Open Thread: Fed Intervention

Here’s a question which I hope the assembled crew can answer (in a civil tone!)

How appropriately or inappropriately has the Fed intervened so far in 2007?

There has been no rate changes this year (despite desperate pleadings). In fact, the Fed hasn’t even changed their operating bias.

They have acknowledged the Housing slowdown, and even noted the credit crunch — although anyone with one eye and half a brain has figured out that their claim of "Containment" is laughable.

The biggest action they have taken was last week’s massive repo repurchases to inject lots of cash into the system.  Ironically, its not even 2 years since the reporting of M3 was cancelled — and here we see the biggest difference between M2 & M3 soaring in activity.

Here’s the radical part:  When the market set inter-bank rate spikes, what other options does the Fed have but warm up the


What say ye?

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  1. speedlet commented on Aug 13

    Very appropriate, so far. But they don’t have many good choices left.

    It doesn’t matter how well they play it at this point — it’s how they’ve played it for the last 5 years that counts.

  2. DD commented on Aug 13

    We should just sell Korea to China. How much could we get for South Korea??

  3. metaphorical_mixer commented on Aug 13

    Fed policy is like a small rudder on a big ship. You have to look (and plan) wayyyy ahead as it takes a long time to take effect.

    Unfortunately, with the exception of this country’s comptroller of the currency*, everybody is back-seat driving this economy like my wife: irritated at the ‘slow’ car 10 feet in front of us…not aware of the pileup ahead.

    *Learn from the fall of Rome, US warned

  4. DD commented on Aug 13

    Taiwan…I hear they want Taiwan….

  5. Brian Mihalic commented on Aug 13

    My cynical point of view is this is the time that the Fed was anticipating when they stopped reporting M3. Bernanke would rather inflate than risk deflation – but of course he can’t talk about that.

    But I hold out hope that Bernanke has a better strategy in mind than simply juicing inflation.

    But if more inflation is all the Fed can do, where will the next bubble be? I’ve got some cash sitting on the sidelines.

  6. JS commented on Aug 13

    They have this option: the Fed should get out of the way and stop trying to control the price of credit. These troubles with lending and structured finance should have been handled through micro-regulation years ago. Trying to prevent the markets from repricing risk by defending a short term rate target is the last thing they should be doing. Hasn’t it been the central bankers who have been complaining for some time now that the markets are mispricing risk? So now that markets have awakened to risk, the Fed responds by fighting market adjustments? It’s ludicrous and shows how misguided current monetary policy is. Ignoring developing problems and then cleaning up market meltdowns with suppressed rates and bailouts is a deeply flawed methodology. It’s true that some innocent players would be burned in a market adjustment, but if the Fed hadn’t allowed it to get so out of hand to begin with casualties would have been far fewer.

  7. ECONOMISTA NON GRATA commented on Aug 13

    I would give BB a B plus so far…. He’s really in a tough situation and he’s not going to win a popularity contest anyway you slice it.

    I think that he is doing a good job with what he’s been left to work with… However, this is an early call and so far so good, his real challenges are still to come and I do believe that he’s going to need devine intervention down the road…

    I do not have much confidence in him but this is as good as it’s going to get.

    Best regards,


  8. mhm commented on Aug 13

    The Fed has no option but stay below the radar. Any word it puts out is screened for hidden messages (to suit the screener). It should have acted before the ECB or BOJ but any open, huge effort to stabilize the market could rock the boat too much and sink.

    And let’s not confuse increasing liquidity (short term) with increasing money supply (long term). The Fed’s injection last Friday was reversed today and the BOJ just drained a lot from the pool. I don’t know about the discount window…

  9. Sammy20 commented on Aug 13

    Jerry “I have no clue” Bower called you out tonight Barry asking for you to defend yourself against the incredibliy strong core retail sales numbers.

    My personal response would be they were weak, that if you average the last 2 months they are incredibly weak, you can’t/shouldn’t look at “core” anything and people still must have some room left on their credit cards.

    I can’t believe I even watch that Kudlow show…it really is like one of those ridiculous late night informercials.

  10. Werner Merthens commented on Aug 13


    As long as there are central banks and politicians there will be inflation! It does not matter what cast of characters is on the FOMC or who the Fed chairman is!
    There is going to be the next bubble as sure as this one will blow. Whoever figures out where the next bubble will be first will make the most money.

  11. Sammy20 commented on Aug 13

    and one more thing…this whole Bernake getting high grades is hysterical. The guy has hiked rates by 25bos 1 time early in his tenure because that was consistent with what the fed was doing at the time and he has done nothing since, NOTHING!

    He just keeps repeating the same script that stopped being accurate months ago…and now 2 days after he says everything is rosy in the global economy we have like half a trillion dollars pumped in to calm a panic….I mean, please come on already!!!!

  12. DD commented on Aug 13

    The bubble is the dollar bubble…And some elite wealthy American Industrialists made all the money on the way up, China, Russia and some wealthy Arabs are winning on the way down. The sad part is the people that lost, lost on the way up and will lost even more (including their homes!!!!) on the way down.

  13. Winston Munn commented on Aug 13

    The problem with discussing the Fed’s actions is the lack of transparency. But from Nouriel Roubini’s blog, there is this information:

    “I am being told that the Fed accepted three types of securities in these repos: safe Treasuries, agency (GSEs) debt and mortgage backed securities (MBS) guaranteed by Fannie and Freddie. These latter are not subject to credit risk given the guarantee; but can still technically default if the underlying assets are impaired. Still, there are still anomalies in this use of guaranteed MBS in repos: the rate at which the Fed accepted these MBS was apparently the same as the rate at which it acccepted safer Treasuries and Agency debt. This, in turn, implied that mostly MBS were offered and used in the repos; especially on Friday all submitted and accepted securities were MBS and in the last intervention the average rates on this MBS repos was below the Fed Funds rate.”

    It appears the Fed was giving its own kind of guarantee, that Fannie Mae and Freddie Mac MBS paper was as good as treasury.

    This is simply false as the assest underlying the paper can and is reducing in value.

    We still don’t know what caused the spike in interday rates or the need for the infusion. The spike may have occured due to lending banks being unwilling to take the MBS as collateral without an additional risk premium. If that guess is right, then the Fed was out of line in their guarantee, because market forces had already set the rate on these issues. The Fed can set the discount rate but has no business pricing assets.

