This is why we haven't seen, and aren't going to see, a crash. The mortgage fiasco is going to wipe out about a trillion. The Fed has about a trillion. The Fed will loan out its trillion to cover the losses and allow the market to roll onwards. No crash.
This is also why we're going to see a very long period of extremely weak growth. At some point the Fed will need its trillion back. The overhang of effectively hot money (since the Fed can withdraw it at any time) will depress asset prices indefinitely and impair borrowing and growth. Hence the low rates on long-term bonds in the face of inflation. Long recession, here we come.
Northern Cali, yeah, we'd all like to know that answer - but it's supposed to be the better assets and also over-collateralized. If it's all bad, then the first graph is correct!
Jack Staub, the Fed will be creative and figure out a way to control the Fed Funds rate - but they are already frustrated with how little they can impact other rates. Some would say they've already lost control.
The fact that the borrowings are collateralized has no bearing on the fact that the banks have borrowed to meet their reserve requirements. The only difference is that the Fed has assumed credit risk.
Seriously...LOL
That sh*t has to be paid back my friend and thus significant.
I was going to say that, as far back as Greenspan (seems so long ago, doesn't it?) that mortgage rates were not responding to the Fed's hikes. He called it a conundrum, but he should have called it "uh-oh" as that was the first sign that something was amiss in the credit markets.
So why would they be surprised now by the fact that they've lowered and the same disconnect is happening? It seems as though there are two systems operating here...the Fed's, which controls the flow of traditional banking funds, and the shadow banking system which securitizes debt and resells it within it's own market. One has links to the other, but they operate in different spheres.
Add in the international flow of funds, and how much pricing power (in terms of rates) does the central bank really have anymore? Now that the genie is out of the bottle, will it ever be coaxed back in?
Anyway it was a fast ride down to over half way to zero. Buckled my knees. I think I get it - the Fed's $T = mortgage nominal $T of crap. Who's going to take all the CRE, credit card and other crap?
The FFT would be substantially higher without the TAF/TSLF the PDCF does not affect FFT as they cannot borrow interbank.
The EFF reflects the cost of interbank borrowing among institutions that TRUST each other. Banks are unwilling to lend to questionable banks at ANY rate and thus it does not register in the EFF and does not impact the Fed's FFT decisions.
The eureka moment for everyone will be when they realize that the central banks do not control interest rates, but that they have limited abilities to stabilize (manipulate) them.
The learning curve is pretty steep on this once one overcomes the indoctrination.
Well this has to be on surprisingly bad post on CR. Missed the entire boat. If I want to withdraw 100,000 this shows the banks have to borrow the funds to pay me back. Period. This post paralleled much of what Caroline Baum wrote several months ago, which has all over blog land been shot to hell. No, this is not a false alarm.
How will everyone explain the FFT at 0% and double digit borrowing costs? See, the borrowing paradigm we are familiar with is a spread over treasuries, with treasuries being priced according to inflation expectations. If treasuries are not pricing in future inflation expectations what does that indicate?
"This post paralleled much of what Caroline Baum wrote several months ago, which has all over blog land been shot to hell. No, this is not a false alarm."
I agree, Stuart. It would appear that the Fed has backstopped a banking industry that is, on the whole, insolvent per the definition of "required reserves".
Well this has to be on surprisingly bad post on CR. Missed the entire boat. If I want to withdraw 100,000 this shows the banks have to borrow the funds to pay me back. Period. This post paralleled much of what Caroline Baum wrote several months ago, which has all over blog land been shot to hell. No, this is not a false alarm.
So, if I understand these charts correctly, United States depository institutions currently have non-borrowed reserves of nearly -100 billion, meaning that, of the reserves they currently have, borrowed reserves outweigh non-borrowed reserves by an aggregate of nearly 100 billion? Meaning that, if there were only one bank in the country, and this bank had 10 billion in actual cash deposits from investors, it would also have 110 billion dollars in borrowed money?
And if I understand all that correctly, what C.R. is saying in this post (besides not to panic)is that a good deal of that borrowed 110 billion dollars is set against collateral, so it's not like banks just took out that 110 billion off their credit card, but rather gave the fed some "Assets" they had lying around, allegedly "worth" about 100 billion (or more, if it is overcollateralized) in exchange for straight cash?
This is all very difficult to try and wrap one's head around, so Iwould appreciate it if someone would set me straight if I have something wrong here.
If they could figure out how to change the letter behind the number for reserves to a T instead of a B we would be saved. It pretty much what they been doing any way. The haven't run out of Mirrors yet.
jo6pac
The race to the bottom continues
New guy, if you walked up to the Fed and asked for 100,000 dollars and they just printed it up and gave it to you, that would be inflationary, since they just created money out of thin air. So you have to pledge (pawn) something to get the cash of equal or greater (currently around 20% greater) value. That is not inflationary, as it is a loan.
Similarly, the Fed has securities that they sometimes sell, and sometimes buy from the market to control the money supply (read hit an interest rate target). As long as they are working within their balance sheet constaints, these are sterile operations, read no money was created or destroyed.
So the point of the graph is to show that, in reality, these have no affected the reserves held by banks because they are sterile...collateral has been exchanged for the loan. And, btw, the Fed collects interest on these which is turned back over to the US Treasury.
What this is going to encourage is more paper money being created, thus causing inflation in soft assets (E.g. food) and deflation in hard illiquid assets (E.g houses).
Will the printing presses dry up or will the illiquid assets become liquid first?
Any ideas or hypothesis? Am interested to hear any views.
The Fed has over collateralized the loans by, I think, 20%. What if the housing market continues to tank and AAA +20% is not adequate collateral. The banks can't come up with that much more collateral. Surely then we will see money printed. Germany 1920.
May 13 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said
The fed could crush commodity speculation by raising the funds rate and eliminating the new lending facilities. Unfortunately, the fed's member banks as well as many IBs would become insolvent.
The nationalisation of financial shenanigans continues.
So I am basically on target then? So if a bank that has borrowed from the federal reserve using securities as collateral loses money to the point where they cannot pay the federal reserve back what it owes them, or cannot pay the interest on the loan itself, the federal reserve becomes the new owner of those shiny securities, which due to newly relaxed standards for things like the TAF, could be backed by home mortgages, or car loans, or tulip bulbs or some such?
As I sit upon my high horse today, clouds above, rain falling down, I ponder the possibility of the society that lies beyond this recession. What will America be, who will we be and how will the world look at us? Will be viewed as a state in ruin, burned as Rome, or will we represent the melting pot of a global tribe in turmoil, lost, yet found, full of decay, but able to shed the old skin and grow into something better, something un-imagined on this rain filled spring day?
I question the possibility of a service economy able to pay for higher education costs, I question a health care system that will service just the wealthy, versus the poor that are struggling to keep heads above water, as the cost of living makes a clear distinction between the haves and have nothings. I question the value of the internet and technology which brings billions of people together in a chaotic journey that symbolizes freedom, but ensnares its users as addicts that are fueled by mis-information.
I could go on, but this commencement speech needs something....
Hmmmm, (foot taps)......
I have a dream that one day, The US Treasury will rise above the debt from the subprime bailouts and that we as a nation will stand together and be able to line up around the block for legalized marijuana and the tax benefits that will place American on a new road, a better road, a road less traveled, where debt will be someone elses problem, where our minds will focus on the harsh reality of the journey, versus the destination. It is in this hour that we will find clarity as a nation and rebuild Rome in a thousand days!
Ipodius the FED has been unable to control bank lending rates all the way back into 2004. The reason being is that the commercial banks control more money than the Fed does through leverage. The wall street firms would borrow money and lend it out cheaply. Cheap loans failed on now the banks are left owing money. I don't see how long the Fed can prop up these banks with RE failing all around us.
"This is also why we're going to see a very long period of extremely weak growth. At some point the Fed will need its trillion back. The overhang of effectively hot money (since the Fed can withdraw it at any time) will depress asset prices indefinitely and impair borrowing and growth. Hence the low rates on long-term bonds in the face of inflation. Long recession, here we come." - Fair Economist
With the debt load, and assumptions about growth made by those who took on the debt, I do not see how we dont have an extremely severe recession...or worse.
A good analogy was house prices in bubbled up regions. Many said the could just go flat. I said no way...as soon as they went flat, then fundamntals will dictate that they drop...and dramatically.
It is the same with credit and our economy. As the economy slows, the rosy scenarios and assumptions on which many financing schemes were based will fall apart, and there will be more defaults. We are looking at a historically large credit crunch BEFORE a recession.
Add recessionary feedback to the mix...and I dont see how we dont have a crash. By crash I mean huge losses...not necessarily a one day climax ala 1929 or 1987. I just dont see how the wheels dont fall of when we have a recession.
It's the composition of non-borrowed reserves that I find interesting. If you subtract the PDCF and "Other credit extensions" from the total of Non-borrowed reserves, you are left with the amount being borrowed by commercial banks through the TAF, Primary, Secondary, and Seasonal facilities.
The math shows that borrowings through the PDCF have shrunk a bit, implying that liquidy is improving for the IBs.
However for the commercial banks, well, not so much.
You know what is a total trip (Yo, yo, yo)? The Fed has only bailed out one bank, the smallest mind you and they have already used more than half their balance sheet (of course theres the TAF). Can't wait until the next one, LEH, MER or WM anyone.
It's the foreign central banks that are printing money hand over fist, and pumping it over here. In the process driving up local inflation rates. They've effectively taken over that role, for now, away from the Fed. Those analyzing US money supply only by looking at what the Fed is doing are also missing the boat. We've outsourced money supply expansion to our pushers. As the junkie, with an increasing tolerance, we better not have that supply cut off.
I will never say this again but I think CITI is the only bank that is in fact too big to fail. If there is ever commercial national bank it will be Citi. Won't stop it from going to 12 dollars though.
Wall Street global corportaions (with bailouts and PPT funding) are seeing increased sales due to inflation increases. Wall Street and stocks however, do not yet factor in the amount of businesses closing. For example, there are "many" bakeries going out of business. Small mom and pop shops that were fighting wal-mart expansion several years ago, are shut down. Fewer independent business openings are the next trend in the faux recession. We will see global corporations go into price war mode to stay alive -- and thus, as inflation impacts phase in this year, unemployment will increase and spending will decrease. meanwhile, increased costs will look great for wall street and what is left of the middle class will be destroyed with 2 years -- as these people spend down reserves, giving more cash to those at the top.
Re: In the first quarter of 2008, the trucking industry experienced the highest same-quarter levels of firms going bankrupt since 2001.
Bankruptcy shut down 925 firms nationwide in the past quarter, according to a report by Tennessee-based Avondale Partners, an investment banking firm with interests including health care, communications, financial services and trucking.
The recent closures parked an estimated 42,000 trucks, or more than 2 percent of the nation's heavy-duty capacity, according to the report. Smaller firms were hit hardest, but the average size of firms increased to 45 trucks, meaning hard times hit larger firms too.
There were more than 1,100 company failures in the first quarter of 2001. By that year's end, 110,000 trucks were off the road, according to the report.
Food prices are already way up hence inflation there and house prices are coming down, deflation.
Bernanke just said that things are getting better.. hence what they are doing is working.. though there is more to be done. I take that to mean he will do more of the same in various incremental degrees.
Can someone explain to me how the increasing monetization of assets and providing more lines of credit that the fed does actually help in the above scenario (food/house)?
The reserves are borrowed in the sense banks borrow treasuries from the fed, but these borrowings are offset by collateral. As such the banks aren't "losing reserves", they've just swapped collateral.
Even if these borrowed reserves are collateralized (and I agree that the paper banks are putting up is NOT AAA), it can't be a good, or normal state of affairs we see in this chart.
It shows nothing like the dive taken in non-borrowed reserves in the last few months, since the start of data in the 1950s.
False alarm? A very loud, scary false alarm, if so, and one capable of causing panic.
The normal Fed Credit mechanism is a BALANCING mechanism.
That is, you take in a check drawn on me. I am now short $1,000 in reserves and you are long $1,000 in reserves. I need 'em, you have 'em, I go through the fed funds system and borrow them (maybe from you). System remains in balance. If I need to borrow them for some reason and can't hit the funds, I then go to the discount window and get them. This hits the numbers.
Ok, now why is this different?
Simple - why would you go to the TAF unless you had to? The TAF isn't at an advantageous rate!
So if I have a balance problem, I would still hit the normal overnight facility between Fed members.
Ah, but what if I can't, because I don't have any collateral?
Well, if I have no good collateral and the other members don't trust me, then I hit the TAF.
But wait - how did I get to where my reserves were low enough that I had to go hit the TAF in the first place?
That's the question behind the curtain.
Note that if there is no SYSTEM deficit, then that graph doesn't go negative. That is, if I borrow $10 billion from the TAF and it goes to another dealer, they are "long" the same $10 billion I am short. They cancel.
It is only if I LOSE the $10 billion that there's a problem.
If paying interest on reserves on deposit to the Fed will encourage banks to increase their reserve base and stop the Wriston/Citibank games of twisting balance sheets, regulations, and accounting rules inside out, then I am all for paying interest.
Reserves are to absorb losses. Adequate reserves mean the banks absorb the losses. Inadequate reserves mean everyone else pays for the losses via Wall Street socialism.
By providing cash for illiquid securities at low interest rates the FED creates the possibility for the bank's to make more money to cover their losses. The problem is that the type of transactions the bank's engage in is not regulated. It could be anything from lending to hedge funds or direct commodity investment to more sedate lending to people with verifiable good credit -- for housing or otherwise.
I see it as a game of doubling down with the Fed/our money. If it works great. If it doesn't, the relative size of the crater in a systemic failure probably doesn't matter... dark I know but that's how I see it.
Karl - "But wait - how did I get to where my reserves were low enough that I had to go hit the TAF in the first place?"
