Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet.
Is this really the right way to phrase this?
Is "sterlizing the expansion of the Fed's balance sheet" really equivalent to keeping the overnight rate above zero?
It is obvious how the SPF acted to "sterilize" the balance sheet expansion, by taking out just as much cash as was being injected. It is not at all obvious (to me, anyway) that paying interest on reserves accomplishes the same thing, even if it does keep the overnight rate from hitting zero.
"The Fed has done about as much as it can do," Kansas City Federal Reserve President Thomas Hoenig said in an interview on PBS's Nightly Business Report. Interest rates are already extremely low, he noted, according to a transcript of the program.
"We might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively," he added.
I went to Chili's this weekend and it was very, very crowded. This made me happy because I think Chili's is an excellent restaurant for a chain. Much better than Bennigans ever was.
Has Bush told Paulson and Bernanke, Enough intervention and heroic save efforts, guys. This intervention stuff is killing our credibility about free enterprise and less regulation, and it does not seem to be working, anyway. And, this intervention stuff is merely adding to the deficit, which is huge, now. Nice try, good effort, no more.
Thats my read of the two statements and what happened this afternoon.
If yes, the coast is clear for the market to fall, and soon.
Nemo,
IMO the Fed paying interest on reserves has the same effect as the Fed selling securities through open market operations. Selling securities through OMO parks the cash at the Fed, out of the money supply. The Fed pays interest on those securities. With the new system, the Fed just pays interest on the cash directly, and since the FFR is so low institutions park their cash at the Fed instead at other institutions.
CR,
I was thinking about another indicator. Call it the "Fed Reality Check." The difference twixt the official FFR and that actual overnight rate.
I am actually getting quite angry about this. The "Prime Rate" is supposedly 300 bps above a center weighted survey of 30 banks at the end of the month. That would have been 300 bps + 38 bps for a prime of 3.38%. Instead the WSJ tries to say the last business day of October that 30 banks reported that they were lending at EXACTLY the FFR target. This is a scandal at least as large as the LIBOR manipulation issue of several months back. What's your take?
Forgive me if this is a dumb question but is there any chance that the companies who borrowed money from the Fed wont be able to pay it back? (And their collateral is worth less right now?)
You know those changes we made last month that we altered last week that we said we'd never do a year ago, well scratch those. We got new changes now that are sure to please. However, I wouldn't base any major business decisions on them. They're liable to be a'changin again next week. Hope everything is clear to this point. I'll be sure and keep you informed when the new changes get hammered out over bong hits and valium....
When the Fed sells securities (or the Treasury does so on their behalf), they directly control the amount of cash they remove from the system. And I thought "sterilize", by definition, meant they take out precisely as much as they inject through other mechanisms...
Is it really true that paying interest on the reserves removes just as much cash as was added? (And if so, is this true for any rate of interest on the reserves, or only once the rate is set equal to the target, as it is now?)
Nemo, clearly the SPF sterilized the expansion of the Fed balance sheet. Now - by paying interest on reserves and thereby encouraging reserves - the Fed doesn't have to sterilize the reserves to expand the balance sheet (maybe the interest, but that is minor). At leas that is the way I understand it ... until someone corrects me!
Of course maybe the intent isn't to sterilize any more and to get a little more inflation in the system - that is possible - and I might be misunderstanding how this is all working (not exactly something I've spent too much time studying in the past!).
Collateral? Well the Fed and Treasury would have to show us what they took as collateral. If any charges are coming I suspect this will be the trigger.
Someone posted CNBC's breakdown of money lent out and it is North of 4 trillion. When all we are witnessing is deflation and deleveraging is it hard to realize half of that money isn't coming back?
mykillk - seriously doubt specifics like that were on the G20 agenda; no time and why take that to the table and implicitly recognize the authority of the forum to comment on a particular element of a rescue program? And the way policy has been, erm, evolving over the past month would suggest they probably decided to do it sometime between coffee and grapefruit this morning..
I'm a little confused. If banks have negative borrowed reserves, how does paying interest help? The Fed's interest rate is below the fed funds and discount rate levels (although I'm not sure how the effective rate factors into this). So, the question is, where are they going to get $559 billion from unless the fed is going to start dumping all of the collateral back to the banks when the loans maturity now... which would probably by a disaster.
The only other way I see this working is if the fed does a sh*tload of open market purchases and repos to expand Bank reserves. This would be hugely inflationary if viewed as permanent.
In fact, this makes sense to me. The whole point is to inflate things and expand the money supply which the SFP would not do.
The program, which peaked at $559 billion, effectively drained cash from the financial system,
Really? Wow, just 141 B less than the 700B bailout. And nobody debated this. And nobody 'saw' this. And the Fed is offsetting its impact by paying interest on reserves which are mostly borrowed.
Is Govt realizing that this problem is bigger then they are and that they are going to go down with the ship if they continue to bail out everyone? So now they are not asking for more TARP funds and are shrinking Fed balance sheet while that is still possible?
Could it be an indicator that a fundamentally different strategy is on the horizon, or that simply they are putting things on hold until Messiah gets sworn in?
Don't start coloring yet. The dollar isn't America or it's people. Stop believing in the Fed and start believing in ideals and community.
Volker-you have been a voice of reason regarding influencing your community and starting programs to keep order and provide food. A simple start to reinvigorating our country and instilling the freedoms afforded by the Constitution. A generation of hardship raising another great generation. Now is the time to believe.
Of course maybe the intent isn't to sterilize any more and to get a little more inflation in the system - that is possible - and I might be misunderstanding how this is all working (not exactly something I've spent too much time studying in the past!). - CR
This is what I've suspected all along. Above all, the fed wants to inflate asset values to save the banks, pensions, etc. In order to accomplish this goal, the fed has to push investors to accept more risk. A prerequisite to encouraging a move to risky assets is to devalue the dollar via inflation.
Greenspan steered people towards risk and the results were disastrous. Bernanke's attempts have been disastrous also. The concentration of wealth and lack of real income growth are the root problems, but get only lip service.
You would think Bernanke would realize you can't make people rich by devaluing their currency.
Bernanke has no constitutional authority to do what he is doing.
I find it much more persuasive to believe that the decisions to not use the last $350B (of the $700B authorized), and to rearrange the deck chairs between the Fed and Treasury are political rather than fiscal/monetary. The GM bailout plays into this as well.
The Cheneyesque moves seem to making this into Obama's Depression, not Bush's. Put the burden on the new Dem. congress to unwind the mess along with whatever new Treasury Secy is named.
Angry Save wrote "This is what I've suspected all along. Above all, the fed wants to inflate asset values to save the banks, pensions, etc. In order to accomplish this goal, the fed has to push investors to accept more risk. A prerequisite to encouraging a move to risky assets is to devalue the dollar via inflation." ------ I agree. Debt solution? http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996
It has been written elsewhere that paying interest on reserves is causing problems with financing letters of credit.
Could you explain how this cause-and-effect might function, or, if you don't properly understand it, provide some idea of how you think it might function if you did understand it?
Volker-you have been a voice of reason regarding influencing your community and starting programs to keep order and provide food. A simple start to reinvigorating our country and instilling the freedoms afforded by the Constitution. A generation of hardship raising another great generation. Now is the time to believe.
zoom | 11.17.08 - 7:13 p
Nemo,
I haven't researched this, but under OMO the Fed would determine how much cash it wanted out of the system and would sell securities based on that. With the new system, the Fed could theoretically limit the amount of reserves it is willing to take. It would seem that the Fed is accepting all reserves that any institution wants to deposit; and is incentivizing that with the interest payments. In order to sterilize the funds that were injected.
Now that seems nonsensical, but the key is this:
"rhhardin writes:
The point of the injection is not to inject cash but to take on systemic risk that the market can't deal with.
The money goes in a circle but the risk it carries stays with the Fed.
A risk filter, as it were, working in a circular money stream."
I think rhhardin is on the mark here; the Fed takes assets as collateral for its lending...the banks deposit that lending back with the Fed to earn some interest and the risk of those assets taken as collateral is the Fed's risk. Fed as SuperSIV...sitting on these assets until "fire sale" conditions go away or taxpayers eat the losses. Then we'd get inflation. It's a hairball.