    Also curious is the question that if these GSE assets are so treasured, what was Paulson doing in China begging Madame Wu to buy more GSE paper?

    So in my mind, the question of whether or not the Fed’s actions were justifiable is dependent upon motivation.

    If they were simply infusing liquidity that is fine; if they were attempting to price a non-treasury asset, they were way out of line.

  14. J at Not One Cent commented on Aug 13

    I agree with Sammy20 about Bernanke’s indecision between the frying pan and the fire–until Thursday. I agree with Speedlet that the Fed dealt itself a bad hand years ag–but Bernanke is upping the ante with more cash instead of folding.

  15. zero529 commented on Aug 13

    “Fed policy is like a small rudder on a big ship. You have to look (and plan) wayyyy ahead as it takes a long time to take effect.”

    What’s worse is that Newton’s 3rd (and 2nd, for that matter) goes nonlinear when you start talking about economic “forces”. Try navigating your big ship through waters that anticipate your actions . . .

  16. DD commented on Aug 13

    Correct watson, i mean winston. The fed accepting this garbage paper clearly states that their biggest fear is deflation…not inflation.

  17. brian commented on Aug 13

    “But if more inflation is all the Fed can do, where will the next bubble be? I’ve got some cash sitting on the sidelines.”

    I’m thinking gold/silver in about 4-5 months….
    or Boeing perhaps….They make helicopters don’t they??

  18. m3 commented on Aug 13

    i think he’s done a good job so far.

    i don’t like what he’s done, but i don’t see any other realistic options. he can’t cut, but he can’t hike either. he’s in a tough spot.

    the repos were done out of necessity; to think otherwise is naive. the amount of money they put in was stingy compared to the ECB. this isn’t something they were glad to do. just ask gov. poole.

    i also think the idea of them hiking rates will NOT have any effect on inflation. does anyone really think gasoline prices will fall if the fed hikes 25 bp? they were hiking for years (425 bp) and prices across the board have gone up. why that would change now is beyond me. there’s enough inflation in the pipeline for years.

    at the end of the day, long term interest rates are too low. THAT’S what’s causing inflation. but the fed has no control over them. absolutely none.

    also, remember that the inflation problem (monetary and price) is a global one, not a US problem. if the BOJ is at 0.25%, and china’s M3 is growing at 17%, or whatever it is, what is he to do about it?

    i think his chief critics are the ones who are demanding that he change things he has no control over.

    he’s in a tough spot.

  19. Will T commented on Aug 13

    Never underestimate the central banks’ ability to inflate. Central banks are not, despite what is repeated on TV, independent entities. Any organization whose internet address ends with dot-gov (as in or is not independent and free of political influence. But I digress….
    It’s impractical for them to let asset prices deflate. They will print more money and postpone the inevitable.

  20. algernon commented on Aug 13

    M2 has been growing for some time at ~6.5% (MZM, ~9%) in order to keep the Fed Funds rate at 5.25% Money supply growing at more than twice the official inflation rate is hardly neutral, much less tight.

  21. Lord commented on Aug 13

    So far so good, as Wiley Coyote always said, but are they looking far enough ahead? Perhaps they are but are limited in how their actions would be seen. Time will come for them to act in the future, and time will tell whether they will have been too late. I don’t think so yet, but neither will I think so for long.

  22. RobT commented on Aug 13

    How about we vote Ron Paul in office and abolish the Fed.

  23. SteveC. commented on Aug 13

    Personally, I’d give them a B. I would have maybe hiked 50 bp rather than 25,then gone to neutral bias.

  24. Groty commented on Aug 13

    The FED can either target growth in the monetary base or it can target the overnight lending rate for reserves. It can’t do both.

    Targeting the overnight lending rate has become the default tool to conduct monetary policy.

    At its regularly scheduled policy meeting last week, the FED surveyed the economic climate and decided 5.25% was the appropriate lending rate for overnight reserves. When a sudden shortage of reserves emerged, the market price for reserves spiked. Because 5.25% was decided to be the appropriate target rate, it had no choice but to intervene to supply more reserves. You can infer the FED believed the reserve shortage was temporary because it chose to supply reserves via a repurchase agreement rather than buying securities outright.

    Asking if the FED’s interventions have been appropriate or not doesn’t seem like the right question. To me, the only question you can ask about the FED is whether 5.25% is the appropriate overnight lending rate.

  25. Keith commented on Aug 13

    I think the word ‘inject’ is being thrown around by MSM and they do not understand what the Fed is actually doing. The Fed injects $7-$12 billion daily on average a day, but then withdraws it the next day (the primary dealers need to return the money). These are called Repos, dealers give the Fed: Treasuries, Agency debt, and Fannie/Freddie debt, and the Fed give the dealers cash. The process is reversed the next day or three (weekends), with the Federal banks making some interest on the overnight loan. There are longer terms, like a whole 14 days, but most are overnight loans. The Central banks do not inflate through interest rates, or open market actions, they inflate through low reserve requirements and the fractional reserve banking system. I put $1 in my savings account, the bank loans $10 based on its reserve of my $1. Some of those $10 make it into another savings account, and a bank lends $10 on every dollar, and so on. Or I’m a hedge fund and I talk a bank into loaning me 50% of the value of a MBS, so I can buy more MBS, which the bank loans me more money on, and so on. The Federal Reserves are banks, whom make money by lending to the Primary Dealers based on their Fed Funds rate. Could they tighten the supply of money, sure, but they would earn less interest for doing nothing.

  26. Winston Munn commented on Aug 13

    DD wrote: “Correct watson, i mean winston. The fed accepting this garbage paper clearly states that their biggest fear is deflation…not inflation.”

    Unlike previous Chairs, I don’t think Bernanke hides this fact. After all, doesn’t the Fed have a core inflation target? And it ain’t zero!!!

    Bernanke is earlier comments spoke of the need for debt access. Notes from a recent meeting showed some were concerned that the savings rate would rise more than anticipated.

    How many of the connect-the-dots have to be provided before the picture is clear?

    For a debt-driven economy, inflation is a requisite; deflation is the enemy to be avoided at all costs.

    My own view is in this latest crisis, the Fed saw the potential for significant deflation and acted preemptively to try to stave it off – by attempting to intervene in the pricing of assets.

