the financial system and provide the back-drop for long-term stability.
The dead bodies will fall along the bottom of the food chain, but, they need to send a clear message that the fear that is prevalent in the municipal and agency market is misplaced.
As to the shadow banking system, it seems, by any measure, everyone including the shadow knows its days are numbered due to margin requirements becoming more difficult.
I remain convinced that the commodity bubble is next due to this ever spreading tightening of credit within the hedge fund space, also, that pricing relief is much needed in the average household across the country.
These over-leveraged, opaque vehicles playing with sophisticated investors money knew the risks, created the bubble, and in my opinion will experience much of the coming pain.
It is also my opinion that in this space, similar to the bid-rigging allegations in the auction rate market and the eventual seizing of the market, that much of the liquidity could have been created through the presence of false market by market participants trading with each other in order to create the aura of a liquid market, one which in our history was fairly illiquid. My contention is that in reality, when all is said and done, nothing will have changed, reversion to the mean will show just how illiquid these markets really are when the bids go away.
I note the third wave is not as bad as the earlier ones, which in turn were not as bad as the credit crunches in the 81-83 and 74-75 recessions. So, it's not yet time to cower in the bunker, at least not yet and not based on this indicator.
I agree with several other posters, and the nationalization thread on HousingWire, that this is defacto (partial) nationalization. The Fed can't pull back the TAF because that will crash the system in a very bad way. So they're effectively holding a substantial equity stake. You could argue it's worse than nationalization because they have an equity stake but no stock voting rights. Privatized profit, socialized risk, as usual (although as I pointed out earlier, this risk was already socialized anyway.)
You could argue it's worse than nationalization because they have an equity stake but no stock voting rights.
Well, perhaps. Then again, Mr. B. could "suggest" that certain banks do certain things or, you know, the collarteral at the next TAF rollover would need to be increased. Those that play ball live to fight another day. Those that don't...
So perhaps in this case, behind the scenes pressure would be more effective than voting rights.
Carl Somers writes:
Let's see, $100B TAF (35 day term), $100B Repo's (28 day, MBS Ok), and $200B tax prebate stimulus checks. Starting to look like real money.
And that's not counting the FHLB, which did something like $600B more lending than usual last year, lending to the like s of CFC (at least $50B). Bet that's some mighty nice colatteral they got there.
quoting ipodius: They're not going to lose money.
Why not? Is it really that unlikely that the collateral turns out to be worth less than the amount the fed lent in exchange? Also, if they do lose money, does it really matter to them? I suppose if it's bad enough they may lose face (and confidence), but given what's happening to the dollar, is it really clear that they're not willing to accept this?
I am of the opinion that we do not need monolines. Once upon a time in a land far away it was possible to do analysis on bonds. Good ones had high prices and bad ones had low prices.
As to the failure of the municipal auction rate markets, perhaps that is more an unwillingness to provide long term financing at short term rates. It happened to GE when their CP was disavowed. They then began to pay long term rates for long term money. Entities issuing municipal bonds should do the same.
David Pearson, it really depends on how ugly this gets. The overcollateralization is substantial - so it will take quite a downturn for this to be viewed as preferred stock (IMO).
Fair Economist, when the Fed finally reduces the size of the TAF (they will some day!), then that will be a good sign for the economy. I just don't see this as partial nationalization - but maybe that is just a definition issue.
Best to all.
Good ol' American "Can Do" attitude. We can do something to fix this.
The Fed can not DO a darn thing to fix this. The Fed created it and the IBs went along with it. It is not fixable. It is a deflationary spiral, feeding on itself, and it will not stop until it stops on it's own.
How can the Fed lose money when the Fed can print as much as the Fed wants?
Is it really that unlikely that the collateral turns out to be worth less than the amount the fed lent in exchange?
If the collateral is worth less, the bank is subject to a margin call, or the next rollover is reduced. Those answers are in the faq's on the fed site for the TAF.
Also, the Fed has a balance sheet and reports, so it is accountable. It could, however, mitigate losses by taking a hit on profit. Yes, the Fed earns a profit by earning interest on holdings against no interest currency. At the end of the day, the Fed is a business.
How can the Fed lose money when the Fed can print as much as the Fed wants?
Here we go again...the Fed has a balance sheet just like any business. Any money printed shows up as a liablity on the balance sheet. So it can't just "print money" without consequence. See my last post for how the Fed earns a profit or look it up.
The Fed just doesn't "print money". And, as a matter of fact, if you follow any of the monetary numbers you will see that the monetary base is actually shrinking. That means that capital is being destroyed faster than it is being created. That is the liquidity problem. It's also called by another word: deflation.
ipodius: If the collateral is worth less, the bank is subject to a margin call, or the next rollover is reduced.
Yes, I should have made clear I was considering the case that the bank becomes insolvent. As far as taking a loss, it seems they could easily take it out of the interest from their enormous holdings of treasuries. Since they usually return (forgive) this interest to the government (minus expenses), the loss would be covered by taxpayers.
Thanks,
Yes, I should have made clear I was considering the case that the bank becomes insolvent.
Well that's what we're talking about with the "nationalization" argument. In fact, the difference between the collateral and the mark (if sufficiently large, although how it gets that way in 28 days is a good question) could be realized if the bank were "nationalized". In other words the bank is insolvent and disposed of, the Fed having the difference returned by the sale/transfer of assets, which would be done by the FDIC.
So I'm not at all sure the taxpayer is as exposed (if at all) here as would be the case with a straight-forward bailout. If the bank were seized the stockholders would take the hit.
Conjure and I have grave doubts about this working.
Since the beginning, the Fed has been behind the power curve and has offered nothing but band aids, albeit very large ones.
Junk is junk. The TAF, which is a well-intentioned effort, simply treats the symptoms. The cancer is still there, and that's why I say they'll have to come back into the market again and again until, for all practical purposes, they own all of it.
IMO, this thing doesn't end unless and until they finally face up to the problem and the boards are cleared.
The Fed just doesn't "print money"
I'm no macroeconomist but I believe the Fed can in fact print money when it takes Treasuries from the Government and issues cash credits to the corresponding government demand account. These show up as assets on their books, and currently they say
they're holding ~$700B of monetized US debt.
Well mp and conjure, you have a point. A lot of crap is out there. How much of this has been pledged in the TAF is a good question. In theory, this could work but as you point out the Fed is generally reactive and not proactive.
I will stand by my prediction that at least one major bank and two IBs are going down. Hedge funds will all but disappear. The collateral damage from that will change the landscape of finance for good.
Mish would be a lot easier to take if he stopped characterizing Bernake and the Fed as a bunch ignorant morons (though I'll give him the latest Bush-Co. frat boy appointee.)
Did you see how much manure is available just in Texas. This entire problem can be solved in just a few months if we start a derivative market and let SIFMA lobby for tax shelters! By summer we could have a global market buying crdir default swaps in manure futures using Euros!
^ "I don't have any solution but I certainly admire the problem." -- Ashleigh Brilliant
In case someone hasn't already posted this:
Banks face systemic margin call, $325 billion hit: JPM
| Reuters
Ipodius, I certainly agree with you in terms of collateral damage but, in terms of the IBs, I think you're optimistic.
Additionally, I think there's too much moral hazard here, and am not nearly as sanguine about that as CR.
If I was the Fed Chairman, I'd be instructing my lawyers to start with Chuck Prince, and put his balls in a vise. I'd tell them to check the statutes and find something with which to prosecute him. There's always something available.
Frankly, its time to scare the shit out of these guys or, even if this problem is solved, the IBs will soon invent another one.
Troy, the term "printing money" is used facilely by some here. My point was that putting money into the system has consequences, and has to be done in specific ways.
Right now, there are very specific problems that they are trying to deal with. Rather clumsily, but they are smart people and may just muddle through. I have doubts but if they pull it off, who cares if it was an accident or intentional?
According to that "lendable amount sheet" the fed will lend out 85% against AAA debt. But the ABX AAA 07 is already at 53 cents on the dollar. Does this mean the fed takes the losses below 85 cents on the dollar? (or whenever the index cliff dives by 15 percent from whatever value it was loaned at)? Doesn't seem like much protection to me.
Frankly, its time to scare the shit out of these guys or, even if this problem is solved, the IBs will soon invent another one.
Optimistic! Me?