At least in part, because as a deposit taking institution you're being encouraged to take on lending previously done through non-bank intermediaries (eg. commercial paper).
Re: "Can someone explain to me how the increasing monetization of assets and providing more lines of credit that the fed does actually help in the above scenario (food/house)?"
Bernanke wants what is termed positive inflation versus deflation, thus the Fed is willing to print as much money as it takes to fight deflation. In the process, inflation impacts assets by increasing the price, versus lowering values.
Higher costs are thought to be absorbed over time, and as more money sloshes in the economy, you see things like higher sales growth, higher EPS, higher this and that, thus inflation is thought to be more controllable, because the market is able to keep things in check with supply and demand, and thus not everything will become a bubble. Adversely , with deflation, you can have runaway panic selling and as money becomes worthless in that direction, it is far more difficult to sustain valuation growth upward.
So with all this extra 20% collateral that's being pawned why aren't the Fed's assets going UP with each loan they make? Or do they get the bogus stuff plus 20% and then mark to market or model cause there's no market?
I see some of the colored areas getting bigger but the total stays the same or drops. And what is that mystery $100B cream on top? Maybe that's the loss reserves for the phony 20% or maybe it's all the interest that they haven't paid to the Treasury yet.
Not really NewGuy. If the bank failed, the Fed is in the first position with the collateral it holds. That collateral isn't just anything no matter what you read on blogs. Furthermore, if the bank or the collateral is dodgy, the bid can be refused.
The aim here is to put liquidity in the system so, in effect, the Fed is financing paper for these institutions on a temporary basis until the market eases it's credit crunch. The graph indicates that nothing new is being created (the Fed is not "printing", another thing you see in blogs) and nothing is being destroyed. So there is no risk here unless one of the banks at the window goes belly up, and even then the Fed has the collateral. Also, the interest rate the banks are paying is not bad for the treasury.
FastEddie, why don't you go out and actually read something besides a blog, or take a graduate class in banking and/or Finance? Enlighten yourself a little too.
The Fed has to supply over $30B per month to maintain the monetary base! That's why BB indicated more is on the way. The TAF delta per month along with the monetary base delta indicates whether the credit crisis is deteriorating or improving.
"Northern Cali, yeah, we'd all like to know that answer - but it's supposed to be the better assets and also over-collateralized. If it's all bad, then the first graph is correct! - CR"
At least you acknowledge it. You should add that to your post, as it is a bigger issue than you suppose in your post. Many of us are quite disgusted at the Fed's feeble attempted explanation that you have now reproduced. The non-borrowed reserves wouldn't be negative if the banks didn't desperately need those borrowings.
As for them being high quality, how high is that if house prices drop another 20%. And don't count that out.
Those reserve demands are quite descriptive of the truth, in this anonymous opinion.
Ipodius--you assumptions are correct if the banks will be able to payback the loans. They won't. The Fed knows that. The 'loans' (really giveaways) will be rolled over, and more 'loans' will be made until the Fed runs out of reserves, which at this rate will be in a few months. Then the Fed will have to start directly printing, and we will be at the real endgame.
Karl will be proven right in the long run. God help Treasuries when it becomes clear the banks can't payback the TAF loans.
Karl just has his bear goggles fused to his face, so in his mind its already a huge problem.
They are both right. The graph looks like it does b/c of TAF/TSFL. This may or not be a problem, as ipodius said, depending on whether the banks can take back the collateral or not (and if they can't, it is because they blew up).
Its not monetizing debt. Yet. And its not "printing" money. Yet.
Look for MBIA and Ambac to raise more billions at super high rates. What idiot would possibly loan money to those clowns? A: their biggest counterparties. Where are the biggest counterparties going to get the dough to loan to MBIA and Ambac? A: The TAF.
The American taxpayer is footing the bill for the biggest bailout of all time, administered primarily through inflation.
Bank CEOs get hundreds billions, J6P loses purchasing power to the tune of 10% a year for the next 3-4 years.
I'm involved in other university courses and can't do graduate finance courses in the short term.
Just tell me if the Fed trusts the banks huddled at the back window why don't they trust each other? And why do the yellow, red-stripped and black parts keep getting bigger instead of the banks selling this fine stuff on the open market.
Everybody is raising capital with ease so there must be plenty of money around to buy good stuff or lend money on the collateral. If it's good enough for the Fed why isn't it good enough for investors.
Fast Eddie - "If it's good enough for the Fed why isn't it good enough for investors."
Keep in mind we're talking about the fed taking "it" as collateral, not buying it outright.
There certainly is plenty of money around to buy this stuff. The problem is that if it start going out fast at firesale prices, a cascade of mark to market losses will hit bank capital ratios before they can raise equity.
The purpose of the fed lending facilities is to keep the ball in the air until banks do their equity offerings.
It's pretty straight forward, they stabilize the average cost of commercial bank credit with their open market operations. Many large banks stopped lending to each other so they provided a path to circumvent the market with the TAF.
Yield = risk price
risk price factors = default potential, inflation debasement of the obligation and investment substitute opportunity cost
The TAF/TSLF equate to the Fed pricing risk with different than the market. Prior to the TAF a bank could get a secured loan at the discount window...but then everyone would know who is insolvent! The Fed wants to keep everyone in the dark.
If a fed takes an asset and makes a loan, that could be "printing money" depending on where the loan is sourced.
Now, some are saying the fed as 500 billion in reserves that it has accumulated over time, and therefore it is not "printing" the money.
But if that money had been out of circulation - essentially reserve stock - then the effect is the same. It is putting 500 trillion into circulation that was previously not available.
On the upside, as someone else pointed out, the fed should try to recoup that 500 million over time thus slowing growth for some time going forward in exchange for the extra rope being let out right now.
Essentially it is acting like a capacitor, which is actually a good thing. I did not realize the fed had 500 billion in reserve.
We've been over this graph for nigh on 5 months now with various opinions on its significance in various blogs and bloomberg columns.
CR you miss the target here - sure the turn down - massive turn down in the graph is because of the TAF - but I don't think we can dismiss it as "just an artefact" caused by the TAF - I used to in Jan/Feb but no more - you have to ask why the TAF came into existence - the banks don't have reserves so they have to borrow them via the TAF immediate and straightforward answer.
Why the TAF ? Who knows for sure - but one thing is for sure - they can't borrow from each other.
Also, in the early days there was a one for one correspondence between the injections via the TAF and withdrawals of liquidity via outright sales of Treasuries and via the daily slosh - No longer - the slosh is now at $93B ( up from $40B last Sep ) and those outright sales of Treasuries stopped too; we have the Fed adding to money IMO. But is this faster than the destruction of credit going on. Mish has a view on this - I agree with him.
It's Japan the sequel. Instead of taking the losses here and now, the Fed's essentially extending them indefinite loans to carry them until either (a) the collateral is worth something on the open market -or- (b) the bank can absorb the losses without failing.
Given that the TAF keeps getting expanded it appears that the collateral's value is not improving nor are the bank's finances.
So you are saying that, apart from a bit of hyperbole about tulip bulbs, my concept of what is happening here is correct. I never said the Fed was forced to take any crap that the banks gave it, only that the Fed is accepting collateral from banks in return for loans to these institutions, and currently, the non-borrowed reserves of depository institutions are outweighed by borrowed reserves to the tune of nearly 100 billion dollars.
So, ideally for the Fed, if any of the banks that are on the hook for some of the Fed's money default, the Fed gets to keep collateral that has a market value of as much, if not more, than was loaned to the depository institution. This is the idea, anyway, but it is NOT a given that what the Fed has accepted as collateral is now, or will remain, of equal or greater value than the loan.
So the Fed creates the TAF, then, in subsequent offerings, increases the amount available, in addition to expanding the list of acceptable collateral. (Note: I am not saying that the Fed is accepting crap wholesale, only that by expanding acceptable collateral to securities backed by mortgage/car/student loans it would certainly seem to increase the risk on the part of the fed.) And so, after all of this financial innovation by the Fed, the non-borrowed reserves of depository institutions not only go negative for the first time in 50 years, but go farther negative than they have ever been positive.
I just do not see how anyone looking at all of this rationally could possibly feel comfortable about it. It appears very much like desperation, both on the part of the Fed and of the banks doing the borrowing.
The way it appears is that the banks, in aggregate, need money, and cannot sell what they have on the open market without taking serious, possibly fatal losses, and so the Federal Reserve is allowing them to use more and more of those securities as collateral, very much in the hopes that they can avoid a systemic crisis, and at some point in the future hand back the securities at a point when the banks can afford to take their losses, or not have to take losses at all if the market returns and those securities are able to sell at par or better.
Of course, it may very well pay off, and the banks successfully pay back their interests and their loans and go back to merrily making profits and whatnot, but given the whole picture, it does not logically follow that this MUST be the case, or even that it is likely to be the case.
Looking at the non-borrowed reserves chart makes me think of the percentage of people paying the minimum payment (less than full-interest) on their option-ARMs: sure, they may all be financially savvy people that are somehow, somewhere, getting a better return on that money rather than paying principal and interest on their loans, but it is also possible, and much more likely, that they simply can't afford it, and are only paying the minimum out of necessity, and not choice. Sure, the Fed may be fully insulated against loss of value on the securities they are accepting as collateral, and the current credit crunch is just a temporary "crisis of confidence"; it seems more likely, however, that the Fed has discovered that the barn door is wide open, and most of the horses gone, so it is clomping around inside making horse noises in the hopes that no one else notices while it shuts the door and prays it can round up some more horses in the meantime.
If we were to flip the metric and talk about the system's "Borrowed Reserves", why would we not include TAF and PDCF borrowings?
Just because they put up collateral does not mean that the collateral itself isn't borrowed!
Institutions are borrowing from these facilities PRECISELY BECAUSE they are out of non-borrowed reserves! That's why they were created! What's misleading?
New Guy, you got it! Especially here: "it seems more likely, however, that the Fed has discovered that the barn door is wide open, and most of the horses gone, so it is clomping around inside making horse noises in the hopes that no one else notices while it shuts the door and prays it can round up some more horses in the meantime.'
OK, so if I have this straight, the main issue in contention is whether the collateral the Fed has been taking is (1) worth as much as the Fed is telling us or (2) it isn't, but the banks will get back on their feet and redeem their collateral over time and no harm done.
The Non-Borrowed Reserve statistic is supposed to give everyone an idea of the banking system's solvency. The fact that banks need to borrow to meet their commitments is what is significant.
The quality and haircut on the collateral is of secondary significance.
I can make $900 of loans; the other $10 is held back as reserves.
If there is only one bank (the degenerate case) there is no need for a Fed to balance reserves, because all the money evenutally comes back to my deposit window, and velocity is constrained by the reserve ratio.
(This, by the way, is why China is raising reserve requirements - to slow velocity of lending.)
Ok, but we have lots of banks. And, its possible for me to run out of reserves in a couple of ways:
You can come in and demand some or all of your deposit back.
I, as the bank, and screw up and lose some of the money through a bad bet - I might, for example, be forced to post collateral or make a payment on a CDS that I wrote that blows up in my face.
I could have more in expenses (salaries, lighting, etc) than I am making in "vig" off the spread between lending and borrowing.
In any event I find myself short.
Now, if this happens, I'm technically insolvent. What I'm supposed to do is sell some assets to raise the money.
But see, I don't want to do that! So instead of selling assets, I want to go take a loan.
But wait a second - the reserve ratio is there so that I have CASH in my vault, or something that can be instantaneously turned into cash, because its purpose is to insure that if you come into the bank and want your money, I have it, as well as regulating lending velocity.
When you put the TAF into the picture what you're doing is lending the money. That sounds great, but what happens if that "AAA" paper loses its "AAA"? It gets put back to the dealer, and that's a problem - see, they needed that money.
It all comes back to how they got in this box - which is that one of the three things above happened.
To prevent asset sales, the TAF is there.
But - functionally, under the rules of fractional reserve banking, the banks that are driving that number negative are insolvent, as they are refusing to shrink their balance sheet or sell more equity (which is the correct way to deal with this situation) in order to raise the capital.
Its a crock, its severely distorting the regulatory function of reserves, and it is hiding from public view the banks that have lost the $100 billion that has been taken down, plus the $40 billion more that was there in the first place.
TAF = Discount Window minus transparency, plus auction format.
Also, keep in mind TAF is open to all member depository institutions, not just primary dealers like the discount window. While I sympathize with ipodius (the Fed is sterilizing, NOT printing money), I am of the camp that is a bit shellshocked that the Fed will be down to less than $500 billion in Treasuries after the next TAF auction. Factor out around $200 billion in Treasuries that will be swapped out by the TSLF (BTW, it is the TSLF, NOT TAF that is accepting asset backed securties as collateral), and your are left with around six $50 billion bullets left in the "Fed gun" before the printing presses have to be fired up. I was not worried two weeks ago as non-borrowed reserves were actually going up (which is good), but then the Fed announced the TAF expansion and liberalization of TSLF terms. Bear in mind the current H.3/H.4.1 numbers do not include the latest TAF auction; this weeks releases on Thursday should show TAF at $125 billion (and may be reveal a trend with the non-borrowed reserves?)
There is a way to resolve this crisis, we are beginning to see it :-
NEW YORK (CNNMoney.com) -- Bear Stearns may have been deemed too big to fail. But ANB Financial, a small bank in Arkansas, wasn't. And we might need to brace for even more bank shutdowns.
ANB, a privately held bank based in Wal-Mart's home town of Bentonville with $2.1 billion in assets, was closed on Friday by the Office of the Comptroller of the Currency. The OCC is a division of the Treasury Department that regulates banks.
I (mostly) agree with your post, except that your list of problems aren't equivalent.
The first (withdrawal of deposits) can cause liability duration mismatches, but doesn't impair capital. The second (credit losses) and third (excessive operating expenses) do impair capital.
Selling down assets (eg. calling loans) fixes the first, but the second and third problems require that capital be raised.