    If the value of GSE paper is deflating, then the entire mortgage complex is failing – not just a humdrum few subprime notes. I think this is what prompted Paulson to travel to China and grovel in front of Madame Wu; it is also what prompted the Fed to attempt to set a price on GSE paper with this MBS repo-fest.

    If the mortgage market collapses, the entired financial industry collapses, much like a universe being sucked into the immense gravity of a black hole.

    Scary thought.

  27. ECONOMISTA NON GRATA commented on Aug 13

    Mr. Winston Munn wrote “if they were attempting to price a non-treasury asset, they were way out of line.”

    Thank you, this was the first thing that crossed my mind when I read the news the other day. The next thought was “Econo, don’t be ridiculous…!” They simply couldn’t be so idiotic. Could they..?

    I read the Roubini post, brilliant….

    Anyway thank you for letting me know that I’m not insane….

    Best regards,


  28. bZeke commented on Aug 13

    I don’t agree with giving grades for two reasons: (1) the grade one gives has a direct relationship to whether one is making money or losing money in the event; and, (2) we’re only on page 1 of what looks to be a long on-going test.

    That said, Fed repos are the right medicine for the moment. What’s different between today and 3 months ago? Lenders have finally woken up and are now expecting to be paid for risk. The repricing pendulum may have swung a bit too far at the moment and taken away a bit too much credit availability, but swung it has. Barry, Nouriel Roubini, and Bill Gross (to name only three) have been pointing to this moment for months/years. And now it’s occurred. So where’s the surprise? Did Bear Sterns, Countrywide, American Home, the mortgage brokers, the guys packaging and selling CDOs, the purveyors of easy credit for cars and everything else, and your neighbor in the McMansion with the 5/1 ARM really think that the Goldilocks credit scenario would exist forever? What past experience could’ve led anyone to believe that?

    Repos are right for the moment because they are a tactical weapon that is targeted directly on the actual problem of the moment, i.e., sustaining the liquidity of the financial system and the financial stability of banking/lending institutions, and calming credit markets. A Fed rate cut, however, is a strategic weapon that would hit across all sectors of the economy, and with the available economic data as uneven as it has been it’s a real question whether a rate cut is called for at this moment. Cramer and others think they know what the effect of a Fed rate cut would be, but they don’t bear the responsibility for the consequences of launching that strategic weapon into the economy. I agree with a previous poster — it’s not so much what the Fed does now as what they did (or didn’t do) with the Fed rate for the past 5 years.

    The Fed has acted to date in a measured way to address today’s liquidity/credit issues while preserving their options to make big moves for the future. Given the cards they have to play, it’s hardly the worst they could’ve done.

  29. Joe commented on Aug 13

    This has the potential to be systemic. Cut and cut now. Learn from your history lessons Ben. Deflation is the real problem (see Japan).
    You have 2 chances to re-inflate- Slim and none.
    Slim is leaving town now.

  30. Si commented on Aug 13

    What JS said, and on another topic, if I hear the term liquidity in reference to finance again I think I’m gonna go apeshit.

  31. wunsacon commented on Aug 13

    As a group, the American public — and hence our politicians — do not want to make tough compromises. No one wants their benefits/subsidies/tax-credits/contracts/army-bases reduced or their taxes increased. So, the only way to “balance” the budget is for the FED to tax it away through inflation.

    I suspect the FED will do what most people on this blog say they’ve been doing:
    – talk tough about inflation,
    – engineer the statistics to support the message, and
    – quietly try to inflate away the debt.

    I’m not saying it’s right or that it’s going to be pretty. But, if it’s — as most of you keep pointing out — what they’ve been doing already, why would they change? Maybe they think it’s the only option and the only real questions are about how to execute.

  32. sanjosie commented on Aug 13

    The “Box” they’re in dictates what’s possible. Can’t lower cause, even with the “impaired” government statistics, inflation is afoot. Can’t raise cause the financials have dug their own graves already. They can only put their finger in the dike as each leak appears. The wildcard is the political winds, and they’re blowing in, singles only – no homeruns here.

    BTW, can I get a refund on my college tuition for my course on the monetary system – all my M3 knowledge has been obfuscated. Got a hedonistic adjustment for that one Ben?

  33. jules commented on Aug 13

    The Fed has (appropriately) jaw boned market perceived inflation.

    The current bid crisis in the mortgage market is a function of over leverage and fear in an over played asset class meltdown.

    The Fed should not bail out greedy, leveraged “PHD”, Quant hedge funds.

    I personally hold the IB’s accountable for allowing the 10/20/30/40/50/to 1 leverage Prime Brokerage Accts to “F” the syetem as they are doing.

    Shame on them (the wirehouses!!!)

    I give BB an A-. Greenspan would have screwed this up.

  34. Socalcool commented on Aug 13

    The spike in the dollar was, according to the WSJ & FT, because many European banks had billions of dollar denominanted redemptions coming up and were unable to raise the cash because of the lack of liquidity in CDO’s, etc. The FED acted perfectly because their increased cash infusion expired today and produced the desired effect–restoration of liquidity in the MBS markets. They also made it clear, as Cramer indicated today, that they weren’t going to continue the speculative wave of liquidity that Bernanke inherited. Shaking this crap out of the system might be painful, but dropping rates would be worse in the long run. Also, as China has made clear, they are in the driver seat after waiving their ‘nuclear option’. Everybody–at least for now–wants the system to work. As for inflation and M3, it has been a race to the bottom across the globe as the rest of the world, at least from my perspective, has attempted to prevent the devaluation of the dollar so that there goods and services are still attractive to US consumers. Everybody is over a barrel here and abroad.

  35. ECONOMISTA NON GRATA commented on Aug 14

    Learn from the fall of Rome, US warned
    By Jeremy Grant in Washington
    Published: August 14 2007 00:06 | Last updated: August 14 2007 00:06
    The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon, the country’s top government inspector has warned.

    David Walker, comptroller general of the US, issued the unusually downbeat assessment of his country’s future in a report that lays out what he called “chilling long-term simulations”.

    These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.

    Just picked this up from the FT….

    On the plus side, we do have Paris Hilton, she’ll pull us through.


  36. Winston Munn commented on Aug 14

    ECONOMISTA NON GRATA wrote: “Anyway thank you for letting me know that I’m not insane….”

    Now there’s a serious divergence – inferring that anything I am thinking is sane. Talk about credit spreads….

