Amusing cartoon, via Jim Sinclair:
What’s so amazing about this is the following: When the inter-bank rate, set by the open
market (but based on the Fed Funds Rate) surges 75 basis points above
that Fed Funds Rate, what else can the Fed do but warm up the
choppers?
Otherwise, banks would be lending at the equivalent of three 25 basis point rate hikes.
Pure monetary inflation for sure. Great Cartoon. It about says it all. Wait a bit and look over the horizon and you’ll see the squadron of B52s coming.
Great cartoon! The uber-consumer can now continue to shop.
You CANNOT stop natural processes, like rising rates after conspicuous over-lending cycles. You can only delay the corrective reactions…which will only make them bigger.
Nature > Humans
Everytime!
Check out the Ben Bernanke action figure about 3/4 down this page. The article is interesting as well.
We all have a tendency to focus on the rescue without asking about the cause of the sudden spike in rates. The simple explanation of the cause was an imbalance of supply versus demand: X amount of liquidity in banks with Y as the demand. If central banks had not stepped in, some number of banks would have been unable to function.
The question to me is whether this was an increase in demand withdrawls (a bank run) or a decrease in supply caused by a restructuring of loan-loss provisions (causing a lowering of reserves to the point of illiquidity).
The fact that the Fed stepped in to protect its target rate is not a surprise, as that is what they are supposed to do. What is surprising is the scale of needed relief – to banks around the world.
It is also important to realize that this infusion was accomplished by repurchase agreements, meaning a termporary fix. Whatever underlying problem initiated the event has not changed.
It is unlikely that the cause of the event was loan loss provisions – after carrying ARM and interest-only ARM loans on the books at virtually full value the time arrived when the accountants came to the bank CEOs and said it could no longer be done – there was no way to hide the losses under GAAP. Not every bank has this problem and it wouldn’t occur on the same day. This problem is real and ongoing, but will be more layered in its consequences.
That leaves a bank run – but no one saw the populace standing in lines at banks demanding money (most likely because no one has any savings to demand). This bank run had to come from large institutions pulling out of perceived risk. Seems to me that only a demand of that magnitude could cause a worldwide systemic crisis in liquidity.
This flight from risk has serious consequences forward going, as credit spreads should be expected to widen dramatically. Undercapitalized businesses will be hard pressed to roll over debt or find new sources of capital.
Althoug the central bank infusion temporarily solved the capital liquidity crisis, it did not eliminate the pychological illiquidity crisis.
Suddenly, RISK has become a 4-letter word.
Too bad he’s not droppin certain people who’s names will go unmentioned outa that chopper…
Too bad he’s not droppin certain people who’s names will go unmentioned outa that chopper…
It’s not just about risk, it’s about reality.
A lot of people got a peek behind the paper mache facade of the current economic and financial realities.
.
For a long time the credit markets have been punishing savings and investment, while rewarding speculation.
This is merely a (somewhat difficult and belated) return to more normal times.
they’re just trying to keep this house of cards up until the elections next Nov, since the only thing Bush and the Republicans managed to accomplish was easy money, over-leverage and an asset bubble. the real problem will come the day after the election, when the Fed will be free to stop propping up the markets. that will be painful.
“Otherwise, banks would be lending at the equivalent of three 25 basis point rate hikes.”
It really hurts the central banks (The Man) when market forces tell them
that they are wrong about their “target interest rate” (TOO LOW)
ie….
-inflation is higher than they report
-risks are higher in all the “funny money” assets/securities…
-CASH not debt represents wealth
-“be a borrower nor lender be….?????
KP and Idaho Spud
hit the nail right on the head with their posts and I hope more people begin to understand the phrase
TANSTAAFL
“It is also important to realize that this infusion was accomplished by repurchase agreements, meaning a termporary fix. Whatever underlying problem initiated the event has not changed.”
Exactly. Three days repos have been the norm so there’s nothing extravagant in the manner in to which the Fed intervened. It’s the amount of injection is what was exceptional. But even more exceptional and alarming so was their acceptance of junk MBS as collateral! That to me is more telling than anything. Monday the banks have to buy it back. Tomorrow is going to be an interesting day.
To your second part, this stems from mortgage delinquencies. I stress again the point, we’re having these credit strains already and we’re only in the 2nd inning of the mortgage reset ball game. The vast majority of resets and delinquencies still lies ahead of us. One has to ask what awaits the credit market when we’re in the 4th inning, 6th inning of delinquencies. The bottom callers and containment callers need reflect on that. Forget the Chinooks, B52s anybody…IMO
An overlooked comment from Bernanke is telling. I will have to paraphrase as I can no longer find the quote: many felt the risk going forward was the savings rate would rise more than anticipated.
This makes it plain. Inflation is a requisite of a debt-based economy; the goal of the Fed is not about eliminating inflation but managing required inflation; the greatest fear of the Fed is deflation.
Forewarned is forearmed.
just to share. A useful and relevant comment to this thread from Doug Casey.