All kds bets are going bad and the tribe is about to leave the reservation, so now he resorts to whining. People tried to tell him how it would go down, but he is so arrogant and f@cktarded that he shouted them all down.
Tenets of the faith:
Bond crash imminent. Get in line karl, everyone and his dog thinks this. The long bond yield is more likely to go to 0% than it is to go to double digits. They will monetize. Bilge that asshole.
Stock market crash. Bullcrap! The Dow is more likely to go to 20k than it is to go to 6K, like you hope for.
Go back to TF and dispense some more worthless advice and act like a petty tyrant, because that's what you are. Go lick your aching puts azholz.
ANB is part of the CMBS story. The FDIC got hit with 250M in losses to make good. Like the Alt-A story this one hasn't really begun to unfold yet.
With regard to the above discussion I loved the comment about the Fed making "horse noises." Had me laughing.
I still feel that all the Fed's "buying time" strategy has done is allow the bank's to fractionally double down with taxpayer money in the hope of getting out of this mess. Giving liquidity to the guys that got us into this mess is not the smart move.
Why is the fed publishing this chart?
If it was me I'd be stuffing it down the shredder and whipping up a new one in excel. Now it's all over the net and printed on Chinese made t-shirts, better hope one of the old guard doesn't see tiger lilly wearing one.
Is there a mechanism for banning certain posters from posting comments? It would improve the environment around here lately. You all know who I'm referring to...
I see it as a game of doubling down with the Fed/our money. If it works great. If it doesn't, the relative size of the crater in a systemic failure probably doesn't matter... dark I know but that's how I see it.
^^ Kind of like the Cold War Nuclear talk about " Bouncing Rubble "
"The Non-Borrowed Reserve statistic is supposed to give everyone an idea of the banking system's solvency. The fact that banks need to borrow to meet their commitments is what is significant.
The quality and haircut on the collateral is of secondary significance."
OK, true, but if it is a liquidity issue - the collateral is worth every penny, but the banks just can't sell it this week because everyone is irrationally spooked - that is a very different story than if the banks are insolvent and this is a stop gap until we think of something else. The first is more like a run on a bank than like all your customers just went bankrupt.
Adding - And if it were the "irrational for a week" scenario, then why does the second chart look the way it does? Shouldn't it have been a big dip followed by receding back towards normal? It does at least seem to have bottomed out.
BTW, Anon, I've appreciated your comments as they have been spot on (but really, get yourself a new handle!) And since we are tallying the Fed's balance , according to this (PDF Alert) the Fed Gold stock as reported in the H.4.1 is valued at get this $42.22 per fine troy ounce. So the current Fed hoard, at todays market price of ~$850/oz is worth:
$11.041 billion / $42.22 * $850 = $222.28 billion
Always nice to know something is there if the Treasuries run out.
FWIW, back around 2000 the Fed issued a whitepaper as there was some concern on how open market operations would be conducted as the US was running a surplus and the government was retiring Treasury debt. Ahhhh, those were the days.
"jus me writes:
IF there was ever a time for an uber nerd post it is now. This thread is all over the place and 75% WRONG.
I second that, as I have no idea which 25% is correct."
I agree there's a need for a uber-nerd post. The area is in my general professional expertise, but I will highlight out that I'm not an expert in the details.
There's two main argument threads (including previous discussions):
(1) The Fed is "printing money";
(2) The Fed is bailing out the banks by taking on garbage assets.
(1) The answer is simply that the Fed is not "printing"; operations are necessarily sterilized.
Why: The Fed targets the fed funds (onshore inter-bank rate on excess reserves). If the Fed buys anything unsterilized, they create reserves. Those excess reserves will depress the fed funds rate. They would immediately have to either (a) lower the target rate; or (b) do offsetting open market operations to drain the reserves they created. Thus, they have no ability to "print money"; they can only set the target rate too low.
In summary: NO PRINTING.
(2) The Fed may be making a mistake by taking on the credit risk and creating moral hazard. This turns into a political argument. However, I would note:
(a) The Fed's credit risk is de minimus. They will seize other assets from their counterparties to make themselves whole.
(b) The Fed is attempting to target LIBOR. Almost the entire fixed income OTC derivative complex uses LIBOR as an underlyer, then there's currency swaps as well as LIBOR-linked floating rate products. Look up the OCC report to see the size of those markets. Guess what? The equity market is a dwarf in comparison. The Authorities have an interest in not seeing the LIBOR complex decouple completely from the Fed's target rate.
The fed can only run out of treasuries if it chooses to.
They can perform a permanent market operation at any time to buy more treasuries. The treasuries go onto their balance sheet as an asset, the check cashed by the treasury(or whoever they purchase the treasuries from) goes onto their balance sheet as a liability.
Opinion:
Ipodius is an elitist apologist that may understand many of the technicalities, but not the big picture.
Past liquidity crises were all solved by temporary liquidity provisions...What gives this time around?
Solvency
The "illiquid" assets on bank balance sheets can be performing reasonably within model expectations NOW, but the market has priced in FUTURE impairment... With a performing asset it would thus appear to be a liquidity issue.
The Credit Suisse graph of mortgage resets suggests 2008 will be a tamer year for RMBS.
It is no longer significant whehter or not the fed is printing money. Bank reserves requirements are now essentially 0 due to swap accounts(this opinion comes from the federal reserve), what really matters is the VELOCITY of money.
If they fed is loaning treasuries to banks that would otherwise be technically insolvent, those banks must lend in order to create a profit(spread) on the borrowed treasuries. These loans increase the velocity of money via increased debt creation, worsening the general instability of the system, and leading to increased malinvestment.
This is nothing more than propping up of a rotten system, which will cause increased pain at some point in the future.
"jus me writes:
bond guy - thank you!
What about the notion that the Fed is "running out of balance sheet." Is that a realistic concern?"
"Running out of balance sheet" only makes sense if it is translated to "no Treasurys left on the balance sheet" (i.e. - they could grow their balance if they need to so in order to get fed funds to hit their target).
The only thing they lose is the ability to run more TAF/TSLF operations - they would thus have no further ability to attempt to reduce the LIBOR/fed funds spread.
Since targetting LIBOR is technically not part of their job description, it could be viewed as a "nothingburger".
It may make outlook for markets scarier, given the size of the LIBOR derivative complex. But, the spreads are still only on the order of 100 bps, and I don't think the world would end even if they went to 200.
None, the collateral needs to be rated AAA. I don't believe that anything AAA is considered Level 3 yet.
Actually the Fed list linked above indicated that the Fed would accept some non-AAA as collateral.
It seems clear that the Fed has marked many securities higher than the free market, even after the Fed "haircut"; otherwise, why go to the Fed to swap for Treasuries? The difference between the market valuation and the Fed valuation is where the "printing" lies. Those institutions either loan to hedge funds or loan to their trading desks, the traders invest in the hot sector to turn a profit, and voila, $126/bbl oil and food riots around the globe.
You hit it on the nose. Dollars are collecting in fewer and fewer pockets as wealth holders don't consume enough to offset the debtor's demand for income to service/extinguish their debts.
There is credit saturation to the degree that the Fed is now lending to create an arbitrage on outstanding debts. This drives rates down artificially. Organic credit origination occurs when asset prices "bottom."
Just a quick note on AAA. Some securities are rated AAA due to the insurance wrapper. If MBI or ABK can't make good on all claims presented -- and do a BK -- then these securities would be far from AAA.
"SweetHomeKilla writes:
It is no longer significant whehter or not the fed is printing money. Bank reserves requirements are now essentially 0 due to swap accounts(this opinion comes from the federal reserve), what really matters is the VELOCITY of money."
True, but irrelevent when discussing the impact of how the Fed deploys its balance sheet.
"If they fed is loaning treasuries to banks that would otherwise be technically insolvent, those banks must lend in order to create a profit(spread) on the borrowed treasuries. These loans increase the velocity of money via increased debt creation, worsening the general instability of the system, and leading to increased malinvestment."
This is wrong. The Fed is lending the banks Treasuries, in exchange for MBS (or whatever) so that the bank can then borrow against the Treasuries. The Fed is acting as an intermediary so that the banks can finance their existing balance sheets. The Fed, in the meantime, is pocketing a spread to act as an intermediary.
My back of the envelope calculations indicated that the Fed could earn $5 BN on these operations this year. Not bad.
"This is nothing more than propping up of a rotten system, which will cause increased pain at some point in the future."
"MarkS writes:
It seems clear that the Fed has marked many securities higher than the free market, even after the Fed "haircut"; otherwise, why go to the Fed to swap for Treasuries? The difference between the market valuation and the Fed valuation is where the "printing" lies"
The whole problem is that the banking system is having problems financing their balance sheets. If they could find the lenders who were willing to lend against those assets, they would borrow from them. But those lenders no longer exist, at least not at spreads anywhere near current levels.
BTW, it is the TSLF, NOT TAF that is accepting asset backed securties as collateral
According to the Fed's own web site TAF will take anything acceptable at the discount window, including ABS. TSLF & PDCF collateral are somewhat different.
tj & the bear writes:
It's Japan the sequel. Instead of taking the losses here and now, the Fed's essentially extending them indefinite loans to carry them until either (a) the collateral is worth something on the open market -or- (b) the bank can absorb the losses without failing.
Given that the TAF keeps getting expanded it appears that the collateral's value is not improving nor are the bank's finances.
I'd agree with this analysis (as far as I can tell), with the addition that it's politically feasible (and indeed being encouraged) for the IB's to borrow even more money and make even more loans into the market, even though a fair-market valuation of their assets would show them as currently insolvent. In essence the Fed is serving as an off balance sheet vehicle for the IB's to continue leveraging their MBS's to make more risky loans, and try to cash out more before the system collapses.
In essence, the Fed is creating additional leveraged systemic risk by assuming the role of counter-party for whom no amount of risk is too large. Anything to try to keep the party going, I guess.
The fed IS printing money when it allows the bank to set the value of collateral at it's own discretion......that is why they are going to the TAF instead of selling it on the open market.
If I say it's worth .95 then the Fed loans me that amount of cash based on the collateral I give them....at that value...when in reality it more likely worth MUCH less. Again if the value was really there do it openly.....
There is a big disconnect when the banks are allowed to set value and then claim everything is okey-dokey...
If it were ok then do it on the open market.
The difference (that we seem to have a big lack of understanding of) is the value of what the banks say it's worth and the actual value in relative terms.
That is why we will never see proof that the fed is printing money. It doesn't have to do it physically...it does it with the cash injections valued by the very people that shouldn't be allowed to do it at all.
It's really not very hard to see......if you want to see it.
According to the Fed's own web site TAF will take anything acceptable at the discount window, including ABS. TSLF & PDCF collateral are somewhat different.
tj & the bear,
Thanks for the correction. While the TSLF recently liberalized its requirements to allow asset backed securities (that's where my head was), you're right that advances under the TAF to a Participant will be
collateralized by the same pool of collateral as its borrowings from the discount window primary or seasonal credit programs.
Look at this (PDF) to see what can be pledged. Hmmm, a 40% haircut is applied to Subprime Credit Card Receiveables.
The fed can only run out of treasuries if it chooses to.
There are some practical constraints..
During a banking crisis everyone above the FDIC limits is trying to trade "bank cash" for Treasuries. A large player like the Federal Reserve may find that it simply can't find the amounts that it needs on the open market at any price.
The Federal Reserve also can't buy Treasuries that trade with a negative yield (meaning that buying them and holding them to maturity would leave you with less money than you started with.) Treasuries routinely traded with negative yields during the Great Depression (better to take a small loss than risk losing it all when the bank collapses).
Third, the Federal Reserve can't just go buying Treasuries willy-nilly without impacting interest rates.
That's why the Fed is lobbying Congress to allow them to pay interest on bank reserves. Doing so would allow them to un-couple buying and selling assets from interest rates.
I'm not sure I've figured out what the over-all impact would be but I'm pretty sure that the following would happen.
Interest earned on Treasuries would now go to the banks instead of Congress (it's a subsidy of banks)
The system could be vastly over-reserved so the Federal Reserve could collapse savings account yields to below the FFR for all but the shakiest banks (The TAF effectively accomplished the same thing).
The Federal Reserve would have unlimited power to force down yields on any asset class
The Federal Reserve can't pay out higher interest rates than it collects so it wouldn't be able to raise the FFR higher than the average yield on it's portfolio (maybe?). Stop paying interest at some point?
The end game of the Fed creating/financing an arbitrage against outstanding debt is a 0% EFF/FFT rate. The entire charade is an academic curiosity more than a solution to the problem.
Wait a minute here. I think we've lost something here.
1) Open up your wallet
2) Take out a dollar (or a five, whatever you have)
3) Read the TOP CENTER IN BOLD
FEDERAL RESERVE NOTE
It does not say, "US DOLLAR", or "US GOVERNEMENT CURRENCY" or "BUREAU OF ENGRAVING AND PRINTING" it says FEDERAL RESERVE NOTE.
THE FEDERAL RESERVE ABSOLUTELY, POSITIVELY CONTROLS THE CURRENCY. They don't do the actual printing. That is done by Bureau of Engraving & Printing who state on their website that they "The BEP prints billions of Federal Reserve Notes for delivery to the Federal Reserve System each year (the BEP does not produce coins all coinage is minted by the United States Mint). "
So let's stop arguing about whether the Fed can start running the press. They can.
Now in the case of the TAF and other recent "innovations" they haven't not been handing our dollars in exchange for shit collateral, they've been handing out T-Bills which the banks can then sell or hold as securities on their balance sheets. So, they've been proping up balance sheets by hiding the shit assets the banks are holding (RMBS, CMBS, auto loans, credit card debt). JPM has seen the opportunity to help others hide their crap assets such as the deal where they swapped Target's credit card receivables. How long do you think it took JPM to package those up and tender them to the Fed in exchange for T-Bills.