JimPortland: I disagree. I think this is much too major a decision to be simply political. This seems exactly along the lines of something they would have decided at the G-20 meeting this weekend.
Don't nobody waver, this is Bush's and nobody else. He put us in the ditch of the century. Obama will be a fabulous president. We will be fine, not without service and unrewarded effort, but fine nonetheless.
In and of itself, suspension of the SFP is a positive sign. Things starting to equilibrate to the new normal again?
What they didn't say is that Treasury will be back to borrow in force in the longer-term maturities, in order to sustainably finance the huge spike in the national debt that they've engendered with the TARP and all the other policy flailings of the past 6 months.
Usual plug: Hop off the chatroom format and over to the ic4mg Forum! I don't mind running it solo (it helps me think through my investing) but more would be merrier...
I think rhhardin is on the mark here; the Fed takes assets as collateral for its lending...the banks deposit that lending back with the Fed to earn some interest and the risk of those assets taken as collateral is the Fed's risk. Fed as SuperSIV...sitting on these assets until "fire sale" conditions go away or taxpayers eat the losses. Then we'd get inflation. It's a hairball.
Zombie Kung Fu Panda | Homepage | 11.17.08 - 7:23 pm
In spades. Or else the Fed fails. Then everything we've talked about is moot, except the community garden thing.
Michael Hudson:
"What makes this dynamic unstable is that U.S. exports become even less competitive as higher housing costs and debt-service charges push up the cost of living and doing business. The more dollars foreign countries recycle, the less the U.S. economy will be able to work off its debts by exporting more. So the dynamic is guaranteed to be a losing game for foreign governments unless anyone can explain how the United States can generate the $4 trillion to repay its debt to the worlds central banks. To make matters worse, the dollars downward drift against the euro and sterling obliges foreign creditors to take a loss on their dollar holdings as denominated in their own currencies.
kNobody has found a market-oriented solution to this problem. That is what doomed the G-20 meetings this weekend to failure, just as there could be no agreement at the G7 meetings a few weeks ago. In the face of U.S. Treasury dreams of re-inflating the mortgage market, Europe is trying to draw the line at financing a losing proposition. But now that gold no longer is the means of settling balance-of-payments deficits, foreign central banks lack an alternative to the U.S. dollar to hold their monetary reserves. This leaves them with (1) U.S. Treasury securities, and (2) U.S. mortgage securities. Recent years have seen a further diversification via sovereign wealth funds into (3) direct ownership of mineral resources, industrial companies, privatized national infrastructure and other equity investment rather than debt. But rather than welcoming this, the U.S. Government seeks to limit foreign central banks to buying junk mortgages, junk bonds and other financial garbage. To call this market equilibrium is to indulge in the feel-good argot that fogs todays international financial dialogue."
What they didn't say is that Treasury will be back to borrow in force in the longer-term maturities, in order to sustainably finance the huge spike in the national debt that they've engendered with the TARP and all the other policy flailings of the past 6 months.
Usual plug: Hop off the chatroom format and over to the ic4mg Forum! I don't mind running it solo (it helps me think through my investing) but more would be merrier...
Comrade Wisdom Seeker | Homepage | 11.17.08 - 7:27
Quit plugging your site. Besides, the longer term securities are going unbought.
I'm not getting this, maybe someone can set me right.
(1) In its interbank operations, the Fed takes paper (hereinafter "the bubble-gum wrappers") and in exchange credits the bank's account with cash reserves. The Fed balance sheet expands, and on the other side this is called "addressing liquidity pressures".
(2) Special SPF notes are issued, and in exchange the Fed gets cash. This in effect reverses the process in (1). Cash reserves diminish. The idea is to cut down on cash reserves so that banks aren't so comfortable that they pay only zero interest to their peers for cash.
Paying interest on cash reserves is another, completely different and artificial, way of keeping interest rates from going to zero.
Obviously, what I'm missing is at least two points. If the intent is to not make the banks so comfortable that they won't pay anything for cash, then why not have simply curtailed the operations in (#1) above. Unless, of course, the operations in (#1) were in large part for the purpose of taking bad paper off the hands of the banks, more than more than for any supposed monetary hydrodynamics. In which case, this whole story would be a case of mixing up two types of story: (a) bailout operations for specific institutions; and (b) supposed macro-monetary tinkering. Am I on the right track? (In which case there must be a better way of explaining the process...)
On the edge writes:
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
On the edge writes:
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
Slightly more complex than that but yes pure play politics. Recall that Barney was the squeaky wheel for insisting on the two step funding. Now that the first $350b is worse than wasted the Republicans are using the opportunity to get the Democrats to take the "responsibility" for the second and subsequent funding increments.
Badger: remember leeches? that used to be the way doctors treated maladies, that and bleeding (to rid the body of ill humours). Ill humours, hah!
Buy heritage seeds, get to know your neighbors, stock up on canned goods and ammo. And before the shooting gets out of hand, try to get the morons at city hall to do something constructive.
Increasing numbers of Chinese merchants are saying they have no access to dollar credit, especially in dry goods.
If true, that's amazing. Another possibility is that they're lying. With prices on commodities falling, and their own customers failing to pay, they may be trying to reneg on contracts.
If true, that's amazing. Another possibility is that they're lying. With prices on commodities falling, and their own customers failing to pay, they may be trying to reneg on contracts.
mp | 11.17.08 - 7:36 pm | #
Remember the post where a scrap metal dealer was turned away at the ports in China? Renege on contracts? It's a way of life.
Someone mentioned watching the suppliers for the telltale on the automotive industry. Since GM is making their dealerships wait for their incentive payments; what are the odds suppliers are getting stiffed?
I think the same would also apply for the computer industry. Can they survive Intel cutting 20%?
they may be trying to reneg on contracts.
mp | 11.17.08 - 7:36 pm | #
HA - China already stuck it to some Australian coal companies!
This stuff is already being played. But, China risks that suppliers will return. Maybe not unless contracts are paid in full upon signing and not upon deliveries.
I've just been informed on another site that the economy is not doing all that bad and the liberals are making this all up? Have you guys been lying to me all along?
Only a few years ago, global trade had developed to the point where less than 20% of total dollar volume was handled on letters of credit. It was being invoiced.
Conjure predicts that letters of credit will come back with a vengeance. Problem is, who in the global banking industry is going to want the business?
zoom writes:
"Don't start coloring yet. The dollar isn't America or it's people. Stop believing in the Fed and start believing in ideals and community."
Thinking like that these days ensures you get eaten first. This ain't the 30's, 40's, 50's, or even the 80's.
Show me an altruistic community organizer in front of a bunch of 30 year old amoral ex-business people with little kids who are hungry, and I will show you a community organizer on the ground, lying in their own fluids, stripped naked for their "dead by natural causes" leather hiking boots, everything stolen and his yurt burned down for good measure.
Jas is right about this (can't believe I said this), culture has exacerbated the "get yours" mentality to an exponential extreme. Whats that quote?
oh yea,
"those who beat their swords into plowshares will be ruled by those who don't"
mp writes:
The bottom line is that there's a major credit crunch going on in China, and I'm not optimistic about the government's ability to deal with it.
As I said the other day, it's time to consider the possibility of a Chinese implosion, which no one has been talking about.
mp | 11.17.08 - 7:39 pm
Forgive me as I work through this problem aloud.
Possibility 1:
It is a negotiation ploy to renege on contracts that they find undesirable.
Possibility 2:
China's banks are so bogged down with debt that they are uncomfortable or unwilling to provides LoC or credit to the Chinese merchant class? Even the PBoC is having problems pushing USDs through their system--or even trying?
As for (1), it could be happening, and after I read about that UK national who was working in the scrap metal industry was held for ransom, how else could you easily break off business relations? Also, could (1) also be a sign of business desperation to save themselves?
As for (2), is that the one where there is internal strife, revolts, and a sign of no more China->Fed loving?
On the edge writes:
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
Slightly more complex than that but yes pure play politics...
I disagree Rob. The entire nation knows and for the most part supports an Obama stimulus package that will be coming next Jan. or Feb. That entire $700B was considered spent. Attempting to link half of the TARP money and the problems therein to Obama is too far of a stretch.
@Volker "Quit plugging your site. Besides, the longer term securities are going unbought."
Okay, no more plugging.