Things that you expect to happen usually take longer than you’d think. But once the process gets underway, they usually happen much more quickly. It’s like a boulder balanced on the edge of a cliff; nothing seems to happen until it happens all at once. Just adjust that analogy to the scale of a human lifespan.
The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is an increase in the supply of money that outruns growth in the supply of goods and services. Papering over problems with yet more money is now the default solution for governments around the world. Case in point, when faced with the growing problems associated with the subprime mortgage sector, the European Central Bank announced that it would make “unlimited” funds available to the banking sector. The Fed will, predictably, react in the same way, running the printing presses overtime.
The other concept is price inflation, which is an increase in the overall level of prices for goods and services.
The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices—rather than the money-creating government that is the true culprit.
We’re now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What’s really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode.
It’s just a matter of time. But I think it’s going to happen this cycle.
What’s wrong with the Wayne Angell explanation? After the BNP bombshell, banks understandably freaked out. Those with excess reserves chose to buy treasurys rather than lend them overnight to banks with deficit reserves.
Considering Wall Street created securities nobody can value, I don’t see how the BNP situation resolves itself. If BNP were to estimate a value for its CDOs, and the value is too low, people who redeem now get screwed and those who stay in the fund get unjustly enriched. And if they estimate a value that’s too high, then those who are redeemed now are unjustly enriched and those who stay in get the wood.
And how many others are in a similar situation but haven’t come clean?
If investors in the BNP funds demand liquidity, the only choice I can see for BNP is to hit a low ball vulture bid.
Why do I think many of the firms who created these CDOs, and are ultimately responsible for this crisis, will be the vultures who scoop up the paper at pennies on the dollar?
I have a question regarding the repos last week. Is there any way that the banks can forgo repayment to the FED, have debt be forgiven or workup a payment plan? Can a third party payoff in lieu of bank. I just can’t see how the banks are going to payoff on Monday.
“I don’t see how the BNP situation resolves itself.”
It can’t resolve itself. The fundamental issue is one of solvency not liquidity.
” Is there any way that the banks can forgo repayment to the FED,”
They have to repay it. There may be an extension type of option, but I’m not aware of any. Someone else on this thread could clarify if there is. Your conclusion question of not seeing how the banks are going to payoff on Monday is exactly where I’m at. I suspect alot are wondering what they are going to do Monday. Hopefully there’s more than just a few bright heads working on that right now.
Winston
Forewarned is forearmed.
Translate, do you think the FED will start purchasing coupons to push some debt free money into the eco, real helicopter drops.
Did the Fed actually overshoot? (Of course, TOMO amount values often said to be more art than science): From Reuters:
The cost of borrowing money overnight in the U.S. federal funds market, a critical measure of conditions in the financial system, tumbled to 1 percent by late Friday, way below the Fed’s 5.25 percent target rate.
This showed that masses of cash were sloshing around the banking system and markets can keep operating. The first major test comes on Monday when Japan’s markets open.
http://www.reuters.com/article/bondsNews/idUSB32834420070812
Maybe no need to break out my Swanson Fugu IP-dinner to accompany Sunday night browsing. . .
Charlottemom, received a good answer to this question of what happens Monday. Per calc risk.
“In which case, the banks have to repay them on Monday. Is there an option where they can push them forward to a later repayment date or can they forgo payment outright? If not, how are they going to be able to repay them tomorrow????
Stuart, you’re looking at this the wrong way.
What the Fed did here was bolster the cash reserves of the banks for three days. (They gave banks cash for their reserve accounts in exchange for those securities the banks will have to buy back on Monday.) Why did they do this? Because the credit markets were so jittery that banks were borrowing a lot of cash from each other and driving up short term lending rates, which wasn’t going to help the problem. The Fed came in with repos at a much lower interest rate, which stopped all that desperate borrowing from each other. Certainly those repos can be rolled over if they need to be. The Fed is hoping that they won’t, and that everyone will be a lot calmer on Monday.
If in fact the banks can’t buy those securities back, then they’re insolvent. They fail. The Fed has been betting that they were not insolvent, they were just caught up in a lunge-for-cash thingy that will die down. I for one do not believe that the Fed would have been handling things with a 3-day repo if they had really believed that those banks were insolvent.
I guess we’ll see on Monday who was right.”
winston has been spitting gems today:
Inflation is a requisite of a debt-based economy; the goal of the Fed is not about eliminating inflation but managing required inflation; the greatest fear of the Fed is deflation.
PREACH!!
Don’t y’all think FNM/FRE have yet to report huge losses in coming quarters?
Here’s an excerpt from the latest Hussman piece:
Contrary to the apparent belief of investors, the Fed did not shift its policy, nor did it “bail out” the mortgage-backed securities market by “buying” them from banks.
What actually happened is that the Federal Funds rate shot to about 6% on Friday morning, and the FOMC brought it down to its target rate by entering into 3-day repurchase agreements . The banks sold securities to the Fed on Friday, and are obligated to buy them back from the Fed on Monday at the sale price, plus interest. Such open market operations are designed to ease the immediate demand for liquidity, and to give the banks and dealers more time to find buyers in the open market for the securities they are trying to liquidate.