    On a more serious note, the Hussman piece referenced above is thoughtful – his supposition that MBS were used because this is what banks hold sounds logical; however, I am still uneasy as what I have been able to piece together is that the Fed actively encouraged the use of MBS for collateral.

    And no one yet has come up with the answer as to what caused this crisis to occur virtually worldwide on the same day.

    It’s almost like Watergate days: follow the money. But to where and whom did all this repo money go? And what prompted the emergency need?

  37. reality check commented on Aug 14

    Why should the Fed ease rates, the fomented perma bull market is supposed to go to 15000 this year, so all of the talking heads in mass mdia have been calling for… so everything is great right… I mean, we knew about the sub prime problems in February yet they looked the other way from higher energy costs, higher consumer spending on debt to income ratios of near 30%… yea it’s a bull market,,, built on a pillar of debt.. it will crumble into the abyss… don’t try and pick a bottom.. we are no where near it.

  38. km4 commented on Aug 14

    The USA is headed for deflation….period !

  39. KirkH commented on Aug 14

    There will be no replacement bubble. Housing was too perfect. Tax free, accessible to joe six pack via the equity ATM, and it allowed people to convince themselves they weren’t just mindlessly speculating.

    No, they were investing in the American dream, their family’s future, and as realtors will tell you, “they’re not making any more land”.

    The Fed has no choice but to print and slash fast enough to outrun foreclosures.

  40. Andrew commented on Aug 14

    Sorry for my ignorance. Where did the Fed get the 38 billions dollars to pump into the market? I don’t think the Fed has a stockpile of cash in some basement. Did they borrowed it from Chinese or just print it out the thin air? If the money was printed out the thin air, the collateral is our (future) tax money. We are the ones bailing out the hedge funds. Is this what’s going on?

  41. stormrunner commented on Aug 14

    I don’t believe a Cramer between meetings emergency rate cut to 4.25 will bleed into the long bond fast enough to save housing. This markets already turned. Even if the banks get easy money they’ll be scared to lend knowing the off load conduits got a massive kink in it. All we can hope is that as they inflate to stave off the quickly deflating RE bubble that median wages will increase and meet housing median prices somewhere back at 3 – 4x factor so that we’re not the last generation to be able to afford the dream. This is the test! If Benanke can pull this off in less than 24 months after the mess that Greenspan made my hats off to him regardless of the inequities I feel exist in the system.

    For a graphical representation of just how difficult this will be check out my neighborhood.

    This picture speaks a thousand words every one I show it to instantly quips, are you trying to make me depressed?

  42. Eclectic commented on Aug 14

    Winston, you’ve been making a lot of sense the last approx, say, 4-5 posts on multiple topics. That’s just a general statement and doesn’t imply I agree entirely with everything you’ve written.

    Bernanke is only now being tested. All he’s done up until this liquidity crisis is continue Greenspan’s initiatives.

    It’s too early still to claim that the housing blow-up hasn’t been contained. Actually, we may have seen the bottom… or the bottom may be months away. We just don’t know yet.

    Bernanke has stated in testimony or speeches (I’ll prove it if I have to) that both he and prior Fed Chairs have made it clear that their interpretations are that Fannie and Freddie loans are not backed by the government.

    My best guess is that the government would in an extended crisis in housing both: 1) – cover GNMA bondholders:

    …while using the network of mortgage lenders who service those loans to work out terms to rehabilitate the FHA and VA mortgagees(*) who took the loans out (thus the government would eat the losses, not the bondholders), and….

    2) – encourage the same workout for non-GNMA loans, but those entities who made those loans would absorb losses until they’d consumed all their potential liquidating net worth, if it required absorbing losses to that extent. Beyond that, it would be a work-out of terms between mortgagees and the successors to their BKed lenders. To the extent that non-GNMA lenders would have tapped depositor capital from banks to make the loans, and then defaulted after liquiditing net worth limits were reached, then any banks that failed would indeed require that depositors’ balances be covered to the limits of depositor insurance. So, whether the FOMC has taken non-Treasury/GNMA assets as collateral for temporary loans or not (I’m not well informed on whether they have or not) is, to my understanding, not quite the offense that you interpret it to be, Winston. My theory being that if the FOMC is able to facilitate an orderly current work-out of liquidity issues, regardless of the assets they accept as collateral, they may in the final analysis be helping to stave off a much worse crisis.

    Pray we don’t have a crisis of that magnitude… Pray.

    (*) – Fannie was initially an agency of government used for guaranteeing FHA loans, but was later spun out of government to private enterprise. It’s prior purposes related to FHA loans was taken over by the newly created GNMA, which also took over responsibility for VA loans in I think approx the mid-1960s. This source claims it was 1968 and that other than VA and FHA loans it does guarantee some other forms of public assistance loans:

    Here’s information on Fannie:

    **These are strickly my personal ideas of one potential course of events – The true course of events might not remotely resemble this.**

  43. sk commented on Aug 14

    I want to include Bernanke’s Humphrey-Hawkins testimony in this – He stands out there and gives just one view – “inflation risks” – “growth continuing” – “housing bubble contained”.

    He can’t possibly really believe all he says – and forget the theoretical argument it looks like we will get empirical evidence that he is wrong. Even if he does believe what he’s saying, he should include a “dissent” section in his testimony – not shills for other parties like unowhos nor the same tired old faces you see on CNBC but
    something fresh – not patronizing either – but damnit give the other side a look in- you are going to look to them to rescue this country if you happen to be wrong.

    And to the extent that they don’t, it fosters deep cynicism and if the boom is really lowered a la the 30s then you are going to need the moderate/enlightened left to unite with as a matter of real urgency.

    So, he’s really missing or refusing to state the deep global / socioeconomic impact IMO and so I score him a 4.

  44. Eclectic commented on Aug 14


    I’m sorry but to my mind it’s simply intellectually dishonest to claim that Bernanke could not claim and stand by those three elements you quoted.

    After sufficient time passes we’ll know if he’s been right or not, and I expect he hasn’t been right, but, to present, it’s not beyond the scope of possibility that he’s correct.

    There is a great assumption in the country about each of those elements that, at least until now, the reality doesn’t fit the assumptions.

  45. Elaine Meinel Supkis commented on Aug 14

    Hello from Culture of Life News!