And yes, that was my point. Reducing supply in the short end of the Treasury curve might help to improve demand in the long end (how steep can the curve get?). Or it might not. But the federal debts have to be serviced -- how's the Treasury going to be repaying the SFP borrowings that are maturing? The long end is where the thorny problems lie.
Yes since they gave all the money to banks, it was very important to take some away from people to balance it. Otherwise those people might not need to borrow from the banks.
Looks like Obama is dropping the hammer and making them cut out the bullsh*t. I'm liking this. It doesn't fix what they did, but it stops the damage from increasing faster.
With the SFP we had a mechanism that by design takes money out of the system to compensate (sterilize) the money the Fed is pumping in. Now they have replaced the SFP with nothing, but are claiming that the Fed paying interest on deposits accomplishes the same goal? Something does not seem right with this arrangement. . .
Jas is right about this (can't believe I said this), culture has exacerbated the "get yours" mentality to an exponential extreme.
Now you've reached where I've been for some time. The problem is building a common center. It manifests in different ways but in the end, the problem is that along the axis of "common vs diverse", we've shifted too far to the "diverse" side.
We've overshot the reason for diversity which is marginal economic gain. Diversity is now a rising expense, not a profit center.
Build a common center.
Schramm + theory of biodiversity tells you all of this.
mykillk writes:
JimPortland: I disagree. I think this is much too major a decision to be simply political. This seems exactly along the lines of something they would have decided at the G-20 meeting this weekend.
mykillk | Homepage | 11.17.08 - 7:24 pm | #
Dude this is all about cars and perception.
Bush is leveraging the urgency of the situation to force Pelosi to utilize the funds from the 25B in loans they already have vs. TARP.
I have been told anecdotally that China has placed strict limits on dollar
yuan exchange for individuals at $5k/day. You would have to trust an awful lot of relatives to do meaningful exchange
Also those with frequent trips out of China may be completely blocked.
Seems that they are trying to tightly control their dollar holdings
Blaming others for our poor judgment seems to be part of our nation character. A second method is to expand their cunning to mythic proportions as with Russia China and AQ.
China all along has tried to tell us that they are very much a third world economy. And that its currency was not industrial strength. I think that is probably truer then the we would like to believe
Yahoo has hired Heidrick & Struggles, the well-known executive search firm, to evaluate candidates, both internally and externally."
Zombie Kung Fu Panda | Homepage | 11.17.08 - 8:01 pm
Long time coming. Once again, a great company surrenders their authority to those who know nothing about them, their culture or their needs. How could it be that a bunch of empty suits could possibly select a replacement? Bullshit.
Does anyone have a guestimate of the peak to trough contraction of the economy? I think Roubini said 5% the other day on CNBC. Today, the Shrill One has a post up that made me think about the issue again. After the stimulus - Paul Krugman Blog - NYTimes.com
mp - plenty of people are looking at the trade fracture story, here, at Yves' outfit, and so on. The basic point is that the med/long factor input story is collapsing, and it's not just related to credit or trust, but to tanking final demand.
London Banker did a good piece over the weekend about it.
Volker - excellent point on bonds, the short terms are in demand, but the long bond is being given the poison apple treatment.
I don't know how old you are but I am mid 30's. I wouldn't trust ANYBODY 18-50 that I know, much less ones I don't, save a couple, if it was my bag of rice vs. their bag of rice.
We have bred this I think, not 100% by greed and corporate warfare, but mostly by our relative complacent excess. Change the paradigm too fast, and the only ones left standing are the ones that react quickly and brutally. Think fight vs. flight responders.
Carlos Gonzalez of Natl. Geographic wrote an awesome book on this, and our reactions to stress and danger is quite physiological. Physiologically speaking, some are in fact more equal than others.
90% of people my age are not compelled to the idea of community, and in fact, barely to the idea of family. A guy who won't take care of Mom, what do you think he will do TO you, much less for you.
150,000 years as animals, a few thousand in relative civilization, a few decades of relative equality and social stability/comfort, and the granola munchers on the fringe get all kumbaya and "Obama will save us", thinking we have "evolved".
Completely ignoring the lessons of instinct and human experience, at their peril.
FYI to many, you are still an animal. You look and interact in the world like an animal, and have the gift of a compartmentalized memory and advanced tool use with all that allows. Yet with all the technology, when pressed you will react to your instinct, like an animal.
I heard an amazing thing today on Bloomie while tooling down the highway. According to a guy from the Cato Institute, China's consumption problems - and by extension America's capitalism - could be fixed if only China's leadership would provide for more socialism-style safety nets.
This insight was offered without the slightest hint of irony.
"Put more money in the hands of the desperate poor and they will spend it."
Give these people a fish and it will feed them for a day of course if you give it to a banker or car company it will do about the same thing so it looks like none of the dumb bastards want to learn how to fish so screw'em.
We have bred this I think, not 100% by greed and corporate warfare, but mostly by our relative complacent excess.
It's a sine wave function.
The key question is
"why do we have common traits?"
"why do we have differences?"
We're currently too far along the diversity axis. This manifests itself in terms of things like the national debt and contention over resources, deceit.
You can patch the current System but ultimately, the "common vs diverse" imbalance will express itself again in some manner.
Just like the debt saturation limit keeps re-expressing itself every time Bernanke patches something.
It's "capitalism vs communism", if you want to see it that way. But I like the more abstract model because I think it gives you a better understanding of alternatives and design issues.
This lack of community, I got mine, it sucks to be you, attitude is what happens when you combine the 60s generation of entitlements with the drugged out 70s and then throw in the greed is good 80s and then 25 years of debt expansion the likes of which have never been seen, let alone tested.
What did we think was going to happen.
Screw you and the horse you rode in on is what happened.
We had it too good for too long and now that the song is over, people are scared, armed to the teeth, and will do something about it.
I don't think it will be Mad Max everywhere, but in cities like LA, well, I don't need to say anything more when the CCs are declined and kids are starving.
OUCH!
While I don't support this unmitigated greed, I am concerned because we don't have the coping mechanisms in place to deal with a major economic collapse.
If we hit 10-12% unemployment in real goobermint numbers, which would double what the goobs say now, what do you think will happen?
Our story may end well some day, but the next 5 chapters are going to be a doozy!
Wow, someone more morbid, or realistic, than me. Some areas I agree. Others no. I don't see total anarchy, but I do see a lot of no go zones.
nova: Small Indian Ponys | 11.17.08 - 8:24 pm |
Anarchy, no. Not long term any way. Warlordism and feudalism would take about three weeks to really set in, and then there would be relative order. The principles of political power closely match physics, IE air rushing into a vacuum.
Played out time and time again throughout history, ancient and recent.
Make it three weeks, and just figure out who the new boss is. Hope he likes you.
I realize that TPTB have their getaways prepared, but they still like the power and control trip and let's face it, Duhmerika is still a great place to live in many regards.
Bush isn't quite ready to leave to Paraguay, just yet. Nice place to go when TSHTF, but not yet for him. He probably still likes his Cowboys and some some college football. None of that except by TV and the Web south of the border.
Anyway, back to the topic.
This is what freaks the powers out. When it gos caput, things will spiral outta control very quickly.
And don't think for a moment a 2-front military will come home fast enough to stop the other 297 million of us from degernating into barbarians.
No, I really can only do a scenario for the area I live in. I do scenarios for recession, depression, terrorist attack, weather damage, moderate social breakdown
Then I figure the logistics, money, long term budget etc...
People will exhibit plenty of control over themselves, the control will be 7.5 pounds of squeeze on a 7 pound trigger.
In all seriousness, these issues self regulate. Humans aren't natural killers, actually no species truly is. Read Grossmans book, "On Killing". Fascinating.
But societal shifts tend to unmask what order previously had hidden. Thats all I am saying. That and 30 YO men are dou**e bags sometimes.
To all the Mad Max gloomers: I think you underestimate your fellow countrymen (or is it countrypersons nowdays?). They may seem like a bunch of selfish bastards today, but I think most would raise to the occasion given the opportunity.
There are enough people among us - perhaps you or the guy down the street - with innate leadership abilities who would try to bring people together. I could only imagine violence in inner cities, and only if collapse comes too quickly.
OT: I'm surprised at the SEC on this Cuban thing. Mark Cuban strikes me as the kind of guy who has been begging for a public forum to expose Wall Street for years.