So, in one sense the Fed hasn't directly pumped dollars into the money supply which is what some people here are saying. On the other hand they are definitely propping up banks by swapping their shit assets for T-Bills.
Discount Window activity disclosure is VOLUNTARY (on the part of the borrower), the FED has never published the specific borrower(s), only the aggregate amounts (h41). The transparency (or lack thereof) has not changed between the DW and the TAF.
"... and your are left with around six $50 billion bullets left in the "Fed gun" before the printing presses have to be fired up."
Well, will it be printing presses or more borrowing from the US taxpayer via the issuance of more treasuries?
What will this do to interest rates?
If SWF are run for the broader benefit of the country (say, China) as opposed to a more traditional understanding of "investment returns", might our foreign creditors be willing to recycle as much money as we need for as long as it suits them (in spite of a negative real return)?
If we just had a massive bubble that was created by irrationally low interest rates and now the fed is trying to "steralize" the "equilibrium" that got us the massive bubble in the first place, doesn't it follow that without the necessary credit destruction and contraction you can't achieve a market clearing equilibrium. Nod to th sytem is bankrupt and that is the cas, but what is the greater cost bailing out the complex directly financed over time or the slow bleed and uncorked inflation genie?
"Tom writes:
If SWF are run for the broader benefit of the country (say, China) as opposed to a more traditional understanding of "investment returns", might our foreign creditors be willing to recycle as much money as we need for as long as it suits them (in spite of a negative real return)?"
As long as the Chinese peg the yuan to the dollar, they have to buy all the dollars offered to them at the pegged price. And given the size of the cash hoard, and the need for liquidity, there is no real alternative other than Treasuries (unless they want to buy some used CDO's).
If they don't want to keep buying Treasuries, they will have to let the yuan rip. That would certainly be destabilizing for the U.S. bond market, but the Chinese economy would be facing quite a shock as well, which probably explains why nothing has been done.
It was never clear to me what China's exit strategy was. Whatever it was, it doesn't look like it worked.
In Latin America, when a currency gets hard hit, they rename it or give it a first name: australs for argentinian peso, reais for brazilian cruzeiro, bolivares fuertes, etc etc.
Shall we propose a name for dollars, like New Dollar or Worthy Dollar or Foolproof Dollar??
"It does not say, "US DOLLAR", or "US GOVERNEMENT CURRENCY" or "BUREAU OF ENGRAVING AND PRINTING" it says FEDERAL RESERVE NOTE."
There's some poor sod in a forum who keeps railing at me about how I am hopeless because I just can't seem to grasp the difference between currency inflation and credit inflation.
The stupid fuck doesn't know what the word "note" means.
First let me say that this is the best thread on CR in quite a long time. We are back to focusing on the future rather than reiterating the obvious present. Some very good debate and discussion - I like "bond guy" and "anon" and appreciate their comments, along with all the rest.
Let me wade in and say that the yuan is not drastically undervalued to the dollar. Now that said, that doesn't mean that the dollar can't fall along way, but it could imply that both are overvalued significantly - along with most currencies. And so begins the rush for hard assets and the weapons/military complexes to protect them. I guess we are mean-reverting to the historical norm, though this mean reversion has the distinct possibility of being of the fat tail variety.
Whatever problems America has, you can rest assured most (not all, but most) countries have them too.
So perhaps the yuan is undervalued by 10-15% to the dollar, but perhaps they both have a long way down ahead. By default the yuan cannot be worth much more than the dollar becuase a) it's largely backed by dollars b) it's "middle class" is likey to take a beating without its best customer (USA) c) their military is MUCH smaller than ours (they have ONE aircraft carrier and only a couple hundred nukes) d)their natural resource estimates are smaller than ours e) they do not have the geographic and political harbor that we do.
What is interesting about the developments of this debt deflation episode vs. GD is that the cheap money is finding its way into commodities (oil mostly now) rather than stocks like 1929.
A parabolic stock rally boosts confidence and doesn't increase costs to the economy. However this paper wealth eventually dies in an equally exciting cliff dive to destroy the cheap money (October 1929). OTOH, parabolic oil destroys the money as the oil is forever gone once consumed. The downside is of course higher oil costs which resonate throughout the real economy.
I suspect this externality was not what the Fed had in mind and believe that the government will reach an agreement with nymex/ice on the margin requirements for long positions in the near future. This development would be functionally cash neutral to the spot market so they should embrace it...especially if it successfully brings down prices to August 16, 2007 levels.
After the oil speculation is dealt with the future cheap money will only have a few options to hide in:
Bonds, Precious Metals, Stocks
Bonds would be the first choice of the government with the most recent projection of $500+ billion in funding they will need to raise for 2008. The final number could end up a multiple of that if the politicians really get going though.
It will be important to watch what happens to these three asset classes when oil specs get their medicine.
The banking system has extreme problems. The unloaned reserves mean a lot because the banking system is actually that short of reserves in a real sense. This isn't money they have to lend, but money they have already let out of the bag. You might have heard Citi is talking of reducing their assets by $400 billion. The last financial statement of theirs I read said they owed $400 billion in fed funds. This is the amount of money they have loaned in excess of the amount of deposits they have to show for it. They owe other banks $400 billion and it appears they are going to attempt to rectify this. You can only do this by taking action to pull back in $400 billion.
I really believe the Fed is taking the risk of going broke here. I also believe that many of these funds are going to be liquidated and the Fed is going to restore itself at some point. Bernanke is up a tree with the dogs howling and hungry. How are they going to get this one back in the bag?
it seems more likely, however, that the Fed has discovered that the barn door is wide open, and most of the horses gone, so it is clomping around inside making horse noises in the hopes that no one else notices while it shuts the door and prays it can round up some more horses in the meantime.
Why do you say "the money is forever gone once the oil is consumed."? Credit can and always will be "destroyed" (sometimes peacefully sometimes violently), but not money. The former is always plentiful and the latter is always scarce. Whether you are referring to money or credit in the case of oil is not of consequence. The payment is sent to foreigners who then recycle it here because there are not other markets to send it to - they aren't deep enough. Now I realize some of the less liquid markets (commodities) are seeing inflows, but a sizeable portion still needs to be returned here. SO how is it "forever gone"???
The fact that the Fed traded secure Treasuries for abolute garbage that is currently wholly unsaleable in the market (meaning has a value of $0) in the TAF and the primary dealer credit facility puts these items squarely in the borrowed reserves category.
If these items had any value, the banks and primary dealers would sell them. Instead they cannot sell them, so they just package them up and dump them on the Fed.
I wonder how much the Fed will give me for that drawer full of sock lint I have. It is unsaleable in the market, thus it MUST qualify for trade in at the Fed for treasuries. And you would have the Fed not categorize such sock lint in the borrowed reserves. This is an exaggerated example, but it belies how hollow your logic is.
what a delight to find you here -- i've been a many-years fan of yours on prubear. (And i've avoided registering and posting there, since 2000, because of all the daily hours it would have taken from me.)
Your clear explanations of things have tracked well with my brain's juggling all these multi-variate phenomena -- and games -- and I appreciate all you've gone through to make your points for many to read...
Good question and I should have been more specific. Yes, I do mean commercial bank money. Think of it as sterilizing the money growth (replacement) because the commodity itself is consumed. Whereas, when the money goes into a stock/bond it sits there as an asset never being consumed...the money comes out via sell-off.
Asset = Liability
Debit = Credit
It's an added bonus that it supports the treasury ponzi game via petrodollar recycling.
Well, it didn't take long for the dust to settle. It's a pity that Karl is so inarticulate, and that CR out-thinks him, out-writes him, and out-classes him so resoundingly.
No wonder Karl slinked over to his little Market-Ticker fiefdom and proclaimed in a sniveling Caligulaesque proclamation to his fawning followers that CR's is "another site to ignore."
Considering Thursday's 9th TSLF, is this article due for an update? I know I would apprecite your comments about how much bad paper is going on the Fed's balance sheet. My impression is none really as the Fed gives the bad paper a haircut and hold it for only a short time returning the paper to the banks/brokers. It appears it is all just a process to facilitate the writedowns and make the banks/brokers books look better for the short term. True?
Can't the Fed just ask the treasury to supply more money after it runs out?
First to ask that?
Pay no attention to that chart behind the curtain!
CR -
May I assume that all of the collateral to the TAF and other facilities is AAA paper? Sure would like to see that collateral...
What happens to the Fed's ability to set and control interest rates as it runs low on non-allocated assets?
This is why we haven't seen, and aren't going to see, a crash. The mortgage fiasco is going to wipe out about a trillion. The Fed has about a trillion. The Fed will loan out its trillion to cover the losses and allow the market to roll onwards. No crash.
This is also why we're going to see a very long period of extremely weak growth. At some point the Fed will need its trillion back. The overhang of effectively hot money (since the Fed can withdraw it at any time) will depress asset prices indefinitely and impair borrowing and growth. Hence the low rates on long-term bonds in the face of inflation. Long recession, here we come.
Northern Cali, yeah, we'd all like to know that answer - but it's supposed to be the better assets and also over-collateralized. If it's all bad, then the first graph is correct!
Jack Staub, the Fed will be creative and figure out a way to control the Fed Funds rate - but they are already frustrated with how little they can impact other rates. Some would say they've already lost control.
Best to all.
The fact that the borrowings are collateralized has no bearing on the fact that the banks have borrowed to meet their reserve requirements. The only difference is that the Fed has assumed credit risk.
Seriously...LOL
That sh*t has to be paid back my friend and thus significant.
I was going to say that, as far back as Greenspan (seems so long ago, doesn't it?) that mortgage rates were not responding to the Fed's hikes. He called it a conundrum, but he should have called it "uh-oh" as that was the first sign that something was amiss in the credit markets.
So why would they be surprised now by the fact that they've lowered and the same disconnect is happening? It seems as though there are two systems operating here...the Fed's, which controls the flow of traditional banking funds, and the shadow banking system which securitizes debt and resells it within it's own market. One has links to the other, but they operate in different spheres.
Add in the international flow of funds, and how much pricing power (in terms of rates) does the central bank really have anymore? Now that the genie is out of the bottle, will it ever be coaxed back in?
Anyway it was a fast ride down to over half way to zero. Buckled my knees. I think I get it - the Fed's $T = mortgage nominal $T of crap. Who's going to take all the CRE, credit card and other crap?
The FFT would be substantially higher without the TAF/TSLF the PDCF does not affect FFT as they cannot borrow interbank.
The EFF reflects the cost of interbank borrowing among institutions that TRUST each other. Banks are unwilling to lend to questionable banks at ANY rate and thus it does not register in the EFF and does not impact the Fed's FFT decisions.
The eureka moment for everyone will be when they realize that the central banks do not control interest rates, but that they have limited abilities to stabilize (manipulate) them.
The learning curve is pretty steep on this once one overcomes the indoctrination.
I am wondering if all the fedspeak today has a theme, since CPI is tomorrrow, if you puzzle it together?
Hoenig - "Inflation Major challenge"
Yellen - "Rates appropriate"
Bernanke "Boost loans"
No more cuts, regardless how weak economic readings are?
Well this has to be on surprisingly bad post on CR. Missed the entire boat. If I want to withdraw 100,000 this shows the banks have to borrow the funds to pay me back. Period. This post paralleled much of what Caroline Baum wrote several months ago, which has all over blog land been shot to hell. No, this is not a false alarm.
How will everyone explain the FFT at 0% and double digit borrowing costs? See, the borrowing paradigm we are familiar with is a spread over treasuries, with treasuries being priced according to inflation expectations. If treasuries are not pricing in future inflation expectations what does that indicate?
stuart -
It is a terrible post and I would encourage CR to rethink his thesis.
"This post paralleled much of what Caroline Baum wrote several months ago, which has all over blog land been shot to hell. No, this is not a false alarm."
I agree, Stuart. It would appear that the Fed has backstopped a banking industry that is, on the whole, insolvent per the definition of "required reserves".
Well this has to be on surprisingly bad post on CR. Missed the entire boat. If I want to withdraw 100,000 this shows the banks have to borrow the funds to pay me back. Period. This post paralleled much of what Caroline Baum wrote several months ago, which has all over blog land been shot to hell. No, this is not a false alarm.
Welcome to fractional reserve banking?
See the Fed is the lender of last resort for banks and the government is the borrower of last resort. There are limits to both of their "mandates".
As Allen reminds us, some day this war will end.
Thanks, CR, for a great post.
Wow, by October the Federal Reserve won't have any treasuries left. I wonder who will end out bailing them out.
Oh well, maybe Obama will save us.
Atlanta Metro News | ajc.com
I'm now long ink and paper.
So, if I understand these charts correctly, United States depository institutions currently have non-borrowed reserves of nearly -100 billion, meaning that, of the reserves they currently have, borrowed reserves outweigh non-borrowed reserves by an aggregate of nearly 100 billion? Meaning that, if there were only one bank in the country, and this bank had 10 billion in actual cash deposits from investors, it would also have 110 billion dollars in borrowed money?
And if I understand all that correctly, what C.R. is saying in this post (besides not to panic)is that a good deal of that borrowed 110 billion dollars is set against collateral, so it's not like banks just took out that 110 billion off their credit card, but rather gave the fed some "Assets" they had lying around, allegedly "worth" about 100 billion (or more, if it is overcollateralized) in exchange for straight cash?
This is all very difficult to try and wrap one's head around, so Iwould appreciate it if someone would set me straight if I have something wrong here.
Obama will save us if you have hope, and some change too.
Re: "This graph shows that about half the Fed's U.S. Treasuries have been committed to fight the liquidity crisis."
...And it's, one, two, three, four, what are we fighting for?
Country Joe and the Fish
YouTube -
It's pretty simple:
Does your HELOC balance still reflect money you borrowed to consume despite it being secured against your home?