    The world changed last month. Japan and China have started a currency war and this is going to screw world FOREX markets big time. The Chinese just decided they are strong enough to reel in the Japanese. Japan just removed the billions they threw into the stew pot last Friday.

    We have virtually NO FOREX reserves. Europe had $400 billion FOREX reserves for the euro and used up 2/3rds of this in just three days. They won’t show this in their IMF records because they will fudge things by making this money magically. But eventually, if it isn’t replaced, it will have to be deducted from somewhere.

    99% of American financial news services ignore the epicenter of the financial crisis: Japan. It puzzles me greatly.

    Actually, it doesn’t puzzle me. Japan is the source of the creation of funny money everyone uses and throws around so lightly.

  46. Jason G. commented on Aug 14

    It is a bit of a magic trick lately…

    Manage inflation expectations with the FOMC rate, but really goose the monetary supply through non-traditional actions like repos, back room dealings, etc.

    It’s been on their play books for a while to keep the public distracted with the FOMC rate, policy announcements, etc., but then act to spur and stoke monetary inflation in every other possible way. I’m a little worried that they had to announce the repos last week as that means the non-public stoking may not be effective enough.

  47. jz commented on Aug 14

    “ The FED can either target growth in the monetary base or it can target the overnight lending rate for reserves. It can’t do both.”

    Absolutely false. It can and it does. The rate is the primary target. The base is secondary, especially in the short term. In this case, high velocity of transactions through the system caused maldistribution of bank reserves and failure of the system to clear smoothly at 5.25. More reserves required in aggregate to clear at 5.25. Roubini is wrong. There is no problem with a uniform 5.25 lending rate. What is more important and unknown is the discount that the Fed applied to value lower grade collateral – but a uniform lending rate at 5.25 is consistent with the target rate. This was a technical operation to ensuring clearing at 5.25. The meaning of it all is much overblown. The problem is entirely a function of uneven reserve distribution and banks’ reluctance to spend excess reserves normally because of it – to avoid borrowing at the window. It is not a change in monetary policy.

  48. Justin L Tindall commented on Aug 14

    We learned back in the 80’s that Command Economies are doomed to failure, perhaps with Primer Bernanke ahead of the Politburo, it will be proved to be correct once again?

  49. ben commented on Aug 14

    Overnight Fed interventions are like putting tissue paper on an open wound.It won’t stop the bleeding. Only rate cuts will.

    The most recent “appropriate” action by the Fed has done very little to reign in Libor rates, which are at the heart of most all short term borrowings by non-banks. The disconnect between Libor and Fed Funds is very significant and acts as a tightening on the US economy at a time of slower growth…not good.

  50. Eclectic commented on Aug 14

    I don’t know how many realize this but Wal-Mart has just, subliminally, asked Mr. Bernanke for a rate cut.

    That’s the world’s largest retailer saying the macro for their customers just isn’t cutting the mustard.

  51. Paul commented on Aug 14

    Mr. Hussman has it right. The Fed can set either an interest rate or a quantity of money. Not both. If they set a rate, they must provide as much or as little short term cash in the system to support that rate (which is what they did last week). If they want to set a quantity of money, they could do that, but would have to ignore the rates that the public wishes to lend that cash to one another. When Mr. Bernanke talks of the helicopters, it is tongue-in-cheek. He means that the Fed would lower interest rates to 0% if necessary and provide as much money as the system demands, not print cash like Weimar Germany.

    The best question to ask is the one James Grant continually asks: Is it proper to let government employees price-fix the money market, or should the market set money prices? When has price-fixing (particularly by the government) ever worked long term? To answer your question, no, the Federal Reserve should not have intervened last week, but they had no choice but to do so if we want (and allow) them to set short term interest rates.


  52. michael schumacher commented on Aug 14

    Money quote:

    ” the core PPI has now risen 2.3% over the last 12 months, the biggest gain in two years, something the Federal Reserve will have to keep a close eye on.”

    How much more data do they need to look at?? At each meeting they end it with “and we will continue to look at the data”.

    Seems likely there is a trend that has shown itself-LOL

    Inflation ex inflation has risen…..makes you wonder what real inflation is- about 5%


  53. Karl Smith commented on Aug 14

    I think the response from the FED has been nearly perfect. Unlike most here I was a hardcore hawk. I was pushing for a rate increase up until late May / early June.

    In hindsight I think the FEDs response was more appropriate. Keeping the bias on, but not actually raising rates has done enough to calm inflation expectations and to do away with the notion of a FED put without actually driving the economy into recession.

    At the time I was willing to force a recession in order to alter inflation expectations but that does not appear necessary.

    The only thing I would consider is closing the gap between the discount rate and the funds target. And, I emphasize consider.

    A smaller gap would provide an automatic break against liquidity crises without having to explicitly inject funds and deal with the confusion that that causes in the markets.

  54. michael schumacher commented on Aug 14

    anyone see the futures action last night….

    No wonder we opened up “positive” today….only to follow the realistic action later on. Wal-Mart lowering is no small thing….only the talking heads seem to ignore it.


  55. AD commented on Aug 14

    My thoughts…

    1 – The Chinese using the ‘Nuclear Option’ will hurt them more than it will hurt the US in the long run. A poor policy decision.

    2 – If anything, we need a rate hike. Think Volcker.

  56. dark1p commented on Aug 14

    What’s true in government is true in economics: you can’t throw money at a problem and expect that to fix things. The past decade has been horrible re the future it’s set up (I suppose you could go back even further, but…).

    Moving from one bubble to the next is not the answer, it’s a parlor trick–and printing or loaning more money into an overflush system may be the only thing the Fed can do right now to keep from getting tarred and feathered, but it’s ultimately suicidal. Like every other response the Fed has had since the mid-90s, it’s a band-aid that hides the gangrene underneath. And the gangrene keeps getting worse and worse the longer it’s papered over.

    If we had taken our medicine in ’97-98, it would have hurt, but we’d have recovered. If we took it in 2000, it would have hurt a bit more, but with the same result. In 2001-2, it would have been very painful, but we sloshed that attack away, too. Now we have what we have.

    One of these days, and it looks like it may be soon, the serial bubble trick isn’t going to work, the easy money won’t ever be easy enough, and we’re going to have to deal with a very ugly reality: the system is built on chicanery and manipulation instead of real growth and production. It’s not different this time. This scenario always ends badly.