I realize he has written about it before, but, giving him a stage like this just encourages him even more.
Could he become a folk hero? They always pop up at times like these.
I just went through all the SFP announcements and checked their maturity dates...the SFP still has $510 billion + Interest in obligations...These are short term loans that will all mature between 11/20 and 1/29/09...where will the money come from?
Perhaps we won't even "print" here, that is, pump unsterilized money into our own economy We'll send the fresh bills to China via our minority holdings in their banks?
C C - ever been shot at? Had someone knock you down and put a knife to your throat? Try to beat the living crap out of you? Tried to buy milk at Giant when snow was forecast?
Ohhhh.. Yeahhhh! Here comes the printing. Can you hear that? That the sound of printing machines creating sweet sweet inflation. Music to my ears. Forget deflation. Buy stocks and wait for the inevitable inflation-driven market rally! Don't get stuck in fixed income like suckers.
"Ohhhh.. Yeahhhh! Here comes the printing. Can you hear that? That the sound of printing machines creating sweet sweet inflation. Music to my ears. Forget deflation. Buy stocks and wait for the inevitable inflation-driven market rally! Don't get stuck in fixed income like suckers."
Ask Peter Schiffs investors how the inflation trade has worked so far.
Am I wrong if I see some kind of loop effect developing here? So, the Fed becomes lender of last resort, and then 1) Fed balance sheet swells 2) Treasury begins SFP program to finance Fed's lending 3) Treasury debt builds up ($560 Billion); Treasury is forced to halt SFP lending 4) Treasury withdraws SFP deposits to repay short term offerings 5) Start over a few weeks later
Pissed in California. You are thinking way too short term. Everybody will be worried about deflation for the next 6 months while inflation driven investments are going to be getting cheaper and more and more alluring. In 6 months it will be hard to deny that deflation is under control and then the inflation trades will blossom into a beautiful flower.
Is this how it works?
Bank needs to maintain capital reserve.
Bank trades bad paper for good dollars from FED.
Bank deposits good dollars with FED and gets paid interst equal or greater to the loan rate on the dollars.
Credit is monetized because value of bad paper is kept at model value.
What breaks this cycle?
"Humans aren't natural killers, actually no species truly is."
My FIL was trained to be a snipper in WWII. He said that being the government had trained him to kill in the army they should let him kill one person a year. He's dead now but you get the point.
Flying Hawaiian: I think it has less to do with banks needing to meet their reserve requirements and more with banks hoarding their cash in interest-bearing reserves at the Fed. I bet they pay more interest than anything else right now. . .
When I first heard about the issue of the Federal Reserve being able to pay interest on reserves deposited there, I couldn't figure out what that meant. I'm still struggling with the implications, but I think I understand what the Fed is trying to do.
The key is to think about how credit is created in our financial system. When you deposit $100 at a bank, it keeps a fraction of this, say $10, in reserve and loans out the rest, say $90. Eventually this money (possibly after changing hands a number of times) is deposited into a bank again. The bank keeps $9 in reserves and loans out $81. This continues on and the result is that from $100, tons of credit (e.g. people's bank deposits) is created.
When the Fed didn't pay any interest, banks worked very hard to minimize the amount of reserves they deposited at the Fed. This made it hard for the Fed to participate directly in the credit creation loop. By paying interest, the Federal Reserve is making it much more likely (especially in scary financial times) that banks will keep their reserves on deposit at the Fed. Now the Fed will keep a fraction of these reserves on deposit and lend out the rest. The money that the Fed lends out is now much more likely to end up back on deposit again at the Fed, whereupon the Fed will keep a fraction and lend out the rest again.
The summary is that the banks are not creating credit right now because they are deleveraging. Paying interest allows the Federal Reserve to create credit on its own.
I don't understand all the implications of this, but it seems like a pretty fundamental change to me.
Running out of ammo?
Never try and teach a pig to sing.
It wastes your time and annoys the pig.
(((bong)))
Bottom?
I wonder if this is related to the 13-week T-Bill doing that thing again.
Decreased supply -> higher prices -> lower rates
Why do I keep thinking about Willie Sutton?
Hey CR --
Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet.
Is this really the right way to phrase this?
Is "sterlizing the expansion of the Fed's balance sheet" really equivalent to keeping the overnight rate above zero?
It is obvious how the SPF acted to "sterilize" the balance sheet expansion, by taking out just as much cash as was being injected. It is not at all obvious (to me, anyway) that paying interest on reserves accomplishes the same thing, even if it does keep the overnight rate from hitting zero.
Related: Fed is starting to capitulate
"The Fed has done about as much as it can do," Kansas City Federal Reserve President Thomas Hoenig said in an interview on PBS's Nightly Business Report. Interest rates are already extremely low, he noted, according to a transcript of the program.
"We might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively," he added.
- NY Times
The great unwinding of America...
I went to Chili's this weekend and it was very, very crowded. This made me happy because I think Chili's is an excellent restaurant for a chain. Much better than Bennigans ever was.
I think the stock market may be free to fall, now.
Member of Federal Reserve says Fed has done all it can:
Fed `Has Done About as Much as It Can,' Hoenig Says (Update1) - Bloomberg.com
Bush said he will not tap remaining $350B.
When, in the afternoon, word came out that Bush would not tap remaining $350B, PPT stopped pulling market up via futures:
Quote.com U.S. Markets - Futures Quotes and Charts - Chart for ES Z8
Has Bush told Paulson and Bernanke, Enough intervention and heroic save efforts, guys. This intervention stuff is killing our credibility about free enterprise and less regulation, and it does not seem to be working, anyway. And, this intervention stuff is merely adding to the deficit, which is huge, now. Nice try, good effort, no more.
Thats my read of the two statements and what happened this afternoon.
If yes, the coast is clear for the market to fall, and soon.
Well see tomorrow.
Nemo,
IMO the Fed paying interest on reserves has the same effect as the Fed selling securities through open market operations. Selling securities through OMO parks the cash at the Fed, out of the money supply. The Fed pays interest on those securities. With the new system, the Fed just pays interest on the cash directly, and since the FFR is so low institutions park their cash at the Fed instead at other institutions.
CR,
I was thinking about another indicator. Call it the "Fed Reality Check." The difference twixt the official FFR and that actual overnight rate.
I am actually getting quite angry about this. The "Prime Rate" is supposedly 300 bps above a center weighted survey of 30 banks at the end of the month. That would have been 300 bps + 38 bps for a prime of 3.38%. Instead the WSJ tries to say the last business day of October that 30 banks reported that they were lending at EXACTLY the FFR target. This is a scandal at least as large as the LIBOR manipulation issue of several months back. What's your take?
We must put money straight into the system.
Enough of this theoretical garbage about sterilizing- just friggin print and expand the monetary base.
All of that credit from 40x that the investment banks invented has to be recreated at lightspeed, or our markets will continue to fall...
Further, we should be doing some simple stuff like increasing disability payments to everyone to make up for the inflation of the last two decades.
Put more money in the hands of the desperate poor and they will spend it.
Instant stimulus.
Someday this war's gonna end...
Forgive me if this is a dumb question but is there any chance that the companies who borrowed money from the Fed wont be able to pay it back? (And their collateral is worth less right now?)
TIA
.....
You know those changes we made last month that we altered last week that we said we'd never do a year ago, well scratch those. We got new changes now that are sure to please. However, I wouldn't base any major business decisions on them. They're liable to be a'changin again next week. Hope everything is clear to this point. I'll be sure and keep you informed when the new changes get hammered out over bong hits and valium....
toodles
Zombie Kung Fu Panda --
Thanks. But...
When the Fed sells securities (or the Treasury does so on their behalf), they directly control the amount of cash they remove from the system. And I thought "sterilize", by definition, meant they take out precisely as much as they inject through other mechanisms...
Is it really true that paying interest on the reserves removes just as much cash as was added? (And if so, is this true for any rate of interest on the reserves, or only once the rate is set equal to the target, as it is now?)
Paulson just his performance a "10" (on Blommberg)...
Uh
Uh
Uh
UH
10
ades,
your right, that is a dumb question.