As Allen reminds us, some day this war will end.
If they could figure out how to change the letter behind the number for reserves to a T instead of a B we would be saved. It pretty much what they been doing any way. The haven't run out of Mirrors yet.
jo6pac
The race to the bottom continues
CR/Tanta I like the new you (site).
New guy, if you walked up to the Fed and asked for 100,000 dollars and they just printed it up and gave it to you, that would be inflationary, since they just created money out of thin air. So you have to pledge (pawn) something to get the cash of equal or greater (currently around 20% greater) value. That is not inflationary, as it is a loan.
Similarly, the Fed has securities that they sometimes sell, and sometimes buy from the market to control the money supply (read hit an interest rate target). As long as they are working within their balance sheet constaints, these are sterile operations, read no money was created or destroyed.
So the point of the graph is to show that, in reality, these have no affected the reserves held by banks because they are sterile...collateral has been exchanged for the loan. And, btw, the Fed collects interest on these which is turned back over to the US Treasury.
Unlucky:
I'm sure he'll do about as well as the monkey in the link. Just look at his long line of legislative accomplishments.
Yes, I know that's off topic and that's all I'll say about it here.
Fair Economist, forgive my ignorance, but is the scenario you paint stagflation?
Thanks
What this is going to encourage is more paper money being created, thus causing inflation in soft assets (E.g. food) and deflation in hard illiquid assets (E.g houses).
Will the printing presses dry up or will the illiquid assets become liquid first?
Any ideas or hypothesis? Am interested to hear any views.
Thanks.
Will the printing presses dry up or will the illiquid assets become liquid first?
Neither will occur until well after rating agencies start reflecting reality.
The Fed has over collateralized the loans by, I think, 20%. What if the housing market continues to tank and AAA +20% is not adequate collateral. The banks can't come up with that much more collateral. Surely then we will see money printed. Germany 1920.
Here is the latest in the saga:
MBIA, Ambac Losses Elevate Aaa Concern, Moody's Says (Update3) - Bloomberg.com
MBIA, Ambac Losses Elevate Aaa Concern, Moody's Says (Update1)
By Christine Richard and Jody Shenn
May 13 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said
Still AAA ! wow
The fed could crush commodity speculation by raising the funds rate and eliminating the new lending facilities. Unfortunately, the fed's member banks as well as many IBs would become insolvent.
The nationalisation of financial shenanigans continues.
ipodius,
So I am basically on target then? So if a bank that has borrowed from the federal reserve using securities as collateral loses money to the point where they cannot pay the federal reserve back what it owes them, or cannot pay the interest on the loan itself, the federal reserve becomes the new owner of those shiny securities, which due to newly relaxed standards for things like the TAF, could be backed by home mortgages, or car loans, or tulip bulbs or some such?
First off, banks do not print paper money.
Second, the Fed does not print paper money.
Third, paper money is sterilized by treasuries that the Fed purchases...limiting factor.
Fourth, the Fed will seek to expand its balance sheet by paying interest on Fed deposits to draw in cash from institutions that are hoarding it.
Fifth, this game will continue until the Fed runs out of balance sheet and the government is cutoff from further borrowing.
IOW, we have a ways to go and things are going to get weirder.
BB - "Will the printing presses dry up or will the illiquid assets become liquid first?"
The fed has made it quite clear that the printing presses are warmed up and ready to go to prevent asset price deflation.
ew guy: yes... then sterile would refer to the Fed's virility.
If I want to withdraw 100,000 this shows the banks have to borrow the funds to pay me back
If you want to withdraw $1, the bank had to borrow the $1 from the FED to give it to you.
Let that sink in for a minute.....
The banking system is insolvent.
And the banks haven't lost 100 billion, they have lost 140 billion (previous reserves of positive 40 billion and current reserves of -100 billion)
Anonymous post at 4:23 was mine.....Sorry about that.
As I sit upon my high horse today, clouds above, rain falling down, I ponder the possibility of the society that lies beyond this recession. What will America be, who will we be and how will the world look at us? Will be viewed as a state in ruin, burned as Rome, or will we represent the melting pot of a global tribe in turmoil, lost, yet found, full of decay, but able to shed the old skin and grow into something better, something un-imagined on this rain filled spring day?
I question the possibility of a service economy able to pay for higher education costs, I question a health care system that will service just the wealthy, versus the poor that are struggling to keep heads above water, as the cost of living makes a clear distinction between the haves and have nothings. I question the value of the internet and technology which brings billions of people together in a chaotic journey that symbolizes freedom, but ensnares its users as addicts that are fueled by mis-information.
I could go on, but this commencement speech needs something....
Hmmmm, (foot taps)......
I have a dream that one day, The US Treasury will rise above the debt from the subprime bailouts and that we as a nation will stand together and be able to line up around the block for legalized marijuana and the tax benefits that will place American on a new road, a better road, a road less traveled, where debt will be someone elses problem, where our minds will focus on the harsh reality of the journey, versus the destination. It is in this hour that we will find clarity as a nation and rebuild Rome in a thousand days!
Ok, proof read it and give it to McCain...
Ipodius the FED has been unable to control bank lending rates all the way back into 2004. The reason being is that the commercial banks control more money than the Fed does through leverage. The wall street firms would borrow money and lend it out cheaply. Cheap loans failed on now the banks are left owing money. I don't see how long the Fed can prop up these banks with RE failing all around us.
"And the banks haven't lost 100 billion, they have lost 140 billion (previous reserves of positive 40 billion and current reserves of -100 billion)"
True, good point to add. thanks.
"This is also why we're going to see a very long period of extremely weak growth. At some point the Fed will need its trillion back. The overhang of effectively hot money (since the Fed can withdraw it at any time) will depress asset prices indefinitely and impair borrowing and growth. Hence the low rates on long-term bonds in the face of inflation. Long recession, here we come." - Fair Economist
With the debt load, and assumptions about growth made by those who took on the debt, I do not see how we dont have an extremely severe recession...or worse.
A good analogy was house prices in bubbled up regions. Many said the could just go flat. I said no way...as soon as they went flat, then fundamntals will dictate that they drop...and dramatically.
It is the same with credit and our economy. As the economy slows, the rosy scenarios and assumptions on which many financing schemes were based will fall apart, and there will be more defaults. We are looking at a historically large credit crunch BEFORE a recession.
Add recessionary feedback to the mix...and I dont see how we dont have a crash. By crash I mean huge losses...not necessarily a one day climax ala 1929 or 1987. I just dont see how the wheels dont fall of when we have a recession.
The federal deficit has increased something like 4 trillion under the Bush presidency. That's a lot of $$ that were created.
I still see CPI inflation. So does my wallet. Also, I still see an overall increase in money & credit.
It's the composition of non-borrowed reserves that I find interesting. If you subtract the PDCF and "Other credit extensions" from the total of Non-borrowed reserves, you are left with the amount being borrowed by commercial banks through the TAF, Primary, Secondary, and Seasonal facilities.
The math shows that borrowings through the PDCF have shrunk a bit, implying that liquidy is improving for the IBs.
However for the commercial banks, well, not so much.
Why did the Federal Reserve reclassify the TAF?
Was it just a mistake or was there another reason?
You know what is a total trip (Yo, yo, yo)? The Fed has only bailed out one bank, the smallest mind you and they have already used more than half their balance sheet (of course theres the TAF). Can't wait until the next one, LEH, MER or WM anyone.
Can't wait until the next one, LEH, MER or WM anyone.
lol. Forgot Citi ?
It's the foreign central banks that are printing money hand over fist, and pumping it over here. In the process driving up local inflation rates. They've effectively taken over that role, for now, away from the Fed. Those analyzing US money supply only by looking at what the Fed is doing are also missing the boat. We've outsourced money supply expansion to our pushers. As the junkie, with an increasing tolerance, we better not have that supply cut off.
Interesting Times,
I will never say this again but I think CITI is the only bank that is in fact too big to fail. If there is ever commercial national bank it will be Citi. Won't stop it from going to 12 dollars though.
Trader Walt -
It was never reclassified...it began in December and that is when Non-Borrowed Reserves turned down...and it's gone down steadily ever since.
Angle two:
Wall Street global corportaions (with bailouts and PPT funding) are seeing increased sales due to inflation increases. Wall Street and stocks however, do not yet factor in the amount of businesses closing. For example, there are "many" bakeries going out of business. Small mom and pop shops that were fighting wal-mart expansion several years ago, are shut down. Fewer independent business openings are the next trend in the faux recession. We will see global corporations go into price war mode to stay alive -- and thus, as inflation impacts phase in this year, unemployment will increase and spending will decrease. meanwhile, increased costs will look great for wall street and what is left of the middle class will be destroyed with 2 years -- as these people spend down reserves, giving more cash to those at the top.
Re: In the first quarter of 2008, the trucking industry experienced the highest same-quarter levels of firms going bankrupt since 2001.
Bankruptcy shut down 925 firms nationwide in the past quarter, according to a report by Tennessee-based Avondale Partners, an investment banking firm with interests including health care, communications, financial services and trucking.
The recent closures parked an estimated 42,000 trucks, or more than 2 percent of the nation's heavy-duty capacity, according to the report. Smaller firms were hit hardest, but the average size of firms increased to 45 trucks, meaning hard times hit larger firms too.
There were more than 1,100 company failures in the first quarter of 2001. By that year's end, 110,000 trucks were off the road, according to the report.
Stuart you are correct. The effects on China are significant. We are starting to see some of it come back to the US via higher Chinese import costs.
Food prices are already way up hence inflation there and house prices are coming down, deflation.
Bernanke just said that things are getting better.. hence what they are doing is working.. though there is more to be done. I take that to mean he will do more of the same in various incremental degrees.
Can someone explain to me how the increasing monetization of assets and providing more lines of credit that the fed does actually help in the above scenario (food/house)?
Or is Ben just .. double speaking?!
The reserves are borrowed in the sense banks borrow treasuries from the fed, but these borrowings are offset by collateral. As such the banks aren't "losing reserves", they've just swapped collateral.
I will never say this again but I think CITI is the only bank that is in fact too big to fail
drinks
Thanks, I was waiting for that line again
I like this drinking game.
Even if these borrowed reserves are collateralized (and I agree that the paper banks are putting up is NOT AAA), it can't be a good, or normal state of affairs we see in this chart.
It shows nothing like the dive taken in non-borrowed reserves in the last few months, since the start of data in the 1950s.
False alarm? A very loud, scary false alarm, if so, and one capable of causing panic.
You're wrong about this guys.
The normal Fed Credit mechanism is a BALANCING mechanism.
That is, you take in a check drawn on me. I am now short $1,000 in reserves and you are long $1,000 in reserves. I need 'em, you have 'em, I go through the fed funds system and borrow them (maybe from you). System remains in balance. If I need to borrow them for some reason and can't hit the funds, I then go to the discount window and get them. This hits the numbers.
Ok, now why is this different?
Simple - why would you go to the TAF unless you had to? The TAF isn't at an advantageous rate!
So if I have a balance problem, I would still hit the normal overnight facility between Fed members.
Ah, but what if I can't, because I don't have any collateral?
Well, if I have no good collateral and the other members don't trust me, then I hit the TAF.
But wait - how did I get to where my reserves were low enough that I had to go hit the TAF in the first place?
That's the question behind the curtain.
Note that if there is no SYSTEM deficit, then that graph doesn't go negative. That is, if I borrow $10 billion from the TAF and it goes to another dealer, they are "long" the same $10 billion I am short. They cancel.
It is only if I LOSE the $10 billion that there's a problem.
Guess what - that's what's happening!
Anon,
What do you mean starting to? CPI inflation is running over 4% yoy and is accelerating.
The middle class is going to choke on inflation trying to save these foolish banks and ficticious asset values.
If paying interest on reserves on deposit to the Fed will encourage banks to increase their reserve base and stop the Wriston/Citibank games of twisting balance sheets, regulations, and accounting rules inside out, then I am all for paying interest.
Reserves are to absorb losses. Adequate reserves mean the banks absorb the losses. Inadequate reserves mean everyone else pays for the losses via Wall Street socialism.
By providing cash for illiquid securities at low interest rates the FED creates the possibility for the bank's to make more money to cover their losses. The problem is that the type of transactions the bank's engage in is not regulated. It could be anything from lending to hedge funds or direct commodity investment to more sedate lending to people with verifiable good credit -- for housing or otherwise.
I see it as a game of doubling down with the Fed/our money. If it works great. If it doesn't, the relative size of the crater in a systemic failure probably doesn't matter... dark I know but that's how I see it.
Norka -
The Fed expanding its balance sheet via paying interest on Fed deposits just enables it to make more bad loans to insolvent institutions.
BB -
You know credit origination is f'ed when we have to make loans against loans to perpetuate it.
Karl - "But wait - how did I get to where my reserves were low enough that I had to go hit the TAF in the first place?"
At least in part, because as a deposit taking institution you're being encouraged to take on lending previously done through non-bank intermediaries (eg. commercial paper).
IF there was ever a time for an uber nerd post it is now. This thread is all over the place and 75% WRONG.
BB,
Re: "Can someone explain to me how the increasing monetization of assets and providing more lines of credit that the fed does actually help in the above scenario (food/house)?"
Bernanke wants what is termed positive inflation versus deflation, thus the Fed is willing to print as much money as it takes to fight deflation. In the process, inflation impacts assets by increasing the price, versus lowering values.
Higher costs are thought to be absorbed over time, and as more money sloshes in the economy, you see things like higher sales growth, higher EPS, higher this and that, thus inflation is thought to be more controllable, because the market is able to keep things in check with supply and demand, and thus not everything will become a bubble. Adversely , with deflation, you can have runaway panic selling and as money becomes worthless in that direction, it is far more difficult to sustain valuation growth upward.
