Entering the Endgame for Monetary Policy 16 comments
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Look at the H.4.1 report. We may have finally hit the panic phase of monetary policy, where the Fed increases the monetary base dramatically. They are pumping the “high-powered” money into loans:
- $20 billion for Primary credit
- $80 billion for Primary dealer and other broker-dealer credit
- $70 billion for Asset-backed commercial paper money market mutual fund liquidity facility
- $40 billion for Other credit extensions
- $80 billion for Other Federal Reserve assets
- -$20 billion netting out other entries
Making it an increase of roughly $270 billion from last week’s average to Wednesday’s daily balance. Astounding.
In general, the increases are not being pumped into the banks, but into specialized programs to add liquidity to the lending markets. Now, I’ve written about this before, but it bears repeating. What happens if the Fed takes losses on lending programs? It reduces the seniorage profits that they pay to the Treasury, which means the Treasury has to tax or borrow that much more. The Fed isn’t magic; it’s a quasi-extension of the US Government in a fiat currency environment. Its balance sheet is tied to the US Treasury.
Yves Smith at Naked Capitalism is correct. The US is no longer a AAA credit, particularly if you measure in terms of future purchasing power of US dollars. I’ve felt that for years, though, with all of the unfunded future promises that the US Government has made with Medicare, Social Security, etc. The credit of the US Government hinges on foreign creditors (like OPEC and China) to keep it going. What will they offer them? The national parks? 
I try to be an optimistic guy and hope for the best. But the current actions of the government are making me think about a massive re-alignment of my portfolio… and I never do things like that. But, if the government is ramming through desperate measures, maybe I should too.
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This article has 16 comments:
So all I can say: very good graphic above but if this is not the 'end game spike' in a relatively short future bigger spikes will be there.
It will take some spikes before the US population understands that beside body fat you can also save real money... (Or better; real value.)
__________
To razorfangius I can say:
Log makes only sense on long term graphs, David publishes a one decade graph. I have no problem with that...
Just as we see distortions and panic describing the 700 billion dollars "stability plan", we see the panic expressed in this article by the author.
The financial sector's bleeding is at the end of the cycle.
The 700 billiion dollars liq
Here we go again.
There is no panic phase in the monetary policy.
Allocation of 270 billion dollars is simply an effective way to inject liquiditywhere it is needed the most .
Just as we see distortions and panic describing the 700 billion dollars
"stability plan",so do we see the panic expressed in this article by the author.
The financial sector's bleeding is at the end of the cycle.
The 700 billion dollars liquidity injection ,will provide the stimulous by far greater than the nominal amount under consideration.
In our system the financial institutions are required to maintain 15% reserve at the FED for every new dollar "circulated".
This creates multiplier effect for every dollar entering the system.
If the financial system receives 700 billion dollars in new liquidity,the system will generate 4.9 trillion dollars in stimulous(7x700 billion)-almost 40% of the GDP,indeed a very effective catalyst.
This stimulous should kick start the economy and contribute to the major market rebound.
This sequential events should enhance the value of the non performing assets underlying the "aid package".
If the value of these assets appreciates significantly enough,than the cost of the "stability plan" to the tax payers could be virtually zero.
In other words we are creating a 5 trillion dollars stimulous at no cost-not bad.
In addition as the Treasury buys the nonperrforming assets at the premium ,the Banks will be able to free up the reserves further enhancing the liqudity.
Incredible but simple.
The 270 billion dollars is a well applied band aid pending the major surgery.
Wake up Congress .
Thanks for the dissertation on the beauty of fractional reserve lending, the poorly-conceived (and soon to be relegated to the ash heap of history where it rightly belongs) monetary system which has brought us to the sorry state we find ourselves. What we are witnessing now is the effective leverage of fractional reserve lending working in reverse. Had we not levered up and inflated in the first place we would not be under such stress now.
In fact, JasonC noted elsewhere that we had realized writedowns of some $530 Billion and had realized equity losses of about $19 trillion. Yep, 35 to 1, that's about right. And it clearly illustrates why the businesses that over-levered MUST be allowed to fail: with the high leverage now working against us, we are trying to pour concrete into a sinkhole. Only after we totally destroy ourselves by pouring in all our good money after bad will we realize that the sinkhole is deeper than we can fill. If we pursue this path, though, we will complete the destruction of ourselves before we realize this. We will learn that unwinding 35-to-1 leverage takes more capital than we have, unless "the logic of the printing press asserts itself," in which case we destroy the dollar and ourselves along with it.
I would prefer to not self-destruct, but the money masters of the universe are going to thrown evrything they have, and everything I have, at the problem.
I SAY LET THE STUPID BUSINESSES FAIL. IT IS THE ONE COURSE OF ACTION THAT WILL CAUSE THE LEAST DAMAGE. They do not deserve our support, even if they have managed to merge themselves into what they hoped would be "too big to fail" status. After they have failed we can have a leisurely search for the guilty, followed by a first-class collaborator-bashing.
write downs - 530B equity los 1.9T
No paper is safe, except for maybe common stocks of real companies that make real stuff needed by real people. FRNs and debt instruments are toast, already doomed to hyper-deflation.
The only way to beat the bankster cartel is to stop playing their game by their rules on their turf with their fiat paper. Convert all FRNs and other paper to real money, physical (clink, clink) silver, gold and lead. Lead, "the other white metal."
In Friday's Denver Post Jeff Wilson of Wilson Advisory alleges the total value of all derivatives is $600 trillion. Excluding those, he says the total U S wealth is $57 trillion. If only 10 percent of the derivatives go bad, you can do the math.