Perhaps I am. But I do think that, behind the scenes, the Fed is making sure that the shadow banking system takes it in the shorts. (no pun intended) The IBs are holding a lot of the paper on Hedgies that are now starting to unwind. There will be no joy in any of them for a while.
But I do agree with you, although the legal proceedings will take a long time to come to denouement. Still, I do see a ritual execution of some of the players coming. Another prediction is that Mozillo will be the first to have his head on a pole. It would be somehow appropriate if Prince had to do his dancing behind bars for 10 to 15.
Every day when I drive across the river and see the dome of HBS I think of all the plots that were hatched there. If the peasants were to revolt, they should tear it down brick by brick like the bastile.
"According to that "lendable amount sheet" the fed will lend out 85% against AAA debt."
If you read the sheet carefully, you'll note they can make any kind of individual deal they want. It's a smoke screen.
"The Fed just doesn't "print money"
Yes. It does. But you were correct otherwise, yet incomplete. The collateral shows up on it's asset side. The monetary base is shrinking, and the Fed is not the monetary base, and the fact that the monetary base is shrinking is testament to just how much control the Fed actually has during a deflationary spiral.
Who do you think the Fed is accountable to? Congress? The executive branch? The GAO? What or who can tell the Fed what to do or instill a consequence of any sort on the Fed? The Fed reports to Congress, and Congress approves or disapproves the president of the districts, but beyond that, their is nothing Congress can do.
So what if the printed money goes on the Feds balance sheet. That has never stopped the fed from printing money and it certainly is not slowing the Fed down right now. The Fed can print as much money as it sees fit and answers to nobody.
I am currently generating some formulas for the manure derivatives, which if God is with us all, will be published by SIFMA Monday morning and fast tracked to Treasury and then over to Warsh, who will then rush this to Chicago where we will see a derivatives market up and running by Tuesday morning.. God save the queen as well -- why not, that is axiomatic!
This is all I have so far, but what think?
Specifically, the phase-matching condition requires the group velocity of the manure pump pulse to be equal to the phase
velocity of the generated THz manure radiation.
As mentioned above, however, the energy of THz pulses (even at room temperature) generated using this material was orders of magnitude higher than using ZnTe for the same manure pump energy.
Steven,
You can't do straight calculation from the AAA ABX of a given issue to the value of all AAA. The ABX stuff, from what I have read recently, is calculated from a group of AAA deemed "most likely of the AAA to suffer losses" since that is what is useful to users of the ABX. Most AAA has not actually suffered any losses and much of it never will. But some of it will, and for AAA the fact that ANY will suffer is not normal or good.
awgee, I'm just unclear as to what your point actually is. The Fed's actions have broad ramifications, so the accountability is actually monumental. Are you suggesting that congress can't change the laws regarding the Fed?
Sorry about the rant, but I've watched this economy lurch from one avoidable crisis to another ever since the Plaza Accords.
There is no business, financial, or political leadership.
The Fed's actions have broad and huge ramifications, but it is naive to think that the ramifications will stop them from creating as much currency as they see fit. But there is no accountability in the sense that the Fed has to answer to anyone for it's actions. The fed reports, but no government or private orgainization has any power other than to change the law as you said. Congress can change the law, but that is about it. Up till then the fed can print as much as it needs to keep it's member banks solvent. My point is the Fed can and does print as much currency as it see fit.
sir Ipodius
Please explain BB's quote about preventing deflation by printing money. Being more on the wingnut side of things, I do not know whether to believe the head of the fed or some one who makes sense but blogs with a peculiar name. TIA
True mp. There was a time when being a executive meant that you saw yourself as creating something that provided value and wealth to many classes and stakeholders. Something with responsibility. Now the ones I have had the displeasure of working with think that it's all about the liquidity event and buying a 9000 sq ft house with a steamroom and a hummer parked in the drive. It's disgusting. And politicians have enabled it all so they can get elected.
Perhaps the reset button will be hit this time. It was avoided after the dot com bust.
St. Louis Fed: Series: BOGNONBR, Non-Borrowed Reserves of Depository Institutions
She's coming down like a ton of shit Mr. Scott
Please explain BB's quote about preventing deflation by printing money.
Please, if I could explain what BB or the Fed meant by anything I wouldn't be posting on a blog, I'd be raking in the cash. I do believe it was the art of hyperbole...what he was saying is that he would act to increase the money supply, thereby creating liquidity faster than it could be destroyed. By the numbers, I'd like to ask him "how's that working out for you Ben?"
My strange name is a sly reference to my having to study Latin for 4 years (that was back in the day before education went to hell), an old BBC series, and a new device that I wonder how I ever lived without.
My sense of that speech is that they could make it painful to hold our currency if they wish. Maybe they are buying the CRB. Name is cool.
tg, after all the heli-ben talk, i bet if he could take those words back and replace them with something else, he would.
I don't think the Fed acts irresponsibly, i just think that they are sometimes far too slow to react to what is happening in the street. Typical academics. Right now, the problem is (as I and some others have been saying) deflation. Asset prices are in collapse and the financial system is at 12:00 conjure time. I can monday morning quarterback, but I have to think that they have a plan that is bigger than I can see. At least I hope so.
I hope you have your seatbelts fastened. The ride is about to get a lot more bumpy.
Ipodius said, "Say a large bank is having a severe problem. If it has to sell these assets on the open market now, they are going to be in even worse shape and, furthermore, dumping these onto the market is going to make it even more irrational."
DUDE WHATEVER.
What your justifying is trying to prevent a market from unwinding, and yes that can be irrationally.
What about the irrational upside to a market, debt or equity? Nobody had a problem with the virtuous cycle that arose from ever-rising real estate prices, but god forbid the vicious cycle take course...no no..we can't have that.
You guys make me sick. Everyone wants to enjoy the upside that comes from bubbles but can't stand the downside that comes when they correct.
If we are going to manage markets, then let's do it ALL THE TIME.
It is always useful to evaluate the present with the proper perspective.
From Barron's
The Great Fall: Here Comes The Humpty Dumpty Economy
"... What makes the quote above especially pertinent, obviously, is that even while recession's clammy hand makes itself felt, inflationary fires are starting to flare in earnest, stirring unfond memories of the 1970s and early 1980s, when the cost of virtually everything from diamonds to doughnuts vaulted into the wild blue yonder. Ray takes due note of the double whammy of recession and inflation back then and points out that the measures of both used at the time were a heap more accurate than those Uncle Sam relies on today. Especially notable, we think, was the calculation he cites of January's 4.3% rise in the consumer-price index (vs. January 2006) by John Williams of Shadow Government Statistics.
Using the degimmicked yardstick that was in use prior to 1980, Williams comes up with a reading of 11.8%, which, to these tired eyes, seems a quantum leap up from the official 4.3%. And, more to the point, it squares a lot more closely with $106-a-barrel crude, not to mention upward leaps just this year of commodities of every kind from 30% or more in aluminum, oats and silver and double-digit gains in coffee, corn, wheat and zinc, among others.
Before 1980 and before fiddling with the CPI became the fashion at the Bureau of Labor Statistics, the reckoning was, as Ray points out, based on "a market basket of goods and services bought and used by the average American family." A measure, in other words, of the cost of living and evidently a good deal closer to the truth than the finagled numbers now in favor. ..."
Potential Moral Hazard..?
Robyn posted a link
in an earlier thread concerning the fall out to the 80's S&L collapse in the Florida area. Not being familiar with the specifics of the S&L deal (I was busy partying at the time and blew right by that one grin) I started googling... One link lead to another which uncovered some strikingly similar 'moral issues' that we face today.
What stood out was the notion that the early attempts at a bail out were patchwork at best. This lead to later lawsuits filed against the FDIC by some of those 'victims'. It seems that some (many?) of the S&Ls had their asset value initially supported through questionable FDIC assistance programs. Years later some survivors decided that they could have gone it alone with out the 'help' of the FDIC.
They contend that Congress fueled the S&L crisis when it passed the Financial Institutions Reform Recovery and Enforcement Act in 1989. When the FDIC subsequently pulled their 'creative funding' attempts at propping up the affected institutions it placed them in an untenable situation. And this was the root cause of the collapse of those businesses. They put together law suits (apparently more than 150 have been filed against the government over the 1989 law) which in essence said that the FDIC owed them.