Nemo, clearly the SPF sterilized the expansion of the Fed balance sheet. Now - by paying interest on reserves and thereby encouraging reserves - the Fed doesn't have to sterilize the reserves to expand the balance sheet (maybe the interest, but that is minor). At leas that is the way I understand it ... until someone corrects me!
Of course maybe the intent isn't to sterilize any more and to get a little more inflation in the system - that is possible - and I might be misunderstanding how this is all working (not exactly something I've spent too much time studying in the past!).
Best Wishes.
I wonder if leaving the 2nd $350B on the table and winding down the SFP were on the agenda for the G-20 meeting?
Money from nothing,
and chicks for free.
Don't pay if all the sick S&Ls are acquired. LOL
The point of the injection is not to inject cash but to take on systemic risk that the market can't deal with.
The money goes in a circle but the risk it carries stays with the Fed.
A risk filter, as it were, working in a circular money stream.
Collateral? Well the Fed and Treasury would have to show us what they took as collateral. If any charges are coming I suspect this will be the trigger.
Someone posted CNBC's breakdown of money lent out and it is North of 4 trillion. When all we are witnessing is deflation and deleveraging is it hard to realize half of that money isn't coming back?
Why we should not bail out the big 3 Error 404: File not found
I have no idea what any of this means. But I don't like it.
mykillk - seriously doubt specifics like that were on the G20 agenda; no time and why take that to the table and implicitly recognize the authority of the forum to comment on a particular element of a rescue program? And the way policy has been, erm, evolving over the past month would suggest they probably decided to do it sometime between coffee and grapefruit this morning..
CC
I'm a little confused. If banks have negative borrowed reserves, how does paying interest help? The Fed's interest rate is below the fed funds and discount rate levels (although I'm not sure how the effective rate factors into this). So, the question is, where are they going to get $559 billion from unless the fed is going to start dumping all of the collateral back to the banks when the loans maturity now... which would probably by a disaster.
The only other way I see this working is if the fed does a sh*tload of open market purchases and repos to expand Bank reserves. This would be hugely inflationary if viewed as permanent.
In fact, this makes sense to me. The whole point is to inflate things and expand the money supply which the SFP would not do.
that's negative nonborrowed reserves
Summers: Need fiscal stimulus that lasts 2-3 years
Layer Liz,
I need your professional services, could you please send me an email?
bob_in_ma@yahoo.com
Thanks!
The program, which peaked at $559 billion, effectively drained cash from the financial system,
Really? Wow, just 141 B less than the 700B bailout. And nobody debated this. And nobody 'saw' this. And the Fed is offsetting its impact by paying interest on reserves which are mostly borrowed.
Color us gone folk.
The only other way I see this working is if the fed does a sh*tload of open market purchases..
I read the Fed will soon buy a boatload of 20 yr treasurys
Lawyer Liz, sorry about that typo. I have a brother-in-law in mortgage trouble.
Thanks.
bob_in_ma@yahoo.com
Random speculation:
Is Govt realizing that this problem is bigger then they are and that they are going to go down with the ship if they continue to bail out everyone? So now they are not asking for more TARP funds and are shrinking Fed balance sheet while that is still possible?
Could it be an indicator that a fundamentally different strategy is on the horizon, or that simply they are putting things on hold until Messiah gets sworn in?
Rubin: Crisis of confidence won't last much longer
and also ..
we believe in a strong dollar policy.
unwinding the facility means the FEd is about to start regurgitating the opaque paper they do not want to disclose?
getting out in Front of the Bloomberg situation?
Is this the Christmas pump getting started?
Ron Paul supporters - make sure you see the Video of the Day on the right side bar (scroll down a little)
Best to all
Don't start coloring yet. The dollar isn't America or it's people. Stop believing in the Fed and start believing in ideals and community.
Volker-you have been a voice of reason regarding influencing your community and starting programs to keep order and provide food. A simple start to reinvigorating our country and instilling the freedoms afforded by the Constitution. A generation of hardship raising another great generation. Now is the time to believe.
It has been written elsewhere that paying interest on reserves is causing problems with financing letters of credit.
Law of unintended consequences?
CalculatedRisk,
US National Money Hole for a future video of the day
Of course maybe the intent isn't to sterilize any more and to get a little more inflation in the system - that is possible - and I might be misunderstanding how this is all working (not exactly something I've spent too much time studying in the past!). - CR
This is what I've suspected all along. Above all, the fed wants to inflate asset values to save the banks, pensions, etc. In order to accomplish this goal, the fed has to push investors to accept more risk. A prerequisite to encouraging a move to risky assets is to devalue the dollar via inflation.
Greenspan steered people towards risk and the results were disastrous. Bernanke's attempts have been disastrous also. The concentration of wealth and lack of real income growth are the root problems, but get only lip service.
You would think Bernanke would realize you can't make people rich by devaluing their currency.
Bernanke has no constitutional authority to do what he is doing.
America's new National Anthem:
YouTube -
I find it much more persuasive to believe that the decisions to not use the last $350B (of the $700B authorized), and to rearrange the deck chairs between the Fed and Treasury are political rather than fiscal/monetary. The GM bailout plays into this as well.
The Cheneyesque moves seem to making this into Obama's Depression, not Bush's. Put the burden on the new Dem. congress to unwind the mess along with whatever new Treasury Secy is named.
Angry Save wrote "This is what I've suspected all along. Above all, the fed wants to inflate asset values to save the banks, pensions, etc. In order to accomplish this goal, the fed has to push investors to accept more risk. A prerequisite to encouraging a move to risky assets is to devalue the dollar via inflation." ------ I agree. Debt solution? http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996
It has been written elsewhere that paying interest on reserves is causing problems with financing letters of credit.
Could you explain how this cause-and-effect might function, or, if you don't properly understand it, provide some idea of how you think it might function if you did understand it?
Volker-you have been a voice of reason regarding influencing your community and starting programs to keep order and provide food. A simple start to reinvigorating our country and instilling the freedoms afforded by the Constitution. A generation of hardship raising another great generation. Now is the time to believe.
zoom | 11.17.08 - 7:13 p
Thank you. I'm all better now.
Nemo,
I haven't researched this, but under OMO the Fed would determine how much cash it wanted out of the system and would sell securities based on that. With the new system, the Fed could theoretically limit the amount of reserves it is willing to take. It would seem that the Fed is accepting all reserves that any institution wants to deposit; and is incentivizing that with the interest payments. In order to sterilize the funds that were injected.
Now that seems nonsensical, but the key is this:
"rhhardin writes:
The point of the injection is not to inject cash but to take on systemic risk that the market can't deal with.
The money goes in a circle but the risk it carries stays with the Fed.
A risk filter, as it were, working in a circular money stream."
I think rhhardin is on the mark here; the Fed takes assets as collateral for its lending...the banks deposit that lending back with the Fed to earn some interest and the risk of those assets taken as collateral is the Fed's risk. Fed as SuperSIV...sitting on these assets until "fire sale" conditions go away or taxpayers eat the losses. Then we'd get inflation. It's a hairball.
JimPortland: I disagree. I think this is much too major a decision to be simply political. This seems exactly along the lines of something they would have decided at the G-20 meeting this weekend.
CR
Great video. That song is going to be stuck in my head for a month.
"Could you explain how this cause-and-effect might function..."
Not sure, but people are talking and writing about it. I supposed it's just another way of saying banks aren't lending.
Conjure's information vacuum is picking up all kinds of anecdotal reports.
In a related matter, China's dollar liquidity seems to have dried up, which is amazing.
Don't nobody waver, this is Bush's and nobody else. He put us in the ditch of the century. Obama will be a fabulous president. We will be fine, not without service and unrewarded effort, but fine nonetheless.
In and of itself, suspension of the SFP is a positive sign. Things starting to equilibrate to the new normal again?
What they didn't say is that Treasury will be back to borrow in force in the longer-term maturities, in order to sustainably finance the huge spike in the national debt that they've engendered with the TARP and all the other policy flailings of the past 6 months.
Usual plug: Hop off the chatroom format and over to the ic4mg Forum! I don't mind running it solo (it helps me think through my investing) but more would be merrier...
I think rhhardin is on the mark here; the Fed takes assets as collateral for its lending...the banks deposit that lending back with the Fed to earn some interest and the risk of those assets taken as collateral is the Fed's risk. Fed as SuperSIV...sitting on these assets until "fire sale" conditions go away or taxpayers eat the losses. Then we'd get inflation. It's a hairball.