Then again, I have no clue...
ipodius,
So with all this extra 20% collateral that's being pawned why aren't the Fed's assets going UP with each loan they make? Or do they get the bogus stuff plus 20% and then mark to market or model cause there's no market?
I see some of the colored areas getting bigger but the total stays the same or drops. And what is that mystery $100B cream on top? Maybe that's the loss reserves for the phony 20% or maybe it's all the interest that they haven't paid to the Treasury yet.
You seem to be an insider. Enlighten us.
Re: "This thread is all over the place and 75% WRONG"
I'd say more like 79%
So I am basically on target then?
Not really NewGuy. If the bank failed, the Fed is in the first position with the collateral it holds. That collateral isn't just anything no matter what you read on blogs. Furthermore, if the bank or the collateral is dodgy, the bid can be refused.
The aim here is to put liquidity in the system so, in effect, the Fed is financing paper for these institutions on a temporary basis until the market eases it's credit crunch. The graph indicates that nothing new is being created (the Fed is not "printing", another thing you see in blogs) and nothing is being destroyed. So there is no risk here unless one of the banks at the window goes belly up, and even then the Fed has the collateral. Also, the interest rate the banks are paying is not bad for the treasury.
You seem to be an insider. Enlighten us.
FastEddie, why don't you go out and actually read something besides a blog, or take a graduate class in banking and/or Finance? Enlighten yourself a little too.
SS: Let's double-down using energy:
Andrew Hall, Citigroup's quarter-billion-dollar oil trader
Andrew Hall, Citigroup's quarter-billion-dollar oil trader - BloggingStocks
Fast eddie,
Eg. If I borrow $100,000 on my $200,000 house, the bank has first call on collateral worth $200,000, but the loan is still only for $100,000.
Ipodius,
You are correct, the fed is not printing. However, the Government IS printing.
Foreign CBs are supporting the nonsense too. Inflation is totally globall now.
False alarm?
The Fed has to supply over $30B per month to maintain the monetary base! That's why BB indicated more is on the way. The TAF delta per month along with the monetary base delta indicates whether the credit crisis is deteriorating or improving.
"Northern Cali, yeah, we'd all like to know that answer - but it's supposed to be the better assets and also over-collateralized. If it's all bad, then the first graph is correct! - CR"
At least you acknowledge it. You should add that to your post, as it is a bigger issue than you suppose in your post. Many of us are quite disgusted at the Fed's feeble attempted explanation that you have now reproduced. The non-borrowed reserves wouldn't be negative if the banks didn't desperately need those borrowings.
As for them being high quality, how high is that if house prices drop another 20%. And don't count that out.
Those reserve demands are quite descriptive of the truth, in this anonymous opinion.
I'm interested to see how the dust settles between CR's take and Karl's take: two respected and savvy analysts with seemingly pretty polarized views.
Anon,
Are you still there ? I love your comments ; could you exlplain a bit to everybody here why you think CB don't control interest rates ?
Thanks
Ipodius--you assumptions are correct if the banks will be able to payback the loans. They won't. The Fed knows that. The 'loans' (really giveaways) will be rolled over, and more 'loans' will be made until the Fed runs out of reserves, which at this rate will be in a few months. Then the Fed will have to start directly printing, and we will be at the real endgame.
Karl will be proven right in the long run. God help Treasuries when it becomes clear the banks can't payback the TAF loans.
Denriddy,
Where do you see Karl and CR's take being polarized?
Its the same view.
Karl just has his bear goggles fused to his face, so in his mind its already a huge problem.
They are both right. The graph looks like it does b/c of TAF/TSFL. This may or not be a problem, as ipodius said, depending on whether the banks can take back the collateral or not (and if they can't, it is because they blew up).
Its not monetizing debt. Yet. And its not "printing" money. Yet.
karl wrote:
That is, you take in a check drawn on me. I am now short $1,000 in reserves and you are long $1,000 in reserves...
Thanks for the econ lesson professor. So where did you get your PhD, the school of Dumbass& Boring? You are an self flatulating idiot karl.
I went to the Fed site a short while back and reviewed all the different types of paper they'll take. Among those items deemed acceptable are:
IOW, trash. The Fed is taking this stuff because no one else will, and giving a minimum 60 cents on the dollar.
See for yourself (warning -- PDF):
http://www.frbdiscountwindow.org/discountmargins.pdf
The bottom graph reflects the Fed's uncommitted assets in grey and everything is a credit risk distinguished by color.
Oh yeah,
Look for MBIA and Ambac to raise more billions at super high rates. What idiot would possibly loan money to those clowns? A: their biggest counterparties. Where are the biggest counterparties going to get the dough to loan to MBIA and Ambac? A: The TAF.
The American taxpayer is footing the bill for the biggest bailout of all time, administered primarily through inflation.
Bank CEOs get hundreds billions, J6P loses purchasing power to the tune of 10% a year for the next 3-4 years.
I'm involved in other university courses and can't do graduate finance courses in the short term.
Just tell me if the Fed trusts the banks huddled at the back window why don't they trust each other? And why do the yellow, red-stripped and black parts keep getting bigger instead of the banks selling this fine stuff on the open market.
Everybody is raising capital with ease so there must be plenty of money around to buy good stuff or lend money on the collateral. If it's good enough for the Fed why isn't it good enough for investors.
"UnLucky writes:
Obama will save us if you have hope, and some change too."
Well, you better hope so.
Hillary and McCain surely won't. If O can't, I guess we're screwed.
Fast Eddie - "If it's good enough for the Fed why isn't it good enough for investors."
Keep in mind we're talking about the fed taking "it" as collateral, not buying it outright.
There certainly is plenty of money around to buy this stuff. The problem is that if it start going out fast at firesale prices, a cascade of mark to market losses will hit bank capital ratios before they can raise equity.
The purpose of the fed lending facilities is to keep the ball in the air until banks do their equity offerings.
"Oh well, maybe Obama will save us.
Atlanta Metro News | ajc.com content...ge_7048215.html
Winston'
Classy. Betcha that bar owner's wife is sleeping with some black guys. Poor loser.
Vince -
It's pretty straight forward, they stabilize the average cost of commercial bank credit with their open market operations. Many large banks stopped lending to each other so they provided a path to circumvent the market with the TAF.
Yield = risk price
risk price factors = default potential, inflation debasement of the obligation and investment substitute opportunity cost
The TAF/TSLF equate to the Fed pricing risk with different than the market. Prior to the TAF a bank could get a secured loan at the discount window...but then everyone would know who is insolvent! The Fed wants to keep everyone in the dark.
If a fed takes an asset and makes a loan, that could be "printing money" depending on where the loan is sourced.
Now, some are saying the fed as 500 billion in reserves that it has accumulated over time, and therefore it is not "printing" the money.
But if that money had been out of circulation - essentially reserve stock - then the effect is the same. It is putting 500 trillion into circulation that was previously not available.
On the upside, as someone else pointed out, the fed should try to recoup that 500 million over time thus slowing growth for some time going forward in exchange for the extra rope being let out right now.
Essentially it is acting like a capacitor, which is actually a good thing. I did not realize the fed had 500 billion in reserve.
We've been over this graph for nigh on 5 months now with various opinions on its significance in various blogs and bloomberg columns.
CR you miss the target here - sure the turn down - massive turn down in the graph is because of the TAF - but I don't think we can dismiss it as "just an artefact" caused by the TAF - I used to in Jan/Feb but no more - you have to ask why the TAF came into existence - the banks don't have reserves so they have to borrow them via the TAF immediate and straightforward answer.
Why the TAF ? Who knows for sure - but one thing is for sure - they can't borrow from each other.
Also, in the early days there was a one for one correspondence between the injections via the TAF and withdrawals of liquidity via outright sales of Treasuries and via the daily slosh - No longer - the slosh is now at $93B ( up from $40B last Sep ) and those outright sales of Treasuries stopped too; we have the Fed adding to money IMO. But is this faster than the destruction of credit going on. Mish has a view on this - I agree with him.
-K
It's all part of the new and improved Obfuscateral Reserve.
TAF = Discount Window minus transparency, plus auction format.
It's Japan the sequel. Instead of taking the losses here and now, the Fed's essentially extending them indefinite loans to carry them until either (a) the collateral is worth something on the open market -or- (b) the bank can absorb the losses without failing.
Given that the TAF keeps getting expanded it appears that the collateral's value is not improving nor are the bank's finances.
ESTRAGON: "Denriddy, Where do you see Karl and CR's take being polarized?"
Start here:
KARL: "You're wrong about this guys."
"(a) the collateral is worth something on the open market "
Good one, tj. House prices rising to new heights, huh? Hmmm. Never?
Tokyo is down 81% from 1989 prices.
Now, what happens when it's accepted that the collateral will never be worth something? That's the big one.
Ipodius,
So you are saying that, apart from a bit of hyperbole about tulip bulbs, my concept of what is happening here is correct. I never said the Fed was forced to take any crap that the banks gave it, only that the Fed is accepting collateral from banks in return for loans to these institutions, and currently, the non-borrowed reserves of depository institutions are outweighed by borrowed reserves to the tune of nearly 100 billion dollars.
So, ideally for the Fed, if any of the banks that are on the hook for some of the Fed's money default, the Fed gets to keep collateral that has a market value of as much, if not more, than was loaned to the depository institution. This is the idea, anyway, but it is NOT a given that what the Fed has accepted as collateral is now, or will remain, of equal or greater value than the loan.
So the Fed creates the TAF, then, in subsequent offerings, increases the amount available, in addition to expanding the list of acceptable collateral. (Note: I am not saying that the Fed is accepting crap wholesale, only that by expanding acceptable collateral to securities backed by mortgage/car/student loans it would certainly seem to increase the risk on the part of the fed.) And so, after all of this financial innovation by the Fed, the non-borrowed reserves of depository institutions not only go negative for the first time in 50 years, but go farther negative than they have ever been positive.
I just do not see how anyone looking at all of this rationally could possibly feel comfortable about it. It appears very much like desperation, both on the part of the Fed and of the banks doing the borrowing.
The way it appears is that the banks, in aggregate, need money, and cannot sell what they have on the open market without taking serious, possibly fatal losses, and so the Federal Reserve is allowing them to use more and more of those securities as collateral, very much in the hopes that they can avoid a systemic crisis, and at some point in the future hand back the securities at a point when the banks can afford to take their losses, or not have to take losses at all if the market returns and those securities are able to sell at par or better.
Of course, it may very well pay off, and the banks successfully pay back their interests and their loans and go back to merrily making profits and whatnot, but given the whole picture, it does not logically follow that this MUST be the case, or even that it is likely to be the case.
Looking at the non-borrowed reserves chart makes me think of the percentage of people paying the minimum payment (less than full-interest) on their option-ARMs: sure, they may all be financially savvy people that are somehow, somewhere, getting a better return on that money rather than paying principal and interest on their loans, but it is also possible, and much more likely, that they simply can't afford it, and are only paying the minimum out of necessity, and not choice. Sure, the Fed may be fully insulated against loss of value on the securities they are accepting as collateral, and the current credit crunch is just a temporary "crisis of confidence"; it seems more likely, however, that the Fed has discovered that the barn door is wide open, and most of the horses gone, so it is clomping around inside making horse noises in the hopes that no one else notices while it shuts the door and prays it can round up some more horses in the meantime.
denriddy,
I thought the "guys" Karl referred to was the posters suggesting chart 1 reflected a loss of reserves, not CR.
If we were to flip the metric and talk about the system's "Borrowed Reserves", why would we not include TAF and PDCF borrowings?
Just because they put up collateral does not mean that the collateral itself isn't borrowed!
Institutions are borrowing from these facilities PRECISELY BECAUSE they are out of non-borrowed reserves! That's why they were created! What's misleading?
Hit and run karl need home court advantage because he is socially f@cktarded.
S Patty, please go back from whence you came.
New Guy, you got it! Especially here: "it seems more likely, however, that the Fed has discovered that the barn door is wide open, and most of the horses gone, so it is clomping around inside making horse noises in the hopes that no one else notices while it shuts the door and prays it can round up some more horses in the meantime.'
Nicely stated.
Anonymous | 05.13.08 - 5:41 pm - "S Patty, please go back from whence you came."
I second the motion.
OK, so if I have this straight, the main issue in contention is whether the collateral the Fed has been taking is (1) worth as much as the Fed is telling us or (2) it isn't, but the banks will get back on their feet and redeem their collateral over time and no harm done.
Is this right?
Anon, Estragon, go suck kds douchewadly genitalia.
Emma -
The Non-Borrowed Reserve statistic is supposed to give everyone an idea of the banking system's solvency. The fact that banks need to borrow to meet their commitments is what is significant.
The quality and haircut on the collateral is of secondary significance.
You (again) are missing it.
I'm a bank.
I start with paid-in capital (equity) of $1,000.
I can make $900 of loans; the other $10 is held back as reserves.
If there is only one bank (the degenerate case) there is no need for a Fed to balance reserves, because all the money evenutally comes back to my deposit window, and velocity is constrained by the reserve ratio.
(This, by the way, is why China is raising reserve requirements - to slow velocity of lending.)
Ok, but we have lots of banks. And, its possible for me to run out of reserves in a couple of ways:
In any event I find myself short.
Now, if this happens, I'm technically insolvent. What I'm supposed to do is sell some assets to raise the money.
But see, I don't want to do that! So instead of selling assets, I want to go take a loan.
But wait a second - the reserve ratio is there so that I have CASH in my vault, or something that can be instantaneously turned into cash, because its purpose is to insure that if you come into the bank and want your money, I have it, as well as regulating lending velocity.
When you put the TAF into the picture what you're doing is lending the money. That sounds great, but what happens if that "AAA" paper loses its "AAA"? It gets put back to the dealer, and that's a problem - see, they needed that money.
It all comes back to how they got in this box - which is that one of the three things above happened.
To prevent asset sales, the TAF is there.