Some are now gaining recognition in the courts that they have valid cause to sue and appear to be doing so.
CR/Others,
I have been trying to find an answer to the following question for sometime.
Who has to pay Goldman, hedgie Paulson, BS if the above cash out their ABX short positions? Who is on the other side of the ABX trade?
Thanks!
It is interesting to note that American CPI, American GDP, America's housing bubble, recession and systemic collapse is now a matter related more so to global equilibrium.
Fed statistics, bank models, ratings models are all out of balance and not adjusted to match the imbalance of reality with the illusions of outdated models and misinformation.
Perhaps we are in a highly efficient system which is based on realtime or hypertime that explloits the weakness of this dis-connection and inefficiency in our governments, our banks, our societal systems.
Perhaps the internet with its vast amount of porn...I mean, data, has skewed and biased the relationship between the last generation and the evolving quantum leap era of attention deficit retardation. The reason chaos seems to be taking hold, is because we have a changing of the guard and this new brave era is based on laziness, greed, lotto tickets, fast food, a service economy that expands in the form of a one dimensional job opportunity as a walmart greeter and the obvious financial burdens of synthetic fantasy which is like an AIDS epidemic with everyone looking the other way. This highly grotesque financial orgy that is fueled by walmart job creation and a serious lack of liquidity is heading into the brick wall of velocity, where no one will be left standing!
Ame
ipodius writes:
"In other words the bank is insolvent and disposed of, the Fed having the difference returned by the sale/transfer of assets, which would be done by the FDIC."
after the last crisis, there was some changes to who's pocket a loss would accrue if a failed bank had been supported by discount window borrowings. see helfer's (former fdic chair)comments on the topic: Finance & Development, March 1999 - What Deposit Insurance Can and Cannot Do
in short, congress thought the regulators were forbearing on large banks; hence, changes were made where the loss would not go to the fdic for failed institutions that were on life support via discount window borrowings. these losses now accrue to fed or taxpayers directly.
today, it is unclear how the the taf borrowings would be treated under the fiicia reforms. should anyone know, please post.
I need help with my speech for Warsh. We are giving this at Harvard in the morning at a champagne brunch; any tips, very appreciated:
It is interesting to note that American CPI, American GDP, America's housing bubble, this recession and this systemic collapse -- is now a matter related more so to global equilibrium than to the failed reality of The American Dream.
Fed statistics, bank models and ratings models are all out of balance and not adjusted to match the imbalance of illusionistic outdated models based upon misinformation which is exploding into chaotic fragments.
The reason The Fed and Wall Street are running in circles like chickens with snapped necks, is because the axe fell and exposed these crooks -- who now have no easy escape route from the slaughter haus! The truth is, the blade needs to continue falling and separate the genetically deficient hens from the retarded roosters. The slaughter should be merciless!
Perhaps we are in a very highly efficient system now, which is based on realtime or hypertime that explloits the weakness of this dis-connection and mass inefficiency in our governments, our banks, our societal systems; our people, our way of life, or the way which the banks wanted things to be.
Perhaps the internet with its vast amount of porn...I mean, data, has skewed and biased the relationship between the previous generation and this evolving quantum leap era of attention deficit retardation scum covered in tattoos.
One reason chaos seems to be taking hold lately, is because we have a changing of the guard and this new brave era mentality is based on laziness, greed, stupidity, lotto tickets, fast food, and a service economy that expands in the form of a one dimensional job opportunity -- which is at walmart as a part time greeter.
The obvious financial burdens of this unraveling synthetic derivative fantasy is like the AIDS epidemic, where everyone is going to be looking the other way for years and not being honest about the overlapping consequences in the future. This highly grotesque financial orgy that is fueled by walmart job creation and a serious lack of liquidity is heading us all into the brick wall with a velocity, where no one will be left standing!
It appears there is a corollary to Keynes, "the market can stay irrational longer than you can stay solvent" observation...
namely that, "the market can stay irrational long after you've exceeded your intrinsic value".
Basically, I'm refering to the fact that the credit markets have been irrationally priced for some time (years) and I'd argue that market participants are finally behaving most rationally (contrary to participant claims).
Re: TAF
While it may be pointless to second guess their intentions, it appears at face to be an attempt to scuttle bank assets away into the Facility in order to allow the banks to hold onto this paper as long as they can so they won't "have" to accept the market's price for them. In the parlance of our time, I'm not certain this is "sustainable".
I AM wondering how the TAF/FED is pricing this collateral, though. That may be an area of inquiry worth pursuing.
Two general points:
What's next... Bankers actually hold and service their credit lines to maturity? Never happen.
The lending industry has spent at least 500 years trying to devise ways of squirming out of holding paper long term for the simple reason that they can't manage interest rate risk due to fluctuations in the supply of money.
Bankers are in a constant spot. On the front end they have to offer savers higher rates or better terms. On the back they have to compete w/ one another for business by lending at ever lower rates or more convenient terms. =Recipe for disaster.
On the plus side, they do get to lever the savings (liabilities). Uh oh. There's that leverage thing again.
Fun thread.I finally got to listen to Neal,prince and Mozillo testilying...wunnerful stuff.All three were slicker versions of a man I once worked for who was accurately described as having most of the ethical sense of a weasel in rut.
Anonymous writes:
St. Louis Fed: Error soid=1
She's coming down like a ton of shit Mr. Scott
Anonymous | 03.08.08 - 10:47 pm | #
nothing to see here,
Non-Borrowed Reserves: False Alarm - Real Time Economics - WSJ
Dirk:
Walras law is based on the following:
income = value of the assets you own and can sell (in Krugman's example three prices, three assets).
you can spend your income on these three assets at the same prices at which you can sell.
i.e. economic models are about redistribution of assets so that everybody is better off.
So essentially everyone in the economy has a budget equation with the following form:
p1 * w1 + p2 *w2 + p3 * w3 = p1 * c1 + p2 * c2 + p3 * c3
where p is price, w represents how much you own initially and c represents how much you consume after trade.
A little algebra can show that if supply equals demand in two markets, it has to equal demand in the third no matter how many people there are.
(Of course, these models all assume that every participant takes prices as given -- but I'm not sure the guys at Goldman and the other banks realize that's what they're supposed to be doing.)
After midnight thread music: Rickie Lee Jones - Flying Cowboys
YouTube
- Rickie Lee Jones - Flying Cowboys
mp writes:
"Junk is junk. The TAF, which is a well-intentioned effort, simply treats the symptoms. The cancer is still there, and that's why I say they'll have to come back into the market again and again until, for all practical purposes, they own all of it."
What if that's the plan?
Even if it's purely unintentional, it's still a scary thought.
The underlying economic reality of the Fed's auction facility depends on its specific future actions.
It could end up being "covert nationalization"---but more like "accidental nationalization", the way dumb teenager rooting leads to "accidental" pregnancy.
To make the point: how would it go down differently if the F'ed Banks were getting TAF loans from a truly private rational profit-seeking entity? Let's say the Personal Bank of Sheik Mega al-lo'Did.
Margin calls.
Remember the bond market rules? 1) Don't panic. 2) If you gotta panic, make sure you panic first.
If a private investor thinks they won't get paid a return OF principal, they won't roll over loans. They'll seize collateral and dump it, at whatever impaired price it gets on the market, and sue the borrower for any remainder.
This obviously cascades.
The point of the TAF is that the Fed is going to be the dumbest lender in the room. They won't margin call anybody or fail to roll over, no matter how broke, incompetent or deadbeat the borrower is.
We've seen this story before.
When it happened somewhere else, we called it "crony capitalism".
We tut-tutted the Japanese Ministry of Finance, Thailand, Korea, Indonesia, and of course the Communist Party of China for pulling this sort of stunt.
Today, our mandarins of crony capitalism share the same color: mandarin orange.
https://image.minyanville.com/assets/FCK/Image/christy/j226.gif
It's good to be a crony capitalist.
The other side of the coin
Commentary: The Fed's doing more damage than good
The Fed may be doing more harm than good Irwin Kellner - MarketWatch
For example, between the end of December and the middle of February alone, the money supply M2 has expanded by a compound annual rate of 12%, according to the Federal Reserve Bank of St. Louis. This compares with a growth rate of only 5.5% from the four weeks ending February 19, 2007 through the four weeks ending July 23, 2007.