Zombie Kung Fu Panda | Homepage | 11.17.08 - 7:23 pm
In spades. Or else the Fed fails. Then everything we've talked about is moot, except the community garden thing.
Michael Hudson:
"What makes this dynamic unstable is that U.S. exports become even less competitive as higher housing costs and debt-service charges push up the cost of living and doing business. The more dollars foreign countries recycle, the less the U.S. economy will be able to work off its debts by exporting more. So the dynamic is guaranteed to be a losing game for foreign governments unless anyone can explain how the United States can generate the $4 trillion to repay its debt to the worlds central banks. To make matters worse, the dollars downward drift against the euro and sterling obliges foreign creditors to take a loss on their dollar holdings as denominated in their own currencies.
kNobody has found a market-oriented solution to this problem. That is what doomed the G-20 meetings this weekend to failure, just as there could be no agreement at the G7 meetings a few weeks ago. In the face of U.S. Treasury dreams of re-inflating the mortgage market, Europe is trying to draw the line at financing a losing proposition. But now that gold no longer is the means of settling balance-of-payments deficits, foreign central banks lack an alternative to the U.S. dollar to hold their monetary reserves. This leaves them with (1) U.S. Treasury securities, and (2) U.S. mortgage securities. Recent years have seen a further diversification via sovereign wealth funds into (3) direct ownership of mineral resources, industrial companies, privatized national infrastructure and other equity investment rather than debt. But rather than welcoming this, the U.S. Government seeks to limit foreign central banks to buying junk mortgages, junk bonds and other financial garbage. To call this market equilibrium is to indulge in the feel-good argot that fogs todays international financial dialogue."
CounterPunch: Tells the Facts, Names the Names
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
What they didn't say is that Treasury will be back to borrow in force in the longer-term maturities, in order to sustainably finance the huge spike in the national debt that they've engendered with the TARP and all the other policy flailings of the past 6 months.
Usual plug: Hop off the chatroom format and over to the ic4mg Forum! I don't mind running it solo (it helps me think through my investing) but more would be merrier...
Comrade Wisdom Seeker | Homepage | 11.17.08 - 7:27
Quit plugging your site. Besides, the longer term securities are going unbought.
I'm not getting this, maybe someone can set me right.
(1) In its interbank operations, the Fed takes paper (hereinafter "the bubble-gum wrappers") and in exchange credits the bank's account with cash reserves. The Fed balance sheet expands, and on the other side this is called "addressing liquidity pressures".
(2) Special SPF notes are issued, and in exchange the Fed gets cash. This in effect reverses the process in (1). Cash reserves diminish. The idea is to cut down on cash reserves so that banks aren't so comfortable that they pay only zero interest to their peers for cash.
Paying interest on cash reserves is another, completely different and artificial, way of keeping interest rates from going to zero.
Obviously, what I'm missing is at least two points. If the intent is to not make the banks so comfortable that they won't pay anything for cash, then why not have simply curtailed the operations in (#1) above. Unless, of course, the operations in (#1) were in large part for the purpose of taking bad paper off the hands of the banks, more than more than for any supposed monetary hydrodynamics. In which case, this whole story would be a case of mixing up two types of story: (a) bailout operations for specific institutions; and (b) supposed macro-monetary tinkering. Am I on the right track? (In which case there must be a better way of explaining the process...)
mp writes:
In a related matter, China's dollar liquidity seems to have dried up, which is amazing.
mp | 11.17.08 - 7:24 pm
As in they have no more spare dollars, or what?
I may just be dense after a day or work...
On the edge writes:
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
Haloscan sucks.
On the edge writes:
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
Slightly more complex than that but yes pure play politics. Recall that Barney was the squeaky wheel for insisting on the two step funding. Now that the first $350b is worse than wasted the Republicans are using the opportunity to get the Democrats to take the "responsibility" for the second and subsequent funding increments.
Badger: remember leeches? that used to be the way doctors treated maladies, that and bleeding (to rid the body of ill humours). Ill humours, hah!
Buy heritage seeds, get to know your neighbors, stock up on canned goods and ammo. And before the shooting gets out of hand, try to get the morons at city hall to do something constructive.
@yagij
Increasing numbers of Chinese merchants are saying they have no access to dollar credit, especially in dry goods.
If true, that's amazing. Another possibility is that they're lying. With prices on commodities falling, and their own customers failing to pay, they may be trying to reneg on contracts.
@yagij
To follow on with my 7:36:
The bottom line is that there's a major credit crunch going on in China, and I'm not optimistic about the government's ability to deal with it.
As I said the other day, it's time to consider the possibility of a Chinese implosiion, which no one has been talking about.
If that were to occur, well, use your imagination.
mp,
Anything that can be attributed to the declining velocity of money I'm incline to believe that is the proximate cause.
The Chicomms find themselves with a whole lotta what no one wants these days. Go long long rice?
If true, that's amazing. Another possibility is that they're lying. With prices on commodities falling, and their own customers failing to pay, they may be trying to reneg on contracts.
mp | 11.17.08 - 7:36 pm | #
Remember the post where a scrap metal dealer was turned away at the ports in China? Renege on contracts? It's a way of life.
JimPortlandOR | 11.17.08 - 7:18 pm
I agree, it is always about politics.
Bond Girl should have gotten a hat tip.
Someone mentioned watching the suppliers for the telltale on the automotive industry. Since GM is making their dealerships wait for their incentive payments; what are the odds suppliers are getting stiffed?
I think the same would also apply for the computer industry. Can they survive Intel cutting 20%?
they may be trying to reneg on contracts.
mp | 11.17.08 - 7:36 pm | #
HA - China already stuck it to some Australian coal companies!
This stuff is already being played. But, China risks that suppliers will return. Maybe not unless contracts are paid in full upon signing and not upon deliveries.
Dangerous game.
I've just been informed on another site that the economy is not doing all that bad and the liberals are making this all up? Have you guys been lying to me all along?
"Renege on contracts? It's a way of life."
Only a few years ago, global trade had developed to the point where less than 20% of total dollar volume was handled on letters of credit. It was being invoiced.
Conjure predicts that letters of credit will come back with a vengeance. Problem is, who in the global banking industry is going to want the business?
Mega-crunch.
zoom writes:
"Don't start coloring yet. The dollar isn't America or it's people. Stop believing in the Fed and start believing in ideals and community."
Thinking like that these days ensures you get eaten first. This ain't the 30's, 40's, 50's, or even the 80's.
Show me an altruistic community organizer in front of a bunch of 30 year old amoral ex-business people with little kids who are hungry, and I will show you a community organizer on the ground, lying in their own fluids, stripped naked for their "dead by natural causes" leather hiking boots, everything stolen and his yurt burned down for good measure.
Jas is right about this (can't believe I said this), culture has exacerbated the "get yours" mentality to an exponential extreme. Whats that quote?
oh yea,
"those who beat their swords into plowshares will be ruled by those who don't"
mp writes:
The bottom line is that there's a major credit crunch going on in China, and I'm not optimistic about the government's ability to deal with it.
As I said the other day, it's time to consider the possibility of a Chinese implosion, which no one has been talking about.
mp | 11.17.08 - 7:39 pm
Forgive me as I work through this problem aloud.
Possibility 1:
It is a negotiation ploy to renege on contracts that they find undesirable.
Possibility 2:
China's banks are so bogged down with debt that they are uncomfortable or unwilling to provides LoC or credit to the Chinese merchant class? Even the PBoC is having problems pushing USDs through their system--or even trying?
As for (1), it could be happening, and after I read about that UK national who was working in the scrap metal industry was held for ransom, how else could you easily break off business relations? Also, could (1) also be a sign of business desperation to save themselves?
As for (2), is that the one where there is internal strife, revolts, and a sign of no more China->Fed loving?
Rob Dawg writes:
Haloscan sucks.
On the edge writes:
Bush/Paulson are leaving the $350B because House and Senate Republicans have told him they are through with him, no more. It is that simple.
Slightly more complex than that but yes pure play politics...
I disagree Rob. The entire nation knows and for the most part supports an Obama stimulus package that will be coming next Jan. or Feb. That entire $700B was considered spent. Attempting to link half of the TARP money and the problems therein to Obama is too far of a stretch.