This was not a major policy shift. Again, it was an effort to keep the Federal Funds rate at the current target of 5.25%, in the face of demand for base money that was pushing the Fed Funds rate to 6%.
These repurchase (RP) agreements fall into three increasingly broad “tranches:” 1) Treasury securities, then 2) federal agency debt, and finally 3) mortgage backed securities issued or fully guaranteed by federal agencies. “Today’s RPs were of this type,” noted The Federal Reserve Bank of New York , which conducts the Fed’s open market operations. So the Fed was not taking in the toxic, leveraged, exotic stuff.
Economist Steven Cecchetti concurs, “A quick look at the history of these temporary open market operations shows that they have been taking mortgage-backed securities as collateral for repo for some time. The quantities have normally been small (between $100 mil and $2 bil) but they have been doing it. So this is not what I would call an ‘intervention in the mortgage-backed securities market.’ And it is not unusual.”
Now, the size of the operation ($38 billion) was unusual, as was the scale with which the Fed allowed dealers to submit mortgage-backed securities as collateral, rather than simply Treasury and agency securities. My impression is that in doing so, the Fed had no intent of “bailing out” the mortgage backed market, or of creating a huge “moral hazard” by absorbing losses for the irresponsible behavior of lenders. Rather, the Fed had to allow submission of mortgage-backed securities because that’s what the banks actually own, and it’s precisely the collateral for which the banks can’t find a buyer.
I pulled this off a thread a ITulip is this the kind of helicopter drop that is likely to occur?
http://www.itulip.com/forums/showthread.php?p=13322
…..I’m a chartalist which has nothing to do with charts and everything to do with the creation of money without debt. One needs to be very careful in the interpetation of Bernieboy’s helicopter drop comment. The US has used a helicopter drop about 56 to 60 times in our history as a nation. In fact this was the original currency of the colonies and many believe the real reason for the Revolutionary War. Colonial Script is a form of Helicopter drop, Lincoln’s Greenbacks are a form of a helicopter drop, Nixon’s $2 bill in 1971 is a helicopter drop. Many other instances in our nations history of money being created through the Treasury directly and not by the banks. Nixon paid the Navy with $2 Treasury Notes directly and the Navy used the $2 bill as payroll to get them into circulation. Kennedy ordered the Treasury to issue Treasury Notes backed by silver, this was a helicopter drop as well. All money created without debt. Our nations coins are Treasury issued, ever wonder why a nation that can send a man to the moon can’t stamp a coin and not leave off the words In God We Trust? Helicopter drops, Treasury Notes and coins are competition with the Federal Reserve. A one d0llar coin could be serious
competition to the Federal Reserve.
BOJ has injected another 600 million yen into market. True?
Market = junkie needing another fix?
Will FED need to help out again this week?
>> Helicopter drops, Treasury Notes and coins are competition with the Federal Reserve. A one d0llar coin could be serious
competition to the Federal Reserve.
Stormrunner, I’m sorry but would you please elaborate? I’m not understanding.
stormrunner wrote: “Translate, do you think the FED will start purchasing coupons to push some debt free money into the eco, real helicopter drops.”
I am of the opinion that the Fed will do everything in its power to prevent systemic deflation from occuring, including a virtual sacrifice of the dollar to the gods of inflation. That is what they are willing to do. What they actually do is dependent upon the depth and systemic implications of this current crisis.
charlottemom,
to answer your question…..
the fed has already told you what they will ALWAYS DO and it will not stop for grins.
Please read Winston Munn’s comments on this thread…
he explains it all very clearly.
wunsacon
>>Helicopter drops, Treasury Notes and coins are competition with the Federal Reserve.
First off let me start by saying I did not author this I read it at the link provided. I do however happen to agree with it, even though I believe there are many here who would patently disagree. In order to see the logic of the statement one must accept that the Federal Reserve System is not Federal at all but merely a cartel, hub and spoke system if you will of private for profit banks regulated by a Federal Reserve Board beholden to the interests of the primary stock holders of these monolithic institutions. All money issued entering the economy is “loaned” into existence even the printed currency from this central bank. That infers that money that is not redeemable or backed by any hard assetts is essentially created from thin air with usury attached.
The examples provided in the excerpt above describe other methods of releasing money created without debt into the system. This is money for which no issuance usury exists. It therefore, even though treasury issued competes directly with the hegemon that is the FED — their network of banks do not get their interest for the currency issued in this fashion.
For a greater understanding of these concepts see “Money as Debt”
http://video.google.com/videoplay?docid=-9050474362583451279&q=Money+as+debt&total=1040&start=0&num=10&so=0&type=search&plindex=0
For an explanation of how this system came to be see “The Money Masters”
http://video.google.com/videoplay?docid=6076118677860424204&q=The+Money+Masters&total=1344&start=0&num=10&so=0&type=search&plindex=9
For insight as to how to spread the knowledge and initiate reform, I haven’t got a clue.
Thanks, stormrunner. I’ve now watched both of those.
I also think I understand what you meant about one being competition with the other.