The rate of growth for highly liquid funds which the St. Louis Fed calls MZM (money zero maturity), is even greater. It soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.
Guess what all this money has accomplished. That's right, Virginia, it has created a whole lot of inflation.
The consumer price index rose 4.3% during the 12 months ending in January -- up from little more than 1% in late 2006. For its part, the 7.4% leap in the producer price index over the most recent 12 months was the most for any 12-month period since October 1981!
"Bankers are in a constant spot. On the front end they have to offer savers higher rates or better terms. On the back they have to compete w/ one another for business by lending at ever lower rates or more convenient terms. =Recipe for disaster."
Poor babies. Competing in a free market ! The horror.
Obviously, their poverty is in evidence by the miserly salaries they pay their employees and managers, as well as the dilapidated, sleepy-town premises in which they toil, in quiet, anonymous profitless service for society's greater benefit.
The point is that the market sets the price of any security. We enjoyed when the market cleared real estate prices at a higher level. The housing bubble fed the consumption bubble (aka HELOC). Everyone knows this, its old news.
Now we must let the market clear, unfortunately at a lower level. People have to take their losses like adults. All parties knew what they were getting into and the risks involved. When a bet goes bad, you lose.
Money of zero maturity is a measure of the money supply. It is equal to M2 less time deposits, plus all money market funds. It measures the supply of financial assets redeemable at par on demand.
MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption. This measurement derives its name from its mixture of all the liquid and zero maturity money found within the three "M's."
The essence of MZM is that it encompasses financial assets with zero maturity. Assets included in MZM are redeemable at par on demand. This definition excludes all securities, which are subject to risk of capital loss, and time deposits, which carry penalties for early withdrawal. In short, MZM includes all types of financial instruments that can be easily converted into money without penalty or risk of capital loss.
M2: M1 + all time-related deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. A key economic indicator used to forecast inflation.
Current Chairman of the U.S. Federal Reserve, Ben Bernanke, has suggested that over the last 10 to 15 years, many modern central banks have become relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon he terms "The Great Moderation
What the Federal Reserve calls smoothing the business cycle I call papering over problems.
IMHO the Fed playing pawnbroker to the banks can't possibly be expected to end well. It's not like you have a good business in a bad spot; these institutions are currently configured for an economy that no longer exists.
It's akin to a prospective homeseller borrowing against their retirement in a futile attempt to wait out the housing downturn.
dr strangemoney's 'Chuck Prince dancing on my grave' induced an economic orgasim and I screamed Roubini, Roubini, Roubini at the top of my lungs!
Mistah Bonzai - Those are commonly called "Goodwill" cases. I was a 30(b)6 witness for the FDIC in a Goodwill case - deposed in DC at the Dept of Justice on a RTC case out of Jackson, Mississippi that FDIC inherited. It was no fun and I had a half dozen FDIC lawyers there protecting the FDIC's interest. The FDIC has conducted a long costly scorced earth Goodwill defense which rarely gets any press these days. The public is still paying for the S&L/Bank crisis as it rapidly runs into the next bank credit crisis.
surferdude - you can bet the FDIC will fight like hell to keep from taking the TAF losses and it will be interesting to see the new legislation after this crisis. If you learn more about this please blog it.
BTW, if you haven't read Denninger's open letter to the President you really should:
The Market Ticker
Of course, that still doesn't solve Mr. and Mrs. Smith's problem, which is going to tank the macroeconomy.
mp,
You can't emphasize that point often enough. Doesn't matter what anyone does with institutions when the citizenry is broke.
I dunno why you like Krugman so much - this is ad hominem no doubt but that man is hopelessly compromised - he plays the big con when the Republicans play the little con - he fucks up on the first sentence:
So, in this case, imagine that there are three assets: money (really monetary base), Treasury bills, and private securities (think mortgage-backed).
that is f*ing triple counting you idiot - there is only 1 asset in this context - its money - the rest are.. arghhh I'll stop here.
-K
sk, I agree with you. I lost faith in Krugman several years ago when he reviewed Kotlikoff and Burns' book on the generational problem, and he torched the book quite vociferously -- except the very argument Krugman was using as the thrust of his attack was simply mathematically wrong. I realized he was just a hack at that point.
bacon dreamz writes:
"Krumgan"?
HE SAID THE FINANCIAL CRISIS SEEMS TO HAVE ENTERED A THIRD WAVE.
sheesh. you should think about getting your hearing checked...
bacon dreamz | 03.08.08 - 8:05 pm | #
Okay, that was pretty funny.
Of course, CalculatedRisk corrected the typo, so no one will ever know what we're talking about.
Tanta, CR, et al,
OT, but blogs like this may help:
Tajikistan 'facing food crisis'
BBC NEWS | Asia-Pacific | Tajikistan 'facing food crisis'
Tajikistan is in the grip of emergency food shortages, the UN's World Food Programme is warning.
The deteriorating food situation is part of the energy crisis which hit the mountainous nation in the middle of its coldest winter for five decades.
Tajikistan is currently using up its last energy resources, and it may face a total blackout.
The Christian Science Monitor, neweurasia, and other media observers are predicting that a nascent hunger crisis will erupt into a full famine as a consequence of the energy shortages.
An international appeal has been made by the United Nations, NGOs, and the Red Cross and Red Crescent for around US$25 million to assist the government. According to the United Nations, more than two million people could face starvation before the end of winter.
ipodius writes:
"The market right now is irrational, and I like Krugman's slap in the face analogy. What the fed is doing with the TAF is supplying a temporary way of avoiding a sale of collateral at an irrational price."
Who says the market is irrational? Long term, the Fed is going to have a hell of a time floating IB's that have 35X leverage on MBS. Its not a good idea to prop up highly leveraged balance sheets filled to the brim with fictitious capital. What am I missing here?
Want an off-topic food crisis? Try this:
UG99 - Wikipedia, the free encyclopedia
Billions at risk from wheat super-blight - environment - 03 April 2007 - New Scientist
Frightening stuff.
How much money Federal Reserve has?
Chris writes:
By depreciating the $ the US is effectively, gradually, defaulting on its debts to the world. Whether the world has awakened to that fact, or whether it can do anything about it is another question. But the idea that the US would never default is nonsense. It is defaulting slow motion.
Chris | 03.08.08 - 8:28 pm |
I would not expect the world to be so forgiving much longer. At some point soon the world will dump outright US Govt debt instruments if this kind of cavalier Fed behaviour continues,just as they are doing with the dollar. Then we will see the alarm bells ringing. The Fed and Treasury are smug for now with Bonds still riding high. When that changes you will see it running down their leg.
How much money Federal Reserve has?
How much do you need?
As Waldman notes, the Fed offers loans only against certain collateral, and requires that loans be overcollateralized.
Overcollateralized... uh huh, just like all those CDOs had "credit enhancements". That makes things pretty safe, right? I mean, everything couldn't all go bad at the same time, could it?
mp: Sorry about the rant
I think if it weren't for the rants and the information calculus of the internet, the bailout would have an entirely different character. While the resolution will eventually probably not be fair with respect to socialization of losses and privatization of profits, we can hope that the collective debate over fairness has had some effect at the margins. I truly believe that the interests in power will attempt to get away with whatever is publicly feasible. If we have reduced their options to those more fair, hopefully we have made a slight difference. While Geithner's speech doesn't step back and look at the bigger picture, it at least seems to be a very accurate, clinical description of the events as they have unfolded. Interpretations will be left to the historians. I agree that it does feel like midnight. The sun has set on the day of mathematical approximations. I think belief in a new system is going to require a new level of mathematical "sophistication". Good luck.
Without a defined mean, it is impossible to consider the variance or standard deviation of a standard Cauchy distribution.
Cauchy distribution - Wikipedia, the free encyclopedia
I will be eagerly awaiting the scholarly papers analyzing the current data. The structured finance emperor has no clothes. I think the side effects will have significant secondary effects. The King is dead. Long live the ... oh the King is still dead.
Milkman: Want an off-topic food crisis? Try this:
A collapse in the industrial food production space is the dark horse in the race for Armageddon. Once you realize that egg laying chickens are dying from broken bones, you begin to understand the over-driven capacity of the food system.