@Volker "Quit plugging your site. Besides, the longer term securities are going unbought."
Okay, no more plugging.
And yes, that was my point. Reducing supply in the short end of the Treasury curve might help to improve demand in the long end (how steep can the curve get?). Or it might not. But the federal debts have to be serviced -- how's the Treasury going to be repaying the SFP borrowings that are maturing? The long end is where the thorny problems lie.
Yes since they gave all the money to banks, it was very important to take some away from people to balance it. Otherwise those people might not need to borrow from the banks.
Looks like Obama is dropping the hammer and making them cut out the bullsh*t. I'm liking this. It doesn't fix what they did, but it stops the damage from increasing faster.
With the SFP we had a mechanism that by design takes money out of the system to compensate (sterilize) the money the Fed is pumping in. Now they have replaced the SFP with nothing, but are claiming that the Fed paying interest on deposits accomplishes the same goal? Something does not seem right with this arrangement. . .
CWS: This is where the disconnect happens. Between the short end and the longer term.
This could be one of a series of triggering events.
I only hope we can get through this transition period without any escalation or expansion of gunfire.
Ron Paul supporters - make sure you see the Video of the Day on the right side bar (scroll down a little)
Also check out this Andrew Bacevich interview.
If you haven't heard of him and are a Ron Paul fan.
His message is similar and IMO he comes across as less of a "nutter".
Something does not seem right with this arrangement. . .
mykillk | Homepage | 11.17.08 - 7:53 pm
So, you seem to be losing confidence. Could it be that our confidence and participation is what has sustained us so far?
Go shopping. Retail therapy, according to great thinkers like Friedman and Bush and other noted philosophers is what we need.
Jas is right about this (can't believe I said this), culture has exacerbated the "get yours" mentality to an exponential extreme.
Now you've reached where I've been for some time. The problem is building a common center. It manifests in different ways but in the end, the problem is that along the axis of "common vs diverse", we've shifted too far to the "diverse" side.
We've overshot the reason for diversity which is marginal economic gain. Diversity is now a rising expense, not a profit center.
Build a common center.
Schramm + theory of biodiversity tells you all of this.
mykillk writes:
JimPortland: I disagree. I think this is much too major a decision to be simply political. This seems exactly along the lines of something they would have decided at the G-20 meeting this weekend.
mykillk | Homepage | 11.17.08 - 7:24 pm | #
Dude this is all about cars and perception.
Bush is leveraging the urgency of the situation to force Pelosi to utilize the funds from the 25B in loans they already have vs. TARP.
It's that simple.
how steep can the curve get?.
BB can cap long term rates. Its in his play book.
yagij - Russia is in the boat. Unfortunatly its taking on water
Yahoo CEO Jerry Yang will step down from his job as CEO, said sources close to the company
"Yahoo (YHOO) will announce the move within the next hour.
Yahoo has hired Heidrick & Struggles, the well-known executive search firm, to evaluate candidates, both internally and externally."
I have been told anecdotally that China has placed strict limits on dollar
yuan exchange for individuals at $5k/day. You would have to trust an awful lot of relatives to do meaningful exchange
Also those with frequent trips out of China may be completely blocked.
Seems that they are trying to tightly control their dollar holdings
Blaming others for our poor judgment seems to be part of our nation character. A second method is to expand their cunning to mythic proportions as with Russia China and AQ.
China all along has tried to tell us that they are very much a third world economy. And that its currency was not industrial strength. I think that is probably truer then the we would like to believe
Zombie Kung Fu Panda - wow!
He sure cost the shareholders a penny or two. Ego go bye-bye.
Yahoo has hired Heidrick & Struggles, the well-known executive search firm, to evaluate candidates, both internally and externally."
Zombie Kung Fu Panda | Homepage | 11.17.08 - 8:01 pm
Long time coming. Once again, a great company surrenders their authority to those who know nothing about them, their culture or their needs. How could it be that a bunch of empty suits could possibly select a replacement? Bullshit.
Yahoo is officially a dead duck.
Does anyone have a guestimate of the peak to trough contraction of the economy? I think Roubini said 5% the other day on CNBC. Today, the Shrill One has a post up that made me think about the issue again. After the stimulus - Paul Krugman Blog - NYTimes.com
My WAG would be 6.5%.
mp - plenty of people are looking at the trade fracture story, here, at Yves' outfit, and so on. The basic point is that the med/long factor input story is collapsing, and it's not just related to credit or trust, but to tanking final demand.
London Banker did a good piece over the weekend about it.
Volker - excellent point on bonds, the short terms are in demand, but the long bond is being given the poison apple treatment.
Me no like.
CC
China's dollar liquidity seems to have dried up, which is amazing.
..."amazing"?
You misspelled "fucking terrifying".
Broward,
I don't know how old you are but I am mid 30's. I wouldn't trust ANYBODY 18-50 that I know, much less ones I don't, save a couple, if it was my bag of rice vs. their bag of rice.
We have bred this I think, not 100% by greed and corporate warfare, but mostly by our relative complacent excess. Change the paradigm too fast, and the only ones left standing are the ones that react quickly and brutally. Think fight vs. flight responders.
Carlos Gonzalez of Natl. Geographic wrote an awesome book on this, and our reactions to stress and danger is quite physiological. Physiologically speaking, some are in fact more equal than others.
90% of people my age are not compelled to the idea of community, and in fact, barely to the idea of family. A guy who won't take care of Mom, what do you think he will do TO you, much less for you.
150,000 years as animals, a few thousand in relative civilization, a few decades of relative equality and social stability/comfort, and the granola munchers on the fringe get all kumbaya and "Obama will save us", thinking we have "evolved".
Completely ignoring the lessons of instinct and human experience, at their peril.
FYI to many, you are still an animal. You look and interact in the world like an animal, and have the gift of a compartmentalized memory and advanced tool use with all that allows. Yet with all the technology, when pressed you will react to your instinct, like an animal.
Animals are often eaten.
Who might take on reviving Letters of Credit?
...Wal-Mart
"That's what you get for turning down our app for an industrial bank. Ha!"
"Who might take on reviving Letters of Credit?
...Wal-Mart"
if they hire a guy with the last name "de Medici" LOOK OUT!!
Senorito On-Topico | 11.17.08 - 8:19 pm |
Wow, someone more morbid, or realistic, than me. Some areas I agree. Others no. I don't see total anarchy, but I do see a lot of no go zones.
I heard an amazing thing today on Bloomie while tooling down the highway. According to a guy from the Cato Institute, China's consumption problems - and by extension America's capitalism - could be fixed if only China's leadership would provide for more socialism-style safety nets.
This insight was offered without the slightest hint of irony.
"Put more money in the hands of the desperate poor and they will spend it."
Give these people a fish and it will feed them for a day of course if you give it to a banker or car company it will do about the same thing so it looks like none of the dumb bastards want to learn how to fish so screw'em.
Senorito
Nicely put.
Recorded history is but a thin layer of slime over the deep sea of the paleolithic.
CC
We have bred this I think, not 100% by greed and corporate warfare, but mostly by our relative complacent excess.
It's a sine wave function.
The key question is
"why do we have common traits?"
"why do we have differences?"
We're currently too far along the diversity axis. This manifests itself in terms of things like the national debt and contention over resources, deceit.
You can patch the current System but ultimately, the "common vs diverse" imbalance will express itself again in some manner.
Just like the debt saturation limit keeps re-expressing itself every time Bernanke patches something.
It's "capitalism vs communism", if you want to see it that way. But I like the more abstract model because I think it gives you a better understanding of alternatives and design issues.
Senorito,
This lack of community, I got mine, it sucks to be you, attitude is what happens when you combine the 60s generation of entitlements with the drugged out 70s and then throw in the greed is good 80s and then 25 years of debt expansion the likes of which have never been seen, let alone tested.
What did we think was going to happen.
Screw you and the horse you rode in on is what happened.
We had it too good for too long and now that the song is over, people are scared, armed to the teeth, and will do something about it.
I don't think it will be Mad Max everywhere, but in cities like LA, well, I don't need to say anything more when the CCs are declined and kids are starving.
OUCH!
While I don't support this unmitigated greed, I am concerned because we don't have the coping mechanisms in place to deal with a major economic collapse.