There is expectation, and then there is reality. If everybody was content to hock themselves to the hilt tomorrow in order to buy a house, because houses would increase in value, then the real estate decline would be over. In one day, everything could turn around. Unfortunately, real estate was a bubble, fueled by a change from banks holding mortgages to banks selling mortgages to Fannie Mae as fast as they could and passing the risk along to the greater fool in a CDO package.
The total value of derivatives and the leverage used to produce them doesn't matter. All that matters is the pricing, which may have no relation to reality, or may have a relation that can change abruptly. The Napoleonic breakfront suddenly becomes worth twice as much, because the government puts a bounty on breakfronts.
Let's talk about economic decline. Who would be the real losers in a depression? The Chinese and the Europeans, not us. Yet the Chinese are alleged to have ordered their banks not to make any more loans to U.S. banks. That seems odd. The Chinese have plenty of liquidity. They could bail us out easily if they chose to. They obviously must be continuing to buy our treasuries, because if that didn't happen, interest rates would soar overnight when demand fell. I don't believe the Fed has enough funny money remaining to "monetize the debt" by buying up the treasuries with our own (ink still wet) money without causing immediate inflation.
So how do we solve the problem? I have some suggestions.
Put a cap on interest rates for credit cards at some reasonable level, like 10%. Bankruptcy laws have already been changed, so that people can't get out of repaying their debts. The banks don't need 20+% interest to make money, when they are paying 1% at the Fed funds window and can leverage that amount by 12 to 1 on reserves. This will immediately give people in debt some relief.
For any adjustable mortgage that is resetting, have the lender ask the homeowner if he wants to stay in the house. For houses that are deep "under water," where the current value of the house is far less than the amount owed in the mortgage, foreclosure is inevitable. If the person wants to stay in the house, have the lender refinance to a fixed rate mortgage at prevailing 30 year fixed rates. Have the government then issue 30 year treasury bonds to fund and pay the difference between the current (before reset) amount and the new, fixed rate amount, in return for an equity interest in the house that is senior to all other notes (including the lender's mortgage), and that serves as a senior lien on any sequence of sales. This is not an original idea. It has already been discussed in the media.
Let me explain a little further. The government becomes a partner of both the homeowner and the lender. The homeowner continues to pay at the previous rate. The government pays the difference, in an "equity sharing" arrangement. If the house is ever sold, the government gets paid first, up to the cumulative amount invested in this equity sharing (plus a nominal interest amount, say 2% APR). The lien goes with the house, so that subsequent sales have the same deal until the government is paid back.
Meanwhile, the lender can sell the mortgage, which is now a fixed rate mortgage that is probably only a little less creditworthy than prime. Fannie Mae buys it and packages it into CDOs, as before, but this time the rating and insurance agencies are carefully monitored to ensure that they are not overly optimistic about the risk.
After 30 years the mortgage is paid off. The homeowner then refinances the home (or sells it) to pay back the government's share of the equity.
Since the funding is done through 30 year treasury bonds, no current money is required from the government, and there should not be an inflationary effect. Banks can use those bonds as assets on balance sheets and "mark to market" at full value the original mortgage, thereby immediately seeing a large increase in the balance sheet total. That has a 12 to 1 multiplier in terms of their ability to loan money, so credit is immediately available.
It is possible, despite moaning and groaning to the contrary, to bootstrap oneself into prosperity. Indeed, it is easy. If one person makes shovel handles and another person makes shovel blades, and nobody wants either one, the situation can change overnight if the two companies put those products together correctly and suddenly have a shovel that everybody wants and that is useful.
If toxic CDOs become nontoxic, then suddenly everybody wants them, the prices go up to reasonable levels, credit increases and everybody is happy. The antique dealer's Napoleonic breakfront is in demand again.
Saying we have to go through a "purging" or "long, deep recession" or other such process is simply untrue. We may end up there, but it is not necessary. We are in our current pickle due to certain excesses. If those excesses are curbed, we can ease our way back to prosperity.
First, there must be confidence in ratings of debt, based on accurate assessments of the likelihood of default. Second, counter party insurance against default, whether through credit default swaps or straight insurance, must be accurately evaluated for safety in terms of reserves held by the insurer. Third, leverage must be limited to reasonable levels. This will not be enforceable universally, because the markets are too complex and international, but enforcement domestically should be possible. Fourth, banks must not be allowed to conceal debt through alleged creation of Cayman Islands shell companies which buy toxic debt from the banks and shield it from view within the shell, while the risk of default remains the same. Fifth, the government, whether at federal or state levels, should auction off foreclosed and purchased properties at the retail level, property by property, to individual buyers, not just in large packages to the fat cats (as some allege was done during the days of the Resolution Trust Corporation). Sixth, those who have caused this crisis through negligence, fraud or malfeasance should face legal consequences. Seventh, some might advise the American public (I am neutral on this) to vote out of office any elected officials complicit in causing this crisis through their inaction, cronyism, ineptitude, or corruption.
Our economic markets are sensitive to large perturbations. If we can reduce the size of the perturbations, the markets will be far more resilient. We can absorb dozens of bank failures, as long as they do not happen simultaneously.
Once values begin to return to sane levels (which may be lower, but will not be zero), the economy can resume its functioning at a reasonable pace. Then we can slowly start cutting our spending (maybe reducing the number of wars we're fighting or moving towards energy independence might help save some money, although I won't second guess our foreign policy).
Never happen ., it's a sensible thing to do . And you know that anything sensible will never happen , hasn't in my 50 years of watching politics , which is the root cause of the problems we face now.
You proposal makes sense , therefore you would never make it into politics . Damn, we need people with a brain running the country.
As the dollar continues its decline against foreign currencies, would you rather own companies that earn those foreign currencies or companies that earn increasingly worthless dollars? That's my rationale anyway. I might have also gone with commodities had they not inflated to bubble proportions. At this point there are much less risky options.