"I've been involved in five hedge fund liquidations in just the last few months, says Drew Chapman, chairman of the alternative asset management group at law firm DLA Piper. I'm afraid there's much more to come."
Hedge funds get trimmed - Crain's New York Business
I'm referring to a back and forth in the middle of this thread between Awgee & Ipodius as to whether or not the Fed can print at will;
Isn't it so that the Fed doesn't literally print? Isn't the actual printing done by the Treasury? Is it public information how much is printed?
FBI Probes Countrywide in Possible Fraud, Person Says (Update1) - Bloomberg.com
country wide under investigation finally
dr strangemoney writes:
Milkman: Want an off-topic food crisis? Try this:
Soylent Green is people!
Soylent gree - Wikipedia, the free encyclopedia
Who says the market is irrational?
The collateral that the Fed takes for the TAF auctions isn't crap. And let me remind you that most people are paying their mortgages and most mortgage-back paper will not be impaired. The truly bad stuff is sitting in the hands of whomever has it, but, it isn't worth nothing.
The problem here is price discovery, which is different from no price at all. Just as the top of the bubble was an over-reaction on the plus side, so this is an over-reaction on the minus side.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
The banks don't like the price of this over-reaction, and they are taking it in the shorts on the crappy stuff. Fair enough. But there is a lot of paper out there that's AAA and getting scorched with the rest. They need credit right now. The Fed is giving it to them, and taking the cream as collateral, which will be seen as cream when the price discovery phase is over. Will it work? If the crap out there turns out to overwhelm the cream, that's when there is a problem of solvency. As mp alluded to, that's the issue to address.
OT,
Parabolic chart. Hong Kong interbank market. Price surge = falling rates.
No liquidity problem at all, quite the reverse.
Quote.com Global Markets - Futures Quotes and Charts - Chart for HB3 1!-HKF
I asked this on the Interfluidity blog but it didn't get answsered.
When the FED takes a bond as collateral for the RP, who gets the interest the bond pays during that period?
If its the FED then they are really making out like bandits with their TAFs.
sk,
I find kruger foul as well. If a Dumborat were in the mal-administration currently he'd be hawking it's briliance handling the problem.
Once Obama or Hitlery are ensconsed his tune will change. It won't mean anything...but it will change.
Cheers,
ipodius,
I agree that the paper is not worthless.
However it is worth less than par, shich is the price paid.
Market participants are trying to find out a current price. The Fed intervening is not helping.
As I said yesterday...let it all fail.
Cheers,
"The market right now is irrational, and I like Krugman's slap in the face analogy. What the fed is doing with the TAF is supplying a temporary way of avoiding a sale of collateral at an irrational price."
I'm sure that's the way Wall Street wants people to see it. Sure some markets have gotten irrational recently, but what's really happening is that markets which have been irrational since 1995 are finally becoming rational again.
People are waking up to the fact that there's been this massive abuse of trust, and now they don't want to do business with each other.
In the end there's only so much the Fed can do about this except threaten a worse abuse of trust by the government to get people lending again.
But in the end you can't build an economy out of abuse, intimidate, and deception... at least not one we'd recognize.
Jeremy,
What does the fact that there's plenty of liquidity in Hong Kong imply?
Thx
Misean - it is one thing to be partisan (most all of us are biased in one way or another) its a whole other thing to be 'right' in the partisan criticism. Just because Krugman is Dem leaning doesn't make him 'wrong' in this case... GOPers try to paint the criticism as 'wrong' just because he's somewhat partisan. I think Krugman is mostly right here.
The GOPers better get used to it - more criticism - they'll have at least four more years of this under the next (McCain) administration. Maybe even eight years if McCain lives that long (I believe he will be the oldest to ever take the oath of office).
DrChaos | 03.09.08 - 1:23 am |
DrChaos makes an excellent point about the possibility of "accidental nationalization," and that seems quite possible to me. It's the path of least resistance and offers a way out, a way to postpone the inevitable.
The fact that the TAF "protocol" makes this possible is why I object to the approach, and consider it fraught with moral hazard. It bears repeating that, although the Fed has issued a lendable amount sheet, they can still negotiate "individual" deals. So, if the pressure rises high enough, anything goes. It can happen.
It also bears repeating that Bernanke might be able to save the banking system, but Mr. and Mrs. Smith's problem will remain.
So, where will we stand if all of this meets Bernanke's expectations? Well, the banks will be back in business again, but the distribution of wealth will skew even more. As Dr Strangemoney pointed out, the profits will be privatized and the losses will be socialized.
why do people keep saying Fed cannot print money? Sure it can, it is called outright purchase of treasury bonds. What it means, Ben walks over to the next cubicle and says 'hey Frank, I gotta print some fresh dollars, do you want twenties or hundreds?'
Essentially, every dollar that government spends can be spent from freshly printed dollar made today. Doesn't have to be from debt, as some people imply. And yes, we should be able to see that immediately as a spike in reported M1 - that is why government is loath to do that.
What does the fact that there's plenty of liquidity in Hong Kong imply?
Fiat creation in Asia - lots of it - and their failure to continue to 'sterilize' it effectively. It will be looking for a home - somewhere.
Please explain to me how the Fed puts that "printed money" into circulation?
Well, what the Fed can do is enable limitless spending by the Federal government through monetization of treasury debt. So indirectly the Fed with the help of the Federal government could put together the first in a series of "one time annual $20,000 tax rebate checks" for every man woman child and domestic animal in the US.
It also bears repeating that Bernanke might be able to save the banking system, but Mr. and Mrs. Smith's problem will remain.
They don't care about the Smiths... or the Jones either. Wipe 'em out and let 'em start over - its the 'Merican way.
But my God forever bless and protect the banking system...
dryfly,
Come on. You have to know by now I'm no Repukelicrat.
Kreger may be correct, and I may be harsh, But i do not trust him. I guess that's my point.
Roubini is also a dumborat, BUT I find his stuff on mark.
Sorry I'm scattered this morning...too much bad news...
Cheers,
Please explain to me how the Fed puts that "printed money" into circulation?
Fed doesn't have to - just make it 'available'. then th eother branches of gov't provide the traction via 'fiscal stimulus'.
It really isn't that big of a problem to re-inflate IF they target the right mechanism... Oh and saying the Japanese couldn't do it isn't an excuse. Japanese COULD HAVE had they target the right fiscal stimulus - it was politically unpopular to do so (they save and don't punish spenders - we do the opposite).
Fed alone can't do this - fed & federal gov't together can.
Come on. You have to know by now I'm no Repukelicrat.
I realize - but I try to look at the message and is it right. Krugman for all his 'faults' is right on his criticism of the current 'leadership'.
GOP better get used to criticism too - my guess is McCain will be pretty Bull Headed in his approach and probably blunder a few times too.
Fed alone can't do this - fed & federal gov't together can.
they all sleep in the same bed.
they all sleep in the same bed.
Missed Information | Homepage | 03.09.08 - 11:44 am | #
And we need to wash the sheets afterward...
R,
High liquidity in HK banking system implies inflow of funds.
Historically, the plentiful and cheap supply of money is closely correlated to stock market performance.
I would expect HK stocks to turn around and move up in the coming weeks.
Jeremy,
Historically, the plentiful and cheap supply of money is closely correlated with price inflation.
I would expect HK prices to turn around and move up in the coming weeks.
dryfly,
Jusy got through all the posts, been up half the night...
I'm a bit rattled. Need some digest time.
I'll hold off posting till my brain comes on line and I digest some of the mess I'm seeing.
ac,
"Well, what the Fed can do is enable limitless spending by the Federal government through monetization of treasury debt."
And what happens outside the US? You can't increase M1 by like $5T and not have a dollar revolt. And FRB monetization of that much debt would require it. M1 and M3 are different.
I need prozac.
Cheers,
And what happens outside the US? You can't increase M1 by like $5T and not have a dollar revolt. And FRB monetization of that much debt would require it. M1 and M3 are different.
M3? M3 doesn't exist, filed away in the historical archives next to fiscal restraint, gold standards and GAAP.
A more permanent fix is needed and this should be a coordinated effort to revive these markets immediately.
The fix is to make borrowers trustworthy again. IMO there's no "immediate" way to do this and any solution that proposes to do this is just another ruse that perpetuates the problem.