  57. SPECTRE of Deflation commented on Aug 14

    Per the US Treasury. On 8/10/2007 the United States was technically in default. The ceiling is $8.965 TRILLION! Any more question?

    08/10/2007 $8,968,607,956,049.61

  58. SPECTRE of Deflation commented on Aug 14

    Barry, this little gem will make for a very interesting day tomorrow:

    August 14, 2007
    Hedge Fund Losses Prompt Exits as Deadline Looms
    Filed at 8:23 a.m. ET

    BOSTON (Reuters) – For hedge funds, August 15 may be D-Day, when investors rattled by heavy losses demand their money back from big and small portfolios alike.

    “We are seeing a ‘shoot first and ask questions later’ mentality among many investors,” said Philippe Bonnefoy, chairman of hedge fund advisory group Cedars Partners, describing how everyone from the wealthy to chief investment officers at endowments are now shunning risk.

    Unnerved by heavy losses at some of the $1.75 trillion industry’s most famous offerings, including AQR Capital Management, Highbridge Capital Management, D.E. Shaw and Goldman Sachs [GS.N], many people want out before things get worse.

    But exiting can be a difficult process in an industry where managers routinely lock up money for months, if not years, and often require 45 days’ advance notice before returning it.

    To pull out at the end of the third quarter, investors will have to notify their managers by August 15.

    “Everyone always waits until the last second to get out, and (Wednesday) is the last second,” said Mike Hennessy, managing director at hedge fund of funds Morgan Creek Capital.

    Redemption notices began piling up weeks ago at hedge funds that specialize in subprime mortgages after two prominent Bear Stearns funds collapsed.

    Now, what seemed like a contained problem has spread from credit-focused strategies to a broad range of funds, including one with a so-called market-neutral focus, that are not supposed to see huge losses, analysts and investors said.

    Market-neutral funds, which hope to exploit market discrepancies by buying undervalued securities and taking an equal, short position in a different and overvalued security, returned nearly 6 percent during the first seven months of the year, delivering some of the industry’s more robust performances. But the U.S. stock market’s recent quick-paced decline, followed by a brief rally and then more losses, erased all gains and left the group with losses, according to investors who have seen weekly numbers.

    “I expect there will be a lot of redemptions in market-neutral funds,” said Andrew Fisch, a portfolio manager for funds of funds at SSARIS Advisors. “The reality is, you will probably see redemptions across the board.”

    Investors said that while the race away from risk is not limited to hedge funds, it is being felt hard in this asset class.

    Because hedge funds can use leverage, or borrowed money, and sell securities short, losses can add up faster here than in mutual funds, for example.

    “No chief investment officer is going to get fired for deciding to get out of hedge funds right now,” Cedar Partners’ Bonnefoy said. “You can always reinvest later on.”

    Industry sources said it is impossible to estimate how much money will leave hedge funds at the end of the third quarter, but they agree the sums will be large. Hedge funds took in $60.2 billion in new money during the first quarter, with funds specializing in distressed securities, arbitrage and event-driven strategies seeing the bulk of inflows, data from Hedge Fund Research show.

    The last time hedge funds suffered net outflows was during the fourth quarter of 2005, according to HFR.

    For the money coming out, there may be no better investment options, investors agreed. “When people pull out because they are scared, they go to cash,” said SSARIS Advisors’ Fisch.

    But some industry advisors are urging people not to throw in the towel quite yet because problems in portfolios will be repaired. “While there are certainly funds that will suffer now, I think when we look back on this period it will turn out to have been a very good one for hedge funds,” said Thomas Whelan, chief executive of Greenwich Alternative Investments, which tracks performance in the hedge fund industry.

  59. SPECTRE of Deflation commented on Aug 14

    This has the potential to be systemic. Cut and cut now. Learn from your history lessons Ben. Deflation is the real problem (see Japan).
    You have 2 chances to re-inflate- Slim and none.
    Slim is leaving town now.

    Posted by: Joe | Aug 13, 2007 11:11:40 PM

    Nonsense. You are asking the FED to throw gas on a 5 alarm fire. The question isn’t illiquidity…it’s solvency. There is nothing left but the debt. The assets backing the debt are pure shit and worthless. No one, and I mean no one, wants to touch any credit instrument at this point because it may be of the toxic variety.

    They have two choices. Bite the bullet and go deflationary or print money/create digi-dollars which take us to Weimar Germany. There is no way in Hell they go the Weimar way.

  60. michael schumacher commented on Aug 14


    you really need a web-site…….fascinating stuff on the redemption stuff….and a bit un-nerving as well.

    I respectfully disagree with this:
    >>There is no way in Hell they go the Weimar way.>>

    They (along with the rest of the world) are well on that road. $400 billion in less than a week is a foundation…..

    Keep up the great info.


  61. UrbanDigs commented on Aug 14

    I think Bernanke has proven to us all that he is fully capable of heading US monetary policy. He has not bent to the tradable markets, and he has proven to be spot on with fed funds rate and statement thus far.

    Where Greenspan was more proactive and aggressive, Dr. Ben is more stable and calculated. I think he is doing a very admirable job thus far and is handling the current credit crisis correctly.

    Keep building investor confidence Ben!

  62. stormrunner commented on Aug 14

    “It’s too early still to claim that the housing blow-up hasn’t been contained. Actually, we may have seen the bottom… or the bottom may be months away. We just don’t know yet.”

    This is a graph of some of the largest markets in So Cal, the 10’th largest economy in the world.

    Please shed some light on how this could possably be contained. I have a reasonably well paying job, a mortgage and poperty tax payment thats about $500 a month short of equivilent rent. And I’m still seriously considering cashing out to aviod losing 300 to 400K in accumulated equity. I’ve been mulling this choice since last summer but decided to stay cautiously optomistic. This statement leads me to believe my complacency is not unwarrented. But a little eloboration would most certainly be comforting.

  63. SPECTRE of Deflation commented on Aug 14


    you really need a web-site…….fascinating stuff on the redemption stuff….and a bit un-nerving as well.

    I respectfully disagree with this:
    >>There is no way in Hell they go the Weimar way.>>

    They (along with the rest of the world) are well on that road. $400 billion in less than a week is a foundation…..

    Keep up the great info.