If we hit 10-12% unemployment in real goobermint numbers, which would double what the goobs say now, what do you think will happen?
Our story may end well some day, but the next 5 chapters are going to be a doozy!
Wow, someone more morbid, or realistic, than me. Some areas I agree. Others no. I don't see total anarchy, but I do see a lot of no go zones.
nova: Small Indian Ponys | 11.17.08 - 8:24 pm |
Anarchy, no. Not long term any way. Warlordism and feudalism would take about three weeks to really set in, and then there would be relative order. The principles of political power closely match physics, IE air rushing into a vacuum.
Played out time and time again throughout history, ancient and recent.
Make it three weeks, and just figure out who the new boss is. Hope he likes you.
"Life is tough. It's tougher when you're stupid!" -- Sgt. Stryker (John Wayne, Sands of Iwo Jima)
Yes, that fits almost every life situation.
I think this is what really scares the powers that be.
THE LOSS OF CONTROL WHEN THIS SPIRALS OUT OF CONTROL!
"THE LOSS OF CONTROL WHEN THIS SPIRALS OUT OF CONTROL!"
OCDan
It already look a bit out of control to me. Wonder how this will affect markets?
on-Topico:
de Medici? Love him. The guy rode a donkey to the bank everyday.
I hit send before I finished.
Sorry!
I realize that TPTB have their getaways prepared, but they still like the power and control trip and let's face it, Duhmerika is still a great place to live in many regards.
Bush isn't quite ready to leave to Paraguay, just yet. Nice place to go when TSHTF, but not yet for him. He probably still likes his Cowboys and some some college football. None of that except by TV and the Web south of the border.
Anyway, back to the topic.
This is what freaks the powers out. When it gos caput, things will spiral outta control very quickly.
And don't think for a moment a 2-front military will come home fast enough to stop the other 297 million of us from degernating into barbarians.
We aren't anywhere near "out of control" as long as the internet is running and iPod supplies are being refreshed at your local Best Buy.
LOL!
6, I would also include Mickey D's.
When that goes TU, look out. No more refillable $0.59 cups of coffee for 89 year old retirees. UGH! That will cause a fracas like none other.
No, I really can only do a scenario for the area I live in. I do scenarios for recession, depression, terrorist attack, weather damage, moderate social breakdown
Then I figure the logistics, money, long term budget etc...
Nova - do you force 5 hurricane too? I've been looking at that for DC.
CC
People will exhibit plenty of control over themselves, the control will be 7.5 pounds of squeeze on a 7 pound trigger.
In all seriousness, these issues self regulate. Humans aren't natural killers, actually no species truly is. Read Grossmans book, "On Killing". Fascinating.
But societal shifts tend to unmask what order previously had hidden. Thats all I am saying. That and 30 YO men are dou**e bags sometimes.
To all the Mad Max gloomers: I think you underestimate your fellow countrymen (or is it countrypersons nowdays?). They may seem like a bunch of selfish bastards today, but I think most would raise to the occasion given the opportunity.
There are enough people among us - perhaps you or the guy down the street - with innate leadership abilities who would try to bring people together. I could only imagine violence in inner cities, and only if collapse comes too quickly.
Nova - do you force 5 hurricane too? I've been looking at that for DC.
No, hurricanes are really scary
OT: I'm surprised at the SEC on this Cuban thing. Mark Cuban strikes me as the kind of guy who has been begging for a public forum to expose Wall Street for years.
I realize he has written about it before, but, giving him a stage like this just encourages him even more.
Could he become a folk hero? They always pop up at times like these.
B of A just took their TARP money and exercised options to buy more shares of China Construction Bank.
I am not joking.
I just went through all the SFP announcements and checked their maturity dates...the SFP still has $510 billion + Interest in obligations...These are short term loans that will all mature between 11/20 and 1/29/09...where will the money come from?
Agree we have let diversity go too far.
Can we please send the H1B's back home forthwith? We need the jobs for us now. Of course we always did, but even moreso now.
B of A just took their TARP money and exercised options to buy more shares of China Construction Bank.
Guess the next payment was due.
Perhaps we won't even "print" here, that is, pump unsterilized money into our own economy We'll send the fresh bills to China via our minority holdings in their banks?
mp?
"BB can cap long term rates. Its in his play book."
You forgot to insert the words "attempt to". Raw printing has nasty consequences when bond holders sniff it out unfortunately.
C C - ever been shot at? Had someone knock you down and put a knife to your throat? Try to beat the living crap out of you? Tried to buy milk at Giant when snow was forecast?
I just go by what I have experienced.
P-oed:
See my question directly above yours.
What if we just monetized the base by funneling money into China's banks? It's kinda like being "half pregnant":)
Ohhhh.. Yeahhhh! Here comes the printing. Can you hear that? That the sound of printing machines creating sweet sweet inflation. Music to my ears. Forget deflation. Buy stocks and wait for the inevitable inflation-driven market rally! Don't get stuck in fixed income like suckers.
"Ohhhh.. Yeahhhh! Here comes the printing. Can you hear that? That the sound of printing machines creating sweet sweet inflation. Music to my ears. Forget deflation. Buy stocks and wait for the inevitable inflation-driven market rally! Don't get stuck in fixed income like suckers."
Ask Peter Schiffs investors how the inflation trade has worked so far.
Am I wrong if I see some kind of loop effect developing here? So, the Fed becomes lender of last resort, and then 1) Fed balance sheet swells 2) Treasury begins SFP program to finance Fed's lending 3) Treasury debt builds up ($560 Billion); Treasury is forced to halt SFP lending 4) Treasury withdraws SFP deposits to repay short term offerings 5) Start over a few weeks later
Pissed in California. You are thinking way too short term. Everybody will be worried about deflation for the next 6 months while inflation driven investments are going to be getting cheaper and more and more alluring. In 6 months it will be hard to deny that deflation is under control and then the inflation trades will blossom into a beautiful flower.
What if we just monetized the base by funneling money into China's banks?
Been there done that. There's a reason China holds a few trillion in US-denominated debt....
I know a lot of 'common folk' in China and I'm hearing nothing about an implosion.
That being said, I believe China will rue the day the Jim Rogers' of the world took an interest in them.
Is this how it works?
Bank needs to maintain capital reserve.
Bank trades bad paper for good dollars from FED.
Bank deposits good dollars with FED and gets paid interst equal or greater to the loan rate on the dollars.
Credit is monetized because value of bad paper is kept at model value.
What breaks this cycle?
"Humans aren't natural killers, actually no species truly is."
My FIL was trained to be a snipper in WWII. He said that being the government had trained him to kill in the army they should let him kill one person a year. He's dead now but you get the point.
Flying Hawaiian: I think it has less to do with banks needing to meet their reserve requirements and more with banks hoarding their cash in interest-bearing reserves at the Fed. I bet they pay more interest than anything else right now. . .
ova, small indian ponies - only in Indonesia. Brutal.
Not DC.
CC
Actually, chimps conduct what amounts to wars. Nature when closely observed is red in tooth and claw.
When I first heard about the issue of the Federal Reserve being able to pay interest on reserves deposited there, I couldn't figure out what that meant. I'm still struggling with the implications, but I think I understand what the Fed is trying to do.
The key is to think about how credit is created in our financial system. When you deposit $100 at a bank, it keeps a fraction of this, say $10, in reserve and loans out the rest, say $90. Eventually this money (possibly after changing hands a number of times) is deposited into a bank again. The bank keeps $9 in reserves and loans out $81. This continues on and the result is that from $100, tons of credit (e.g. people's bank deposits) is created.
When the Fed didn't pay any interest, banks worked very hard to minimize the amount of reserves they deposited at the Fed. This made it hard for the Fed to participate directly in the credit creation loop. By paying interest, the Federal Reserve is making it much more likely (especially in scary financial times) that banks will keep their reserves on deposit at the Fed. Now the Fed will keep a fraction of these reserves on deposit and lend out the rest. The money that the Fed lends out is now much more likely to end up back on deposit again at the Fed, whereupon the Fed will keep a fraction and lend out the rest again.
The summary is that the banks are not creating credit right now because they are deleveraging. Paying interest allows the Federal Reserve to create credit on its own.
I don't understand all the implications of this, but it seems like a pretty fundamental change to me.