Our markets are built on false promises and illusory wealth. There are ways to mitigate some of the damage as people wake up to this fact, but solving the "problem" is going to require rebuilding trust in the markets' ability to value assets and the ability of borrowers to make good on their obligations. A legitimate fix might take 20 years.
You can't increase M1 by like $5T and not have a dollar revolt.
What government is doing at the moment is choosing between a dollar revolt or our children remaining forever debt slaves to Asians.
They are thinking real hard, too.
ac- "A legitimate fix might take 20 years."
Actually, as Conjure Bag points out, the process can be expedited by the use of guillotines.
Actually, as Conjure Bag points out, the process can be expedited by the use of guillotines.
We need to bring back some underappreciated methods from the past. I.E. you default on your mortgage and you go straight to the workhouse.
Rob Dawg,
I imagine it's near the Arc of the Covenant then. But Indy had a result for that.
YouTube -
Cheers,
http://www.denninger.net/letters/open-letter.pdf
Missed,
"Historically, the plentiful and cheap supply of money is closely correlated with price inflation.
I would expect HK prices to turn around and move up in the coming weeks"
I think we're making the same point about price bubbles.
HK is an interesting case as it has a dollar-pegged currency.
This means monetary policy has been `outsourced' to the Fed.
While the Fed's rate-slashing campaign has not yet had the desired effect at home, it is creating bubbles elsewhere.
We all know about commodities, I was just pointing to another potential one in the making.
"I'm referring to a back and forth in the middle of this thread between Awgee & Ipodius as to whether or not the Fed can print at will;
Isn't it so that the Fed doesn't literally print? Isn't the actual printing done by the Treasury? Is it public information how much is printed?"
Middyfeek - When we refer to the Fed "printing" money, we are not talking about the federal reserve notes you carry in your wallet. Printed currency is some iota of a fraction of the either M1, M2, M3, MZM, or any other measure of money in circulation. The Fed "prints" money by typing a few keystrokes on a computer.
Most folks response to this knowledge is, "Well, they can't just type up as much money as they want, can they?" Adn the answer is Yes, they can and are doing it right now. The Fed takes collateral in the form of Tbils or other paper, but there is no limit to how much collateral the Fed can take and how much money they can print.
All fiat currency is actually debt.
hehhe... I like the "pawnbroker of last resort" phrase Krugman mentions.
All fiat currency is actually debt.
Not really. In an outright purchase of treasury bonds, which Fed has to do now and then, Fed buys some bonds with freshly printed money and then destroys them, i.e. they never get called back. So it true printed money, and not debt. But it becomes immediately visible in M1, which is the real bummer. Since doing this on large scale is equivalent to torpedoing the economy, they will only do this when economy has already sunk.
awgee,
""Well, they can't just type up as much money as they want, can they?" Adn the answer is Yes,"
No they can't. Unless you can realize the losses of holders of US denominated securities, you've got your head shoved somewhere smelly.
Cheers,
OT, Global food and global warming are becoming a very real immediate threat; thanks Bush!
Glaciers of Tajikistan occupy about 6% of the national territory and play an essential role in the formation of Amu Darya River flow the largest water system of Central Asia and Aral Sea basin shared by Tajikistan, Afghanistan, Uzbekistan, Kyrgyzstan and Turkmenistan. Significant retreat of many other glaciers is observed. By the end of 20th century, Saukdara glacier in the Pamirs and Zeravshan glacier in central Tajikistan shrank by 2 km. Hundreds of small glaciers, such as Diahandara glacier (area less 1 sq.km) totally disappeared only dust and moraine indicate their former existence.
Glaciers of Tajikistan impacted by global warming
A Chinese official says harsh winter weather is threatening food production and adding to inflationary pressures. Political pressure is also building on the government for its failure to anticipate and solve the problems.
A top Chinese disaster relief official was quoted by Hong Kong's South China Morning Post newspaper Thursday as calling it the worst natural disaster since the People's Republic was founded in 1949.
Tens of millions of Chinese have been affected by the snowstorms across the central and southern parts of the country.
Severe weather warnings have been issued for much of the UK, with England, Waled and Northern Ireland subject to weather warnings. Much of Scotland was also subject to a weather warning earlier today, although they have now been removed.
It has been forecasted that winds of up to 130 km/h will hit the southern and western areas of the United Kingdom in what has been predicted by some to be the worst storm this Winter.
Anonymous writes:
OT, Global food and global warming are becoming a very real immediate threat; thanks Bush!
Do not feed the trolls. Anon, check. OT, check. Global warming, check. Political crisis, check. Blame it all on [____], check.
Ignore mode on.
No they can't. Unless you can realize the losses of holders of US denominated securities, you've got your head shoved somewhere smelly.
So you are saying that yes, they can print, but no, they won't?
Time to thank John Williams for his shadow statistics:
Inflation, Money Supply, GDP, Unemployment and the Dollar - Alternate Data Series
Tell me that M3 isn't scary and that the SGS-Alt CPI isn't more realistic.
What is confusing me is that some people, like Mish, claim that credit is being quickly destroyed now and Fed is actually contracting.
But this is in complete contradiction to SGS plot which shows runaway growth in M3.
Someone is not looking at the data right.
Rob Dawg,
Thanks.
Missed Information,
"So you are saying that yes, they can print, but no, they won't?"
No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
Sheesh!.
Cheers,
Misean,
ok, so I was right, it is what you are saying.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
Or, to put it another way...
If some of the prices we've seen on the ABX and CBMX index are rational then bend over and kiss your butt good-bye. Once losses move past a certain point the rules of the game changes.
It's fun to play Armageddon until you realize that "them" has become "us" and nobody is really "off-grid".
Personally, I think the Federal Reserve needs to shock some of the speculation out of the commodities market. It's almost impossible to confidently invest in longer term securities of any kind if you make a reasonable assumption about long term inflation.
There are only a couple of ways that I can see out of this mess without a nasty down turn...
The first is a spontaneous return of assets into the shadow banking system (ABCP, ARS/VRDOs, etc). I doubt this is going to happen without a Federal guarantee. And, I can't see that happening since the shadow banking system was created mostly to get around banking regulations.
The second would be a direct equity injection into the banking system by Congress to allow the banks balance sheets to increase enough to absorb the collapse of the shadow banking system. Even knowing that the banks had that ability would slow much of the run to "bank-money" and Treasuries.
Every other scenario that I've been able to think of either leads to 30's or 70's style deflationary/inflationary over-shoot that would take a decade or more to recover from.
No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
Fun analogy.. though, if the Fed was really creative, they could inflate quite rapidly.
Money is just numbers on computer screens.. if you got to a truly systemic meltdown point, just issue a patch from the Federal Reserve website.. once a bank downloads it.. their reserve cash quadruples.
I don't think that will happen.. my stance remains..
In the end, I like the idea of banks magically having some multiple of their current reserves. And, their reserve requirement increases so that they must keep that cash on hand.
"All fiat currency is actually debt."
Not really...
I think the basic idea is that debt is just a promise to deliver wealth at some point in the future. In that regard currency is just such a promise.
As Bernanke describes it, a dollar is like a bond that yields no (nominal) interest and has infinite maturity. It has the advantage of being the most liquid form of debt so people accept the lack of interest payments.
We are very busy here at Goldman working on these manure futures and the embedded derivatives. This morning we realized that we can take most of our debt and warp it into a new package, which Paulson is looking at right now (under the table):
Anti de Sitter space - Wikipedia, the free encyclopedia
What we have in regard to theory so far, is the relationship between negative vacuum energy density and positive pressure related to the "second quantization" procedure that takes a set of single-particle quantum manure states as a starting point, from there, all we need is the thumbs up from The Fed and we can write off most of this subprime problem and start packaging Cayman derivatives. We think Warren is on board to rate these as well! Yippy!
RE: Marking to market
In baseball if some GM gets conned into paying a mediocre pitcher way too much this raises the bar for similar mediocre pitchers and has pushed salaries into the sky.
I read that an accounting rule (127??)on marking to market has a similar effect in dropping values of SIVs. If a hedgie has to meet a margin call and has to dump at fire sale prices, these prices then become the "market" against which similar issues are marked.
Is this true and is what the Fed is doing perhaps to give a more realistic
evaluation of assets?
Would using something instead of the spot price as a valuation say a moving average make any sense??
No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
It will if dropped from an airplane.