    Posted by: michael schumacher | Aug 14, 2007 11:09:53 AM

    Michael, Firstly, thank you for the complement. I mean that because I know there are some awfully smart folks who frequent this site. There’s an interesting article below concerning the US Dollar. My grandmother used to tell me a story that pork chops were a nickel a pound during the Depression, but no one had a nickel.

    This is where we are today. All the liquidity/debt is nothing but crap. Everyone needs Dollars to pay their margin, but there are no Dollars to be had. It’s one of the reasons that the Dollar is skying against other currencies. Another point is that the FED and ECB are doing a swap to get Dollars into the hands of those in a wrong way trade(s).

    Our choices are the nickel a pound for pork chops or a wheel barrel for our pound of pork chops. The FED can’t allow money stock to increase, but again, this is just an opinion, and I can certainly be wrong. For this countries sake, I hope I’m not wrong.

    It’s what the FED means by, “we can add liquidity to the market, but we can’t bail out malinvestment”. [From my memory]

    Subprime-Infected Funds Drive Dollar Demand (Update1)

    By Matthew Benjamin and Liz Capo McCormick

    Aug. 14 (Bloomberg) — The dollar is no longer the currency you love to hate. Now, it’s the currency you can’t live without.

    Last week’s credit crunch has set off a worldwide rush for dollars as banks and fund managers scramble to pay back loans used to buy risky mortgage securities. They are competing with firms such as AXA Investment Managers, Investec Asset Management Ltd. and FX Concepts Inc., which are also buying dollars in a bet on further appreciation.

    After a five-year tumble that took the U.S. currency to its lowest level in a decade, it has rallied 1.4 percent against the euro and 1.2 percent against the pound in the last three trading days. And it’s “likely to keep benefiting,” said Mansoor Mohi- Uddin, head of currency strategy in London at UBS AG, the world’s second-largest foreign exchange dealer.

    The dollar’s advance shows that, for all the talk of challenges to its primacy, it remains the world’s go-to reserve currency in times of market turmoil. “This is where people take refuge,” said Komal Sri-Kumar, who oversees $145 billion as chief global strategist at TCW Asset Management Co. in Los Angeles. “The dollar is still a safe-haven currency.”

    The dollar rose against the euro as of 10:37 a.m. in London, climbing to $1.3573, from $1.3613 late yesterday in New York. The U.S. currency is up from $1.3798 late on Aug. 8 and a record low of $1.3852 reached on July 24. “European banks are struggling to roll over their short-term financing,” said Mohi-Uddin, whose bank accounts for 15 percent of the currency market, according to an annual Euromoney magazine survey. UBS predicts the dollar will gain to $1.32 per euro in three months.

    BNP’s Bombshell

    BNP Paribas SA, France’s biggest bank, spurred the stampede into dollars on Aug. 9 by halting withdrawals from funds invested in subprime debt. Just a week earlier, Chief Executive Officer Baudouin Prot said the Paris-based bank wasn’t at risk.

    While the credit-market turmoil originated in the U.S. as delinquencies rose on subprime mortgages — those made to borrowers with poor or spotty credit history — it has spread around the world. European banks are particularly at risk after borrowing in dollars to finance their investments, analysts said.

    There is an “increasingly visible presence of European names on the borrowing side” of lending by U.S.-based banks, Wrightson ICAP economists wrote in an Aug. 13 report, citing their analysis of Federal Reserve data. Europe’s rush for funds was aggravated because U.S. financial markets were closed at the hour of the BNP announcement, they wrote.

    `A Liquidity Panic’

    “The combination of time-zone complications and the regional imbalance in dollar funding requirements between the U.S. and Europe is a combustible mixture in a liquidity panic,” the economists wrote. Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey, declined to comment.

    The overnight lending rate for dollars in Europe, the London Interbank Offered Rate, jumped to its highest in six years as investors and lenders sought cash to unwind bets gone awry. The European Central Bank pumped a record 94.8 billion euros ($129 billion) into euro-denominated money markets on Aug. 9, keeping most of that in the system the next day. The Fed injected $62 billion in the U.S. over the two days.

    Besides BNP, German banks have also been hit. Germany’s government had to organize a rescue package for IKB Deutsche Industriebank AG as the Dusseldorf-based bank unveiled potential losses of as much as 3.5 billion euros.

    NIBC Holding NV, the Dutch investment bank owned by a group including J.C. Flowers & Co., said Aug. 9 it lost at least 137 million euros on U.S. subprime mortgage investments this year. The Hague-based bank said it expected further losses.


    The dollar’s surge may be short-lived if credit concerns abate, analysts said. In that case, investors’ focus is likely to return to a weakening American economic outlook and concern about reliance on foreign funds to finance record U.S. current-account deficits.

    “On any risk aversion there is a return to safe-haven currencies, of which the dollar is the main one,” said Thanos Papasavvas, head of currency management at Investec Asset Management in London, whose firm bought dollars “across the market” last week. “This is mostly a closing down of risk positions which also caught the market short of dollars.”

    The dollar will drop to $1.38 per euro by year-end according to the median forecast in a survey of 45 analysts by Bloomberg. It has declined 18 percent against the currencies of the main U.S. trading partners in the past five years, according to the Fed’s broad trade-weighted index. It fell as low as 102.05 on July 24, the lowest level since June 1997.

    Expecting Weakness

    “If the U.S. economy continues to slow down relative to the rest of the world, and given the large U.S. current-account balance, I would expect the dollar to weaken further,” said Nouriel Roubini, chairman of Roubini Global Economics LLC and a professor at New York University’s Stern School of Business.

    The International Monetary Fund forecast on July 25 that the global economy will expand 5.2 percent in 2007. The Washington- based fund predicted that both Japan and the 13-nation region of countries that share the euro will outpace the U.S., expanding 2.6 percent compared with 2 percent.

    The deepening crisis in U.S. subprime mortgages and credit- market turmoil prompted Fed policy makers on Aug. 7 to acknowledge that “downside risks to growth have increased somewhat.” Defaults on subprime loans are at their highest in a decade, according to Friedman Billings of Arlington, Virginia, a real estate investment trust that owns most of investment bank FBR Capital Markets Corp.

    Losses on subprime securities are also helping the dollar for now by leading some American investors to repatriate funds from abroad, analysts and investors said.