But - functionally, under the rules of fractional reserve banking, the banks that are driving that number negative are insolvent, as they are refusing to shrink their balance sheet or sell more equity (which is the correct way to deal with this situation) in order to raise the capital.
Its a crock, its severely distorting the regulatory function of reserves, and it is hiding from public view the banks that have lost the $100 billion that has been taken down, plus the $40 billion more that was there in the first place.
S.Patty - What do I have to do with poster Karl?
As it pertains to your quality analysis, if you wish upon a star maybe the problem won't be a problem. Peter Pan was able to fly!
What's in your wallet?....just another disturbing 'false alarm.
TAF = Discount Window minus transparency, plus auction format.
were actually going up (which is good), but then the Fed announced the TAF expansion and liberalization of TSLF terms. Bear in mind the current H.3/H.4.1 numbers do not include the latest TAF auction; this weeks releases on Thursday should show TAF at $125 billion (and may be reveal a trend with the non-borrowed reserves?)
Also, keep in mind TAF is open to all member depository institutions, not just primary dealers like the discount window. While I sympathize with ipodius (the Fed is sterilizing, NOT printing money), I am of the camp that is a bit shellshocked that the Fed will be down to less than $500 billion in Treasuries after the next TAF auction. Factor out around $200 billion in Treasuries that will be swapped out by the TSLF (BTW, it is the TSLF, NOT TAF that is accepting asset backed securties as collateral), and your are left with around six $50 billion bullets left in the "Fed gun" before the printing presses have to be fired up. I was not worried two weeks ago as non-borrowed reserves
There is a way to resolve this crisis, we are beginning to see it :-
NEW YORK (CNNMoney.com) -- Bear Stearns may have been deemed too big to fail. But ANB Financial, a small bank in Arkansas, wasn't. And we might need to brace for even more bank shutdowns.
ANB, a privately held bank based in Wal-Mart's home town of Bentonville with $2.1 billion in assets, was closed on Friday by the Office of the Comptroller of the Currency. The OCC is a division of the Treasury Department that regulates banks.
Betcha more to follow.
EBGuy,
Thanks for the clarification on TAF vs. TSLF.
Its a crock, its severely distorting the regulatory function of reserves...
Cry me a river.
uhhhhh...
how come no one ever asks where the Fed(FED,F.E.D,f.e.d) got such a nice big account?
Karl,
I (mostly) agree with your post, except that your list of problems aren't equivalent.
The first (withdrawal of deposits) can cause liability duration mismatches, but doesn't impair capital. The second (credit losses) and third (excessive operating expenses) do impair capital.
Selling down assets (eg. calling loans) fixes the first, but the second and third problems require that capital be raised.
All kds bets are going bad and the tribe is about to leave the reservation, so now he resorts to whining. People tried to tell him how it would go down, but he is so arrogant and f@cktarded that he shouted them all down.
Tenets of the faith:
Bond crash imminent. Get in line karl, everyone and his dog thinks this. The long bond yield is more likely to go to 0% than it is to go to double digits. They will monetize. Bilge that asshole.
Stock market crash. Bullcrap! The Dow is more likely to go to 20k than it is to go to 6K, like you hope for.
Go back to TF and dispense some more worthless advice and act like a petty tyrant, because that's what you are. Go lick your aching puts azholz.
ANB is part of the CMBS story. The FDIC got hit with 250M in losses to make good. Like the Alt-A story this one hasn't really begun to unfold yet.
With regard to the above discussion I loved the comment about the Fed making "horse noises." Had me laughing.
I still feel that all the Fed's "buying time" strategy has done is allow the bank's to fractionally double down with taxpayer money in the hope of getting out of this mess. Giving liquidity to the guys that got us into this mess is not the smart move.
Why is the fed publishing this chart?
If it was me I'd be stuffing it down the shredder and whipping up a new one in excel. Now it's all over the net and printed on Chinese made t-shirts, better hope one of the old guard doesn't see tiger lilly wearing one.
Bent Penny
The Fed published the chart because the "world" knows that it is too big to fail... and will ultimately be bailed out.
Moral of the story is If one is not too big to fail, better get ready to!
How many "Level 3" assets does the Fed currently possess, what is their total assumed value, and what is their composite mark to market value?
I'd really like to know the answer to that question.
Is there a mechanism for banning certain posters from posting comments? It would improve the environment around here lately. You all know who I'm referring to...
IF there was ever a time for an uber nerd post it is now. This thread is all over the place and 75% WRONG.
I second that, as I have no idea which 25% is correct.
I see it as a game of doubling down with the Fed/our money. If it works great. If it doesn't, the relative size of the crater in a systemic failure probably doesn't matter... dark I know but that's how I see it.
^^ Kind of like the Cold War Nuclear talk about " Bouncing Rubble "
"How many "Level 3" assets does the Fed currently possess, what is their total assumed value, and what is their composite mark to market value?"
None, the collateral needs to be rated AAA. I don't believe that anything AAA is considered Level 3 yet.
"The Non-Borrowed Reserve statistic is supposed to give everyone an idea of the banking system's solvency. The fact that banks need to borrow to meet their commitments is what is significant.
The quality and haircut on the collateral is of secondary significance."
OK, true, but if it is a liquidity issue - the collateral is worth every penny, but the banks just can't sell it this week because everyone is irrationally spooked - that is a very different story than if the banks are insolvent and this is a stop gap until we think of something else. The first is more like a run on a bank than like all your customers just went bankrupt.
I wonder if Lama could weigh in on this thread?
"Paging Mr. Lama, paging Mr. Lama."
Adding - And if it were the "irrational for a week" scenario, then why does the second chart look the way it does? Shouldn't it have been a big dip followed by receding back towards normal? It does at least seem to have bottomed out.
There are 3 types of lies :-
lies, damn lies and statistics.
"I see it as a game of doubling down with the Fed/our money"
Yes, but how is anyone supposed to have faith or confidence in our currency if our own government and central bank treat it like a joke?
BTW, Anon, I've appreciated your comments as they have been spot on (but really, get yourself a new handle!) And since we are tallying the Fed's balance , according to this (PDF Alert) the Fed Gold stock as reported in the H.4.1 is valued at get this $42.22 per fine troy ounce. So the current Fed hoard, at todays market price of ~$850/oz is worth:
$11.041 billion / $42.22 * $850 = $222.28 billion
Always nice to know something is there if the Treasuries run out.
FWIW, back around 2000 the Fed issued a whitepaper as there was some concern on how open market operations would be conducted as the US was running a surplus and the government was retiring Treasury debt. Ahhhh, those were the days.
Whoops, EBGuy posted the above.
"jus me writes:
IF there was ever a time for an uber nerd post it is now. This thread is all over the place and 75% WRONG.
I second that, as I have no idea which 25% is correct."
I agree there's a need for a uber-nerd post. The area is in my general professional expertise, but I will highlight out that I'm not an expert in the details.
There's two main argument threads (including previous discussions):
(1) The Fed is "printing money";
(2) The Fed is bailing out the banks by taking on garbage assets.
(1) The answer is simply that the Fed is not "printing"; operations are necessarily sterilized.
Why: The Fed targets the fed funds (onshore inter-bank rate on excess reserves). If the Fed buys anything unsterilized, they create reserves. Those excess reserves will depress the fed funds rate. They would immediately have to either (a) lower the target rate; or (b) do offsetting open market operations to drain the reserves they created. Thus, they have no ability to "print money"; they can only set the target rate too low.
In summary: NO PRINTING.
(2) The Fed may be making a mistake by taking on the credit risk and creating moral hazard. This turns into a political argument. However, I would note:
(a) The Fed's credit risk is de minimus. They will seize other assets from their counterparties to make themselves whole.
(b) The Fed is attempting to target LIBOR. Almost the entire fixed income OTC derivative complex uses LIBOR as an underlyer, then there's currency swaps as well as LIBOR-linked floating rate products. Look up the OCC report to see the size of those markets. Guess what? The equity market is a dwarf in comparison. The Authorities have an interest in not seeing the LIBOR complex decouple completely from the Fed's target rate.
FACT:
The fed can only run out of treasuries if it chooses to.
They can perform a permanent market operation at any time to buy more treasuries. The treasuries go onto their balance sheet as an asset, the check cashed by the treasury(or whoever they purchase the treasuries from) goes onto their balance sheet as a liability.
Opinion:
Ipodius is an elitist apologist that may understand many of the technicalities, but not the big picture.
Emma Anne -
Good question.
Past liquidity crises were all solved by temporary liquidity provisions...What gives this time around?
Solvency
The "illiquid" assets on bank balance sheets can be performing reasonably within model expectations NOW, but the market has priced in FUTURE impairment... With a performing asset it would thus appear to be a liquidity issue.
The Credit Suisse graph of mortgage resets suggests 2008 will be a tamer year for RMBS.
http://economist.mrwhipper.com/IMFresets.jpg
bond guy - thank you!
What about the notion that the Fed is "running out of balance sheet." Is that a realistic concern?
It is no longer significant whehter or not the fed is printing money. Bank reserves requirements are now essentially 0 due to swap accounts(this opinion comes from the federal reserve), what really matters is the VELOCITY of money.
If they fed is loaning treasuries to banks that would otherwise be technically insolvent, those banks must lend in order to create a profit(spread) on the borrowed treasuries. These loans increase the velocity of money via increased debt creation, worsening the general instability of the system, and leading to increased malinvestment.
This is nothing more than propping up of a rotten system, which will cause increased pain at some point in the future.
If you is reading these comments using Firefox, remember Greasemonkey is a friend.
"jus me writes:
bond guy - thank you!
What about the notion that the Fed is "running out of balance sheet." Is that a realistic concern?"
"Running out of balance sheet" only makes sense if it is translated to "no Treasurys left on the balance sheet" (i.e. - they could grow their balance if they need to so in order to get fed funds to hit their target).
The only thing they lose is the ability to run more TAF/TSLF operations - they would thus have no further ability to attempt to reduce the LIBOR/fed funds spread.
Since targetting LIBOR is technically not part of their job description, it could be viewed as a "nothingburger".
It may make outlook for markets scarier, given the size of the LIBOR derivative complex. But, the spreads are still only on the order of 100 bps, and I don't think the world would end even if they went to 200.
None, the collateral needs to be rated AAA. I don't believe that anything AAA is considered Level 3 yet.
Actually the Fed list linked above indicated that the Fed would accept some non-AAA as collateral.
It seems clear that the Fed has marked many securities higher than the free market, even after the Fed "haircut"; otherwise, why go to the Fed to swap for Treasuries? The difference between the market valuation and the Fed valuation is where the "printing" lies. Those institutions either loan to hedge funds or loan to their trading desks, the traders invest in the hot sector to turn a profit, and voila, $126/bbl oil and food riots around the globe.
Thanks
SweetHomeKilla -
You hit it on the nose. Dollars are collecting in fewer and fewer pockets as wealth holders don't consume enough to offset the debtor's demand for income to service/extinguish their debts.
There is credit saturation to the degree that the Fed is now lending to create an arbitrage on outstanding debts. This drives rates down artificially. Organic credit origination occurs when asset prices "bottom."
Are we there yet?
Just a quick note on AAA. Some securities are rated AAA due to the insurance wrapper. If MBI or ABK can't make good on all claims presented -- and do a BK -- then these securities would be far from AAA.
X-man, spot on.
New Guy, nice job.
"SweetHomeKilla writes:
It is no longer significant whehter or not the fed is printing money. Bank reserves requirements are now essentially 0 due to swap accounts(this opinion comes from the federal reserve), what really matters is the VELOCITY of money."
True, but irrelevent when discussing the impact of how the Fed deploys its balance sheet.
"If they fed is loaning treasuries to banks that would otherwise be technically insolvent, those banks must lend in order to create a profit(spread) on the borrowed treasuries. These loans increase the velocity of money via increased debt creation, worsening the general instability of the system, and leading to increased malinvestment."
This is wrong. The Fed is lending the banks Treasuries, in exchange for MBS (or whatever) so that the bank can then borrow against the Treasuries. The Fed is acting as an intermediary so that the banks can finance their existing balance sheets. The Fed, in the meantime, is pocketing a spread to act as an intermediary.
My back of the envelope calculations indicated that the Fed could earn $5 BN on these operations this year. Not bad.
"This is nothing more than propping up of a rotten system, which will cause increased pain at some point in the future."
Kind of late to worry about moral hazard.
"MarkS writes:
It seems clear that the Fed has marked many securities higher than the free market, even after the Fed "haircut"; otherwise, why go to the Fed to swap for Treasuries? The difference between the market valuation and the Fed valuation is where the "printing" lies"
The whole problem is that the banking system is having problems financing their balance sheets. If they could find the lenders who were willing to lend against those assets, they would borrow from them. But those lenders no longer exist, at least not at spreads anywhere near current levels.
BTW, it is the TSLF, NOT TAF that is accepting asset backed securties as collateral
According to the Fed's own web site TAF will take anything acceptable at the discount window, including ABS. TSLF & PDCF collateral are somewhat different.
If that's not the case, can you provide a link?
tj & the bear writes:
It's Japan the sequel. Instead of taking the losses here and now, the Fed's essentially extending them indefinite loans to carry them until either (a) the collateral is worth something on the open market -or- (b) the bank can absorb the losses without failing.
Given that the TAF keeps getting expanded it appears that the collateral's value is not improving nor are the bank's finances.
I'd agree with this analysis (as far as I can tell), with the addition that it's politically feasible (and indeed being encouraged) for the IB's to borrow even more money and make even more loans into the market, even though a fair-market valuation of their assets would show them as currently insolvent. In essence the Fed is serving as an off balance sheet vehicle for the IB's to continue leveraging their MBS's to make more risky loans, and try to cash out more before the system collapses.
In essence, the Fed is creating additional leveraged systemic risk by assuming the role of counter-party for whom no amount of risk is too large. Anything to try to keep the party going, I guess.
i.e., the Fed is SuperSIV 2.0.