And Kicker ... could you please explain the shadow banking to this newcomer?
I think the basic idea is that debt is just a promise to deliver wealth at some point in the future. In that regard currency is just such a promise.
While I cannot disagree with this, let's not be anal. In some sense any wealth you own is 'fiat' because someone out there always has a bigger gun and can take it from you. Gold-backed dollar is still not gold-backed, but backed by a government who can screw you at any moment, gold backed or not. So I think calling all currency debt is not helping, because then we don't have a word for what to call my credit card debt.
No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
It will if dropped from an airplane.
You mean helicopter, right?
eli,
"No, I'm saying a 300cc engine can't go 0 to 60 in 3 seconds.
Fun analogy.. though, if the Fed was really creative, they could inflate quite rapidly."
The point is that they can't. Foreign holders of the debt would revolt. That's my point.
Cheers,
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
One of many insightful comments by ipodius on this thread.
It's refreshing to read some of the commenters here that aren't standing on the sidelines and cheering while the train rushes over the collapsed bridge.
The TAF is providing much needed liquidity into the (visible, not shadow) banking system while absorbing some of those (not worthless, just not marketable today) assets that have been frozen by fear.
There are those who get their kicks from criticizing Bernake, but he's not a deer in the headlights. He's acting in the way he thinks best and obviously is willing to extend or modify his actions as things change.
One thing we know for certain, as Don Ameche said (with an Italian accent) in the movie by the same name, Things Change.
Update!!
We think in addition to making subprime go away, we can make The Iraq war and all US debt go away, but right now, we are not how long it will go away, but very exciting news for us all here! We have found a way to use glueballs with MZM (Money of Zero Maturity is a measure of the money supply. It is equal to M2 less time deposits, plus all money market funds.) This is related to Ben Bernanke and his wonderful ideas related to his theory of "The Great Moderation". Very wonderful morning indeed!!
Here is some bits on glueballs: In particle physics, a glueball is a strongly interacting particle containing no valence quarks. It is composed entirely of gluons. Such a state is possible because gluons carry color charge and experience the strong interaction. Glueballs are extremely difficult to identify in particle accelerators, because they mix with ordinary meson states.
Theoretical calculations show that glueballs should exist at energy ranges accessible with current collider technology. However, due to the mentioned difficulty, they have so far not been observed and identified with certainty.
What we have in regard to theory so far, is the relationship between negative vacuum energy density and positive pressure related to the "second quantization" procedure that takes a set of single-particle quantum manure states as a starting point, from there, all we need is the thumbs up from The Fed and we can write off most of this subprime problem and start packaging Cayman derivatives.
Hey, if you're going to try to build a financial system out of cheap parlour tricks you might as well do it with some style.
According to the lendable amout sheet, the Fed can loan 80% of par on CDOs that have not market price. This sounds generous given the collapse of the ABX idexes that provide insight into the underlying value of the MBSs in the CDOs.
On the surface, I am not reassured by what I've read.
Misean has it right. Inflation is no longer a tool in the Fed's control. If they don't catch inflation real soon the flight from the dollar is going to cause worldwide dislocations. Anybody with a bank account and internet can be in Krone denominated CDs in 24 hours. I mentioned here long ago that inflation can't help the distressed homemoaners anyway. They have adjustables and now find themselves stuck in the loan they have unable to refinance. Thus a partial explanation for the criminally low Fed Fund Rate, to give a few more minutes for a few more people to get into the lifeboats. A lot of us here at CR are probably carrying 5% 30yr fixeds or similar. No way am I paying that baby down, I see what's coming.
For reference, if you fund a repo with a bank on the street, they will haircut market value, not par value.
The one interesting point is that the repo desks are usually pretty poor at marking things to market. You'll get margin calls, but usually really late, and there are somewhat wide margins of error on the collateral you post. They don't argue with a price if you are in some reasonable ballpark.
The repo desks are usually pretty far removed from the trading desks, more back-office than at the market. That's my experience anyway.
I expect the TAF is the same way.
You mean helicopter, right?
Exactly ... what was I thinking?
But this is in complete contradiction to SGS plot which shows runaway growth in M3.
Someone is not looking at the data right
Wall Street created a lot of "money-like" securities in the last couple of decades that aren't reflected in M1-M3. Asset backed commercial paper (ABCP) and auction rate securities (ARS) are two examples.
If you were to define "M4" as M3 + ABCP + ARS + VRDO's and all the other "money-like" securities and graph that you'd see a sharp drop in M4 and a sharp rise in M3. But the increase in M3 wouldn't exactly offset the decrease in "M4".
In other words, the market is narrowing its definition of what is "money".
But, it's also important to remember that this isn't a credit crisis it's also a solvency crisis. And one persons "money" is another persons "debt" there isn't as much money out there as people think. Most of the increase in M3 is the result of large increases in Money Market Funds. I'd bet that some of those funds will be in trouble.
The point is that they can't. Foreign holders of the debt would revolt. That's my point.
Misean,
It's fair for you to make that assumption.. but it isn't impossible. Highly unlikely.. sure. I think foreign entities may hold a larger amount of other types of debt than Treasuries..
So, who will revolt more? We owe $9trillion or something of that sort? The global debt markets appear to be more than 5 times that.. so..
while Treasuries may lose value.. this other stuff could just disappear if margin calls force it to be dumped. Or.. well, that is a possibility.
We are changing some of our nomenclature to update our proxies; please be aware for future reference:
CMO: Collateralized Manure Obligations
CDO: Collateralized Dung Obligations
MBS: Manure Backed Security
RMBS: Reverse Manure Backed Security
Fiat creation in Asia - lots of it - and their failure to continue to 'sterilize' it effectively. It will be looking for a home - somewhere.
dryfly | 03.09.08 - 11:34 am | #
Yep, and of important note, it is still part of the dollar zone at this time. A fact that a lot of people love to ignore when they look at money supply.
Is there no one who can answer my question about who gets the bond interest on the TAF?
Anybody with a bank account and internet can be in Krone denominated CDs in 24 hours.
Not Chinese and Japanese sitting on trillions of USD. They may try to sell those dollars but who will buy?
They will have to revolt, but I wonder what the 'revolt' will actually look like.
Anyway, point is moot, Misean is right in that US will not do that. I am just a bit irked that he won't acknowledge that they theoretical have the means to print money.
eli,
You may be correct.
I'm going bunker.
If I'm wrong...not much...
If I'm right...well then.
Cheers,
. . . who gets the bond interest on the TAF?
I saw nothing on the subject on the Fed site, but it makes sense that the owner of the bond continues to collect the interest, i.e., that there is no assignment of interest on the pledging of collateral.
Also, the Fed is already getting the interest rate on the TAF funds, i.e., 3.08% on the last auction, so it wouldn't make sense for the Fed to collect the income on the collateral at the same time.
Kicker - Great point about M4. I had never thought about it in those terms. I do not think there is any way to know exactly how much credit is diappearing, so there is no way to know if credit deflation is offsetting the increase in M3.
Misean - Maybe foreign holders of t notes and even domestic holder will end up revolting, but that so far it has not stopped the fed from monetizing. What choice does the Fed have? What is Bernenke's history? What did he say he would do in such a case? And why don't you believe him? Hope? Reality does not care what any of us want or hope.
This could change things: judge in California banned all homeschooling in that state yesterday.
And Kicker ... could you please explain the shadow banking to this newcomer?
The shadow banking system was a term coined by Paul McCully of PIMCO to describe all the "liquidity creators" that operate outside the US banking system.
They are just like banks in that the create "liquidity" but since they are outside the banking system they operate without the safety net of the Federal Reserve. As such they are especially vulnerable to bank runs (avoiding which is the entire reason central banks were created in the first place). The "run" on the shadow banking system has been one of the two central themes of the credit crisis (the other being solvency).
The ABCP market was one of the first "runs" and then the ARS was the next to fall. The VRDO market also had a "run" but VRDO's are backed by banks so I don't believe they are part of the shadow banking system.
I would include Money Market Funds (not accounts) as part of the shadow banking system because they operate without a bank guarantee and can't access the discount window and the TAF. But many people believe that they have an "implicit" bank guarantee which is good enough. Since banks don't have enough capital to absorb a run on money market funds I don't believe an implicit guarantee is enough.
