TimT

Fed Creates Bank Margin Squeeze

Interesting comment about the Feds position now being the only buyer of Treasuries and therefore in a position to know if Chinese are unwinding. I never thought of it that way. Are you sure the chinese are mostly in Pfd's. Suggestions on where I/we could find out the facts about it?
On Dec 17 04:30 PM M Dub wrote:

> Still trying to get my head around some of the point here. What does
> the prime rate have to do with a bank's lending model? Sure, some
> credit cards and heloc assets are still prime based, but most dollar
> banking is still libor driven. The curve is what it is, which is
> mostly due to quantitative easing on the long end, so dropping the
> front end makes a lot of sense to keep the curve upward sloping.
> The fed wants consumer rates down either way, for lower debt service
> to spur the economy. Banks have too many existing assets on the books
> and the fed is backstopping their funding, but they don't want new
> assets anyways. Sure, it screws fixed income folks but so would a
> depression.
>
> The inflation and dollar comment are valid, and this has been the
> case for quite a while. Desperate depression avoidance, which has
> serious inflation/paper currency consequences.
>
> Re the chinese: their investment is now pfd. equity....the only buyer
> of UST now is the fed so they will know if the Chinese are trying
> to unwind their positions (i.e not gonna happen). So all we need
> is new money.
>
> Re: Money markets: The government is everything right now. There
> are no real "money markets", it's all fed and treasury risk now,
> which i don't think changes from 1% to .25% or lower.
>
> Banks aren't going to lend but they weren't at 1% either, so again,
> the fed already said they will originate residential mortgages. The
> banks are irrelevant anyways, there is one relevant balance sheet.
>
>
> So what is the point about the prime rate since its mostly there
> for perception? I think whats happening in the libor markets and
> mortgage markets is more relevant.
>

Fed Creates Bank Margin Squeeze

Good article. Lower rates don't help state and local banks that are the only ones doing any lending right now. The rate cut is more welfare for the big banks that helped get us in the mess in the first place.

With regard to the Fed announcement yesterday...

I thought the "short treasury trade" would be the trade of the century but after I read the Fed Statement yesterday and saw that they were going to buy treasuries, I put that idea on hold.

What really puzzles me is that the Fed has been doing everything so far to put money in the system and increase money supply to "get the economy moving again." The after effects of this action would be inflationary in the long run and therefore begin to weaken the dollar. This weaker dollar anticipation would then cause foreign debt holders of Treasury Securities (mainly the Chinese, to the tune of $500bln) to want to sell their positions. With the Fed announcement yesterday it appears the Chinese and others now have a way to sell their positions at a profit and have a ready, willing, and certainly able party (the Federal Reserve Bank--read cost to taxpayers) to maintain the high price as they sell. I am beginning to think the Fed has no clue--they appear to be "academic" only with no real world pragmatism or understanding of what our situation is with regard to our free trade with the rest of the world without any protections for our hard faught for economy, standard of living, and way of life. Don't people understand that when we open trade with other countries and the trading partners we buy from don't float their currency, we in effect import deflation? I'm for free trade but lets have some rules. Too late now...

They say that if your not a little paranoid you don't really know what's going on. What I'm seeing happen over a matter of 4 months is litterally a financial coupe d'etat takeover of our country. Who is behind it and who will end up with what, I have no clue. All I can say is the middle class is getting clobbered.