The fed IS printing money when it allows the bank to set the value of collateral at it's own discretion......that is why they are going to the TAF instead of selling it on the open market.
If I say it's worth .95 then the Fed loans me that amount of cash based on the collateral I give them....at that value...when in reality it more likely worth MUCH less. Again if the value was really there do it openly.....
There is a big disconnect when the banks are allowed to set value and then claim everything is okey-dokey...
If it were ok then do it on the open market.
The difference (that we seem to have a big lack of understanding of) is the value of what the banks say it's worth and the actual value in relative terms.
That is why we will never see proof that the fed is printing money. It doesn't have to do it physically...it does it with the cash injections valued by the very people that shouldn't be allowed to do it at all.
It's really not very hard to see......if you want to see it.
Ciao
MS
MS -
It's not printing as long as their is a liability against the money exchanged. Eventually every party has to perform or the game stops.
According to the Fed's own web site TAF will take anything acceptable at the discount window, including ABS. TSLF & PDCF collateral are somewhat different.
to see what can be pledged. Hmmm, a 40% haircut is applied to Subprime Credit Card Receiveables.
tj & the bear,
Thanks for the correction. While the TSLF recently liberalized its requirements to allow asset backed securities (that's where my head was), you're right that advances under the TAF to a Participant will be
collateralized by the same pool of collateral as its borrowings from the discount window primary or seasonal credit programs.
Look at this (PDF)
their = there
Sorry about some of the spelling...my fingers try to keep up with what the brain is saying.
The fed can only run out of treasuries if it chooses to.
There are some practical constraints..
During a banking crisis everyone above the FDIC limits is trying to trade "bank cash" for Treasuries. A large player like the Federal Reserve may find that it simply can't find the amounts that it needs on the open market at any price.
The Federal Reserve also can't buy Treasuries that trade with a negative yield (meaning that buying them and holding them to maturity would leave you with less money than you started with.) Treasuries routinely traded with negative yields during the Great Depression (better to take a small loss than risk losing it all when the bank collapses).
Third, the Federal Reserve can't just go buying Treasuries willy-nilly without impacting interest rates.
That's why the Fed is lobbying Congress to allow them to pay interest on bank reserves. Doing so would allow them to un-couple buying and selling assets from interest rates.
I'm not sure I've figured out what the over-all impact would be but I'm pretty sure that the following would happen.
bond guy, nice comments.
However, using the term 'nothingburger' will quickly kill your credibility
The verboten phrase was a favorite of a popular-but-misguidedly optimistic poster who no longer entertains us here.
Look at this (PDF) to see what can be pledged. Hmmm, a 40% haircut is applied to Subprime Credit Card Receiveables.
The haircut for home equity loans is ... 11-15%.
Kicker -
Excellent commentary.
The end game of the Fed creating/financing an arbitrage against outstanding debt is a 0% EFF/FFT rate. The entire charade is an academic curiosity more than a solution to the problem.
The final destination does not change.
Wait a minute here. I think we've lost something here.
1) Open up your wallet
2) Take out a dollar (or a five, whatever you have)
3) Read the TOP CENTER IN BOLD
FEDERAL RESERVE NOTE
It does not say, "US DOLLAR", or "US GOVERNEMENT CURRENCY" or "BUREAU OF ENGRAVING AND PRINTING" it says FEDERAL RESERVE NOTE.
THE FEDERAL RESERVE ABSOLUTELY, POSITIVELY CONTROLS THE CURRENCY. They don't do the actual printing. That is done by Bureau of Engraving & Printing who state on their website that they "The BEP prints billions of Federal Reserve Notes for delivery to the Federal Reserve System each year (the BEP does not produce coins all coinage is minted by the United States Mint). "
So let's stop arguing about whether the Fed can start running the press. They can.
Now in the case of the TAF and other recent "innovations" they haven't not been handing our dollars in exchange for shit collateral, they've been handing out T-Bills which the banks can then sell or hold as securities on their balance sheets. So, they've been proping up balance sheets by hiding the shit assets the banks are holding (RMBS, CMBS, auto loans, credit card debt). JPM has seen the opportunity to help others hide their crap assets such as the deal where they swapped Target's credit card receivables. How long do you think it took JPM to package those up and tender them to the Fed in exchange for T-Bills.
So, in one sense the Fed hasn't directly pumped dollars into the money supply which is what some people here are saying. On the other hand they are definitely propping up banks by swapping their shit assets for T-Bills.
However, 'Bizarro World' is an increasingly apt euphemism to describe the current situation.
Anon,
Discount Window activity disclosure is VOLUNTARY (on the part of the borrower), the FED has never published the specific borrower(s), only the aggregate amounts (h41). The transparency (or lack thereof) has not changed between the DW and the TAF.
Section321
The Fed cannot "print" dollars without pledging collateral for the value of the notes they "issue." The process doesn't work like your HP Deskjet.
You are correct that the Fed has assumed credit risk with the TAF/TSLF though.
"bond guy, nice comments.
However, using the term 'nothingburger' will quickly kill your credibility
The verboten phrase was a favorite of a popular-but-misguidedly optimistic poster who no longer entertains us here."
Yup; I put it in quotes for that reason. I started lurking on this site at about the time that saying became popular...
"... and your are left with around six $50 billion bullets left in the "Fed gun" before the printing presses have to be fired up."
Well, will it be printing presses or more borrowing from the US taxpayer via the issuance of more treasuries?
What will this do to interest rates?
If SWF are run for the broader benefit of the country (say, China) as opposed to a more traditional understanding of "investment returns", might our foreign creditors be willing to recycle as much money as we need for as long as it suits them (in spite of a negative real return)?
If we just had a massive bubble that was created by irrationally low interest rates and now the fed is trying to "steralize" the "equilibrium" that got us the massive bubble in the first place, doesn't it follow that without the necessary credit destruction and contraction you can't achieve a market clearing equilibrium. Nod to th sytem is bankrupt and that is the cas, but what is the greater cost bailing out the complex directly financed over time or the slow bleed and uncorked inflation genie?
Another Optimist bites the Unexpectedly Uncontained Near-Bottom Nothingburger.
By Dr. Seuss.
We've been through as many phrases as we've been through optimists, over the last several years. Sniff...
"Tom writes:
If SWF are run for the broader benefit of the country (say, China) as opposed to a more traditional understanding of "investment returns", might our foreign creditors be willing to recycle as much money as we need for as long as it suits them (in spite of a negative real return)?"
As long as the Chinese peg the yuan to the dollar, they have to buy all the dollars offered to them at the pegged price. And given the size of the cash hoard, and the need for liquidity, there is no real alternative other than Treasuries (unless they want to buy some used CDO's).
If they don't want to keep buying Treasuries, they will have to let the yuan rip. That would certainly be destabilizing for the U.S. bond market, but the Chinese economy would be facing quite a shock as well, which probably explains why nothing has been done.
It was never clear to me what China's exit strategy was. Whatever it was, it doesn't look like it worked.
In Latin America, when a currency gets hard hit, they rename it or give it a first name: australs for argentinian peso, reais for brazilian cruzeiro, bolivares fuertes, etc etc.
Shall we propose a name for dollars, like New Dollar or Worthy Dollar or Foolproof Dollar??
"It does not say, "US DOLLAR", or "US GOVERNEMENT CURRENCY" or "BUREAU OF ENGRAVING AND PRINTING" it says FEDERAL RESERVE NOTE."
There's some poor sod in a forum who keeps railing at me about how I am hopeless because I just can't seem to grasp the difference between currency inflation and credit inflation.
The stupid fuck doesn't know what the word "note" means.
First let me say that this is the best thread on CR in quite a long time. We are back to focusing on the future rather than reiterating the obvious present. Some very good debate and discussion - I like "bond guy" and "anon" and appreciate their comments, along with all the rest.
Let me wade in and say that the yuan is not drastically undervalued to the dollar. Now that said, that doesn't mean that the dollar can't fall along way, but it could imply that both are overvalued significantly - along with most currencies. And so begins the rush for hard assets and the weapons/military complexes to protect them. I guess we are mean-reverting to the historical norm, though this mean reversion has the distinct possibility of being of the fat tail variety.
Whatever problems America has, you can rest assured most (not all, but most) countries have them too.
So perhaps the yuan is undervalued by 10-15% to the dollar, but perhaps they both have a long way down ahead. By default the yuan cannot be worth much more than the dollar becuase a) it's largely backed by dollars b) it's "middle class" is likey to take a beating without its best customer (USA) c) their military is MUCH smaller than ours (they have ONE aircraft carrier and only a couple hundred nukes) d)their natural resource estimates are smaller than ours e) they do not have the geographic and political harbor that we do.
CR,
I don't understand why you think this is false alarm. TAF is borrowing againt colateral.
This is like all otheer borrowing or are there borrowing that are different ?
What is interesting about the developments of this debt deflation episode vs. GD is that the cheap money is finding its way into commodities (oil mostly now) rather than stocks like 1929.
A parabolic stock rally boosts confidence and doesn't increase costs to the economy. However this paper wealth eventually dies in an equally exciting cliff dive to destroy the cheap money (October 1929). OTOH, parabolic oil destroys the money as the oil is forever gone once consumed. The downside is of course higher oil costs which resonate throughout the real economy.
I suspect this externality was not what the Fed had in mind and believe that the government will reach an agreement with nymex/ice on the margin requirements for long positions in the near future. This development would be functionally cash neutral to the spot market so they should embrace it...especially if it successfully brings down prices to August 16, 2007 levels.
After the oil speculation is dealt with the future cheap money will only have a few options to hide in:
Bonds, Precious Metals, Stocks
Bonds would be the first choice of the government with the most recent projection of $500+ billion in funding they will need to raise for 2008. The final number could end up a multiple of that if the politicians really get going though.
It will be important to watch what happens to these three asset classes when oil specs get their medicine.
The banking system has extreme problems. The unloaned reserves mean a lot because the banking system is actually that short of reserves in a real sense. This isn't money they have to lend, but money they have already let out of the bag. You might have heard Citi is talking of reducing their assets by $400 billion. The last financial statement of theirs I read said they owed $400 billion in fed funds. This is the amount of money they have loaned in excess of the amount of deposits they have to show for it. They owe other banks $400 billion and it appears they are going to attempt to rectify this. You can only do this by taking action to pull back in $400 billion.
I really believe the Fed is taking the risk of going broke here. I also believe that many of these funds are going to be liquidated and the Fed is going to restore itself at some point. Bernanke is up a tree with the dogs howling and hungry. How are they going to get this one back in the bag?
I'm a bank.
I start with paid-in capital (equity) of $1,000.
I can make $900 of loans; the other $10 is held back as reserves.
I thought they could loan $10,000 when starting with $1000, no? That 1000 is 10%.
Bjones -
You are almost correct in that Basel II targets an 8% reserve ration which implies 12.5x leverage. The other poster was completely misunderstood.
Bjones -
The 10% is against deposits, not loans. That is probably what threw you off.
it seems more likely, however, that the Fed has discovered that the barn door is wide open, and most of the horses gone, so it is clomping around inside making horse noises in the hopes that no one else notices while it shuts the door and prays it can round up some more horses in the meantime.
New Guy, that's an eloquent metaphor.
Anon-
Why do you say "the money is forever gone once the oil is consumed."? Credit can and always will be "destroyed" (sometimes peacefully sometimes violently), but not money. The former is always plentiful and the latter is always scarce. Whether you are referring to money or credit in the case of oil is not of consequence. The payment is sent to foreigners who then recycle it here because there are not other markets to send it to - they aren't deep enough. Now I realize some of the less liquid markets (commodities) are seeing inflows, but a sizeable portion still needs to be returned here. SO how is it "forever gone"???
(I enjoy your posts, thanks for contributing)
The fact that the Fed traded secure Treasuries for abolute garbage that is currently wholly unsaleable in the market (meaning has a value of $0) in the TAF and the primary dealer credit facility puts these items squarely in the borrowed reserves category.
If these items had any value, the banks and primary dealers would sell them. Instead they cannot sell them, so they just package them up and dump them on the Fed.
I wonder how much the Fed will give me for that drawer full of sock lint I have. It is unsaleable in the market, thus it MUST qualify for trade in at the Fed for treasuries. And you would have the Fed not categorize such sock lint in the borrowed reserves. This is an exaggerated example, but it belies how hollow your logic is.
mannfm11 :
what a delight to find you here -- i've been a many-years fan of yours on prubear. (And i've avoided registering and posting there, since 2000, because of all the daily hours it would have taken from me.)
Your clear explanations of things have tracked well with my brain's juggling all these multi-variate phenomena -- and games -- and I appreciate all you've gone through to make your points for many to read...
Gamma -
Sorry, it has been a busy day for me.
Good question and I should have been more specific. Yes, I do mean commercial bank money. Think of it as sterilizing the money growth (replacement) because the commodity itself is consumed. Whereas, when the money goes into a stock/bond it sits there as an asset never being consumed...the money comes out via sell-off.
Asset = Liability
Debit = Credit
It's an added bonus that it supports the treasury ponzi game via petrodollar recycling.
Well, it didn't take long for the dust to settle. It's a pity that Karl is so inarticulate, and that CR out-thinks him, out-writes him, and out-classes him so resoundingly.
No wonder Karl slinked over to his little Market-Ticker fiefdom and proclaimed in a sniveling Caligulaesque proclamation to his fawning followers that CR's is "another site to ignore."
Considering Thursday's 9th TSLF, is this article due for an update? I know I would apprecite your comments about how much bad paper is going on the Fed's balance sheet. My impression is none really as the Fed gives the bad paper a haircut and hold it for only a short time returning the paper to the banks/brokers. It appears it is all just a process to facilitate the writedowns and make the banks/brokers books look better for the short term. True?