It's interesting to note that most of the increase in M3 has been the increase in Money Market Funds and not in savings deposits. There have already been a couple of institutional and "enhanced" money market funds that have run into trouble. There have also one retail fund that had to be back-stopped by its sponsoring bank to keep its AAA rating.
The first sign on a run on money market funds would be increasing interest rate spreads between money market funds and bank savings deposits.
The original article is here:
PIMCO - Global Central Bank Focus- August/September 2007 "Teton Reflections"
Are you suggesting PIMCO plays by the rules or helps make up the rules?
Anonymous | 03.09.08 - 1:03 pm
My real indentity.
Can anyone here tell me what the hell is keeping ten year treasuries at 3.5% yield? I understand the short end of the curve is a hideout as the credit markets shut down but why is the long end attracting any bids? That seems like the worst place to hide as inflation rips our society apart and the dollar gets shredded daily.
Is the Fed busy full time buying the long end?
but, they need to send a clear message that the fear that is prevalent in the municipal and agency market is misplaced.
From riskC
i can't figure how you come to the conclusion that the fear is misplaced.
lower tax inflows, political fear of raising tax rates, skyrocketing benefits and input costs, heavy underfunded pension burden, and overoptimistic RoR. The prices are voted on by the guys at the desks whose income depends on getting the price right. how is that misplaced?
ac-
when I said immediate I meant immediate coordinated effort to restore long-term trust in the financial system. The results will no question take time, thus my prediction for a lengthy period of subpar growth and returns.
as to the shadow banking system, I believe that McCulley was referring more to the hedge community and the lack of oversight.
Make no mistake, tough period, absolutely, dead bodies, absolutely, volatility, absolutely, hedge funds blowing up, absolutely, armeggedon, many here are wayyyy ahead of themselves. We have dealt with crisis previosly and will this time as well, would many including myself prefer a proactive response, of course.
"i can't figure how you come to the conclusion that the fear is misplaced."
Take a step back and look at who is now entering the space in volume and answer that question for yourself understanding why this is the case.
Can anyone here tell me what the hell is keeping ten year treasuries at 3.5% yield? I understand the short end of the curve is a hideout as the credit markets shut down but why is the long end attracting any bids? That seems like the worst place to hide as inflation rips our society apart and the dollar gets shredded daily.
Well, either you or the bond market have it wrong. If you're sure about 10 year inflation trends you can always short the 10 year and buy an oil stock like BP (5.10% yield).
The trade would have a positive carry and inflation would shred Treasuries and boost BP.
To summarize what I think I've learned:
At the end of the day, the success or failure of the TAF will depend on millions of homeowners and how they react to being underwater. The people at the bottom of the food chain are providing the money. If they throw in the towel in large enough numbers--including people with conventional mortgages that back GSE bond--then even the "best" bonds could take a hit. Then
a. some banks could fail, many banks will shrivel up, with much less lending capacity and bringing on a severe economic "slowdown;"
b. the gse system could collapse and Uncle Sam will have to decide what "implicit" means
This explains all the sudden concern in high places for the "plight" of the homeowner.
Do the smart people among you accept my grasshopper's understanding of these matters?
Kicker, that's my point. IF the market is being manipulated by the Fed and they're supplying the bid at every tick down in price the party has to end there sometime. Way too many fires to fight right here and something's got to give. Think about it if the SWFs start SELLING the TY.
Thinking about shorting it through an ETF Monday, ahead of all the economic reports starting Tues... with the - Grande Finale Friday's CPI.
Can anyone here tell me what the hell is keeping ten year treasuries at 3.5% yield? I understand the short end of the curve is a hideout as the credit markets shut down but why is the long end attracting any bids? That seems like the worst place to hide as inflation rips our society apart and the dollar gets shredded daily.
It is not a question about losing to inflation over the long run, investors don't want to lose principal in stocks, real estate, or bonds that are not backed by USA. A 3.5% guaranteed return beats possibly losing 10-75% a year.
fireinthehole - "investors don't want to lose principal in stocks, real estate, or bonds"
Who ever wrote the rule it's not possible to LOSE 10% buying the TYr?
Yield could shoot to 10% as bid vanishes. All you need is sellers. The 3month seems like a safe place if you're worried. The TY is far from safe. Check out the early '80s. Anyone selling then lost... BIG.
Kicker, that's my point. IF the market is being manipulated by the Fed and they're supplying the bid at every tick down in price the party has to end there sometime. Way too many fires to fight right here and something's got to give. Think about it if the SWFs start SELLING the TY.
Sorry, I'm a little slow.....
The Federal Reserve is actually selling Treasuries to sterilize the impact of the TAF and REPO operations. You can see the impact on the SOMA account (which only holds Treasuries) here:
http://www.nowandfutures.com/images/fed_soma.png
Since the Federal Reserve is taking mostly MBS through its TAF and REPO operations the effect should be to lower the spread between MBS and Treasuries (raise Treasury yields and lower MBS yields). The public data shows that the Federal Reserve is doing the exact opposite of what you are suggesting.
While the 10Y isn't predicting run-away inflation the TIPS market isn't predicting run-away deflation either. Currently, the best thing that you can say about the bond market is that it expects a period of very low to negative real yields ahead (as in Japan, 1989).
So Yves...
If you look at that lendable list, gee, how come you find that
(a) agency tier 3 paper is worth 85% of face or balance?
(b) cmo is lendable only if AAA
and so on...gee doesn't this mean that the Fed's whole TAF is now dependent on the ratings agency whores and incompetents, and i don't have to believe in black helicopters to believe that there's real or perceived arm twisting to get these things propped up at AAA to avoid margin calls by the TAF
i think its obvious this can be gamed and what can be gamed will be gamed
Barely, no investment is completely safe. US treasury bonds have been, and are still considered the safest place to park your money.
That has been the case during my lifetime.
Kicker - "as in Japan, 1989"
Hmmm... I was thinking more in terms of Argentina... ~2001
It's a recipe for a lot faster recovery.
from ipodius:
The problem here is price discovery, which is different from no price at all. Just as the top of the bubble was an over-reaction on the plus side, so this is an over-reaction on the minus side.
I know it's more fun to play doomsday and demonstrate how much smarter you are because you didn't participate. But most of us are trying to figure out where things are so that we can be part of the solution, and make a few bucks in the process.
The banks don't like the price of this over-reaction, and they are taking it in the shorts on the crappy stuff. Fair enough. But there is a lot of paper out there that's AAA and getting scorched with the rest. They need credit right now. The Fed is giving it to them, and taking the cream as collateral, which will be seen as cream when the price discovery phase is over. Will it work? If the crap out there turns out to overwhelm the cream, that's when there is a problem of solvency. As mp alluded to, that's the issue to address.
Say amen, somebody.
And, just to complete the thought--that ultimate issue is how many people can't or won't pay off some or all of their mortgage. That's the base of the pyramid, right? And that's the big unknown. That's what's spooking the market. How soon will we know the answer? My guess is it could take many months--the answer will come bit by bit, based on millions of individual financial decisions. Will a trickle of defaults and foreclosures become a torrent that brings it all down? We would like to know that right now, but we don't know and we can't know--not yet.
"I note the third wave is not as bad as the earlier ones, which in turn were not as bad as the credit crunches in the 81-83 and 74-75 recessions. So, it's not yet time to cower in the bunker, at least not yet and not based on this indicator." - Fair Economist
uH....The 3rd leg is just starting....and looks like a vertical wall. Do not make such pronouncements till it is over.
If they don't catch inflation real soon the flight from the dollar is going to cause worldwide dislocations. Anybody with a bank account and internet can be in Krone denominated CDs in 24 hours.
Two words: currency controls
In my opinion I would expect the housing situation to continue to worsen. In a best-case scenario I would say for 8 months. My personal estimate is for at least another two years. Wake up folks, the politicians have been making promises they could not keep for the last two decades. Here it is: greed and ignorance. What was the grand plan? Guess what, there never was one, other than re-election. If you at least want to know why this has happened, I would recommend digging up a copy of the old book by Thomas Malthus, "Essay on the Principle of Population". I think youmigt then understand where we are today. Don't get me wrong, I'm no doomsayer and I think we may be able to fix this thing. But it is going to take some sacrifice on the part of everyone. Yes it sucks, but welcome to reality.