    Kobe Earthquake

    A similar pattern occurred in Japan after the January 1995 Kobe earthquake, which devastated the port located near Kyoto and killed 6,434 people. Japan’s currency climbed more than 18 percent against the dollar in the three months following the disaster, boosted by Japanese investors and insurance companies bringing home foreign investments.

    “At a time when U.S.-based portfolio managers are cutting risks, they tend to repatriate money back to the U.S.,” said Lucio Sarno, London-based director of currency research at AXA Investment Managers, who helps manage $741 billion in assets. “We’ve been buying dollars,” he added, predicting “near-term support” for the currency.

    While the dollar’s share of global foreign-exchange reserves has fallen in recent years, it remains the predominant currency held by central banks. The dollar accounted for 64.2 percent of foreign-exchange reserves as of March, IMF data show. It made up 71.1 percent eight years earlier.

    “For a long time there has been talk about the dollar is garbage,” said John Taylor, chairman of FX Concepts, a New York fund that has been adding dollars among the $12.1 billion in currencies. “The dollar is the king now.”

    To contact the reporter on this story: Matthew Benjamin at , Liz Capo McCormick in New York at .
    Last Updated: August 14, 2007 05:42 EDT

  64. marketwhisper commented on Aug 14

    If M3 is accelerating as dramatically as assumed, what is the financial liability to indexed linked bonds should there ever be a inflatiuon clearing event. How can a govt that issues inflation linked liabilities be trusted to report the clever by half…when the chinease have to come out and say they support the dollar as the reserve c urrency you know it is only a matter of time. Get shorty…

  65. Marcus Aurelius commented on Aug 14

    Bernanke is hiding under his desk in the fetal position, hoping that Greenspan will call and tell him what to do.

  66. Marcus Aurelius commented on Aug 14

    But if more inflation is all the Fed can do, where will the next bubble be? I’ve got some cash sitting on the sidelines.

    Posted by: Brian Mihalic | Aug 13, 2007 9:01:22 PM


    Legalization of illicit drugs is all we’ve got left. It’s a booming business in fat times and lean.

  67. SPECTRE of Deflation commented on Aug 14

    Update on the United States technically being in default. New all time high on the country’s debt yesterday. The current ceiling is $8.965 TRILLION, and weeks ago Paulson said we wouldn’t have to worry about this until Oct. 2007.

    P.S. It’s sill contained per Hanky Panky.

    08/13/2007 $8,969,936,197,090.19

  68. DavidB commented on Aug 14

    Buffett is buying banks and drugs. The drugs I suppose are to be taken after looking at the bank statements

    Berkshire reports Bank of America, Dow Jones stakes

    If Blackstone buys GS does the market own itself?

    The best question to ask is the one James Grant continually asks: Is it proper to let government employees price-fix the money market, or should the market set money prices? When has price-fixing (particularly by the government) ever worked long term?


    The market did try to fix credit rate by driving them up. The fed slammed them back down by adding liquidity. The funny thing is that if the high rates had been left alone liquidity theoretically would have come in to claim the ROI so the fed would not have needed to add liquidity because higher rates would have done the same thing. The fed added risk by sticking to its rates and keeping them artificially low when the market would have solved the problem a lot quicker

  69. Winston Munn commented on Aug 15


    It may be this simple. The Fed encouraged the use of MBS because that is what most of the banks held, and doing so allowed the banks to hold their more liquid treasuries in case of further capital need.

    Ya think?

    Also, I’d like to point out something about SOMA. There has been a lot of talk about the PPT manipulating the markets, yet year to date the SOMA has only grown by about 3% – the Fed has actually been pretty stingy this year.

    The earlier easy debt was not created by the Fed – so any talk of manipulation might be placed on the Prunge Plotection Team, but not the Fed – non-traditional sources created most of the havoc.

  70. Juan commented on Aug 15

    There are agency MBS and private-label MBS. Which was used as collateral and, if the latter, I ran into a theory the other day that private-label types might be provided luster of required federal guarantee through the use of agency credit default swaps, so permit those MBS use as collateral.

    Along moreless the same line, an October 2000 Chicago FRB paper, Historical Origins of the Use of Treasury Debt in Open Market Operations: 1914 – 1933, in it’s Lessons for the Present section noted:

    “…there are a number of parallels between the System’s experiences in its first two decades of existence and the policy choices that the System may face over the next few years. Most obviously, there is a clear precedent for open market purchases of privately issued securities.”

    A final sentence which may obviate my first para.

  71. Eclectic commented on Aug 15


    I can’t give you the specific advice you’ve asked for. First, I don’t give advice on TBP… and second, my real estate experience is so far removed from yours, geographically and culturally, as to make it relatively on Mars by comparison. I’ve bought 2 houses in my 56 years and made mistakes both times. I lived down the first one in 17 years and the second one I’m still living down after 13.


    Of course credit creation exceeded the capacity of the Fed to control it, but they perpetrated the loss of control, not the reverse. Bernanke’s done nothing but focus on that loss of control in several of his speeches and in his testimony.

    Let me say this: If Bernanke is able to reinstate the Fed’s control of monetary policy… he will be a hated man… widely hated… viciously hated… and the hate may last long enough for him to not get the second ticket on the E-Ride at Parko-Federamo… if you catch my drift.

  72. Juan commented on Aug 15


    Agree that the Fed assisted in creating its own loss of control but think that decades of financial dereg – not just U.S. – also played a large part as well as substantially improved technologies and changed mode of corp. organization.

    Which leads me to believe that the Fed, others, having helped release and further develop the genie of global financialization cannot force it back into national bottles without directly attacking, largely destroying, private finance capital.

    Differently, globalization is irreversable other than in association with extreme real and financial crisis.

    Again differently, the postwar shift from national to global has also been a shift from more to less control, to increasing uncontrollability flowing from the contradiction between national states and capital realizing itself globally. One might with reason say that this has been greatly facilitated by the constellation of ‘the market knows best’ (‘there is no alternative’) neoliberal/Washington Consensus policies from the earlier 1970s on.

  73. stormrunner commented on Aug 15

    Eclectic thanks for the reply, I really wasn’t looking for RE investment advice. I was more interested in your taking a gander at those charts as Winston has and the home page also. I’m not certain but I think they could impact which direction you lean towards in defining a RE bottom and a window out of this mess.

    Winstons comment:
    Gov. Arnold better get the soup kitchens warmed up when that chart reverts to mean.

    Your insights as always welcome and respectfully considered.

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