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  • The U.S. Banking System: Too Bigger To Fail [View article]
    "The safety net should exclude shadow banking affiliates, special investment vehicles of the commercial banks or any obligations of the parent holding company"

    That's how economics should work, but politics don't work. Confronted with this same problem (when the non-member commercial banks percentage of total CB system earning assets reached 65%), the Fed just converted 38,000 financial intermediaries (the non-banks, or MSBs, S&Ls, & CUs) into 38,000 commercial banks (via DIDMCA legislation). I.e., it gave the non-banks the power to create new money & credit. It also forced the non-member commercial banks to join the system & follow its rules.

    The inevitable "S&L crisis" was supposed to only represent limited "collateral damage" (to survive the thrifts had to act like commercial banks - change their business plan of borrowing short & lending long - this included using derivatives, brokered loans, etc.). As predicted in June 1980, the GSEs would have to replace the thrift's dominant position in the housing market.

    From 1942 until c. 1995, commercial bank credit creation was a "system" process & controllable. No bank, or minority group of banks (from an asset standpoint), can expand credit (& the money stock), significantly faster than the majority group are expanding. The Fed, through controlling the legal reserves of the member banks, can control the expansion of total bank credit, member, & non-member (& also indirectly non-bank credit - the transmitters of credit/velocity).

    De-regulation is to blame. We necessarily have regulated captialism. And when the banking lobby finally gets pushed hard (because the Shadow Bank's are capable of creating new money & credit just as the E-D system has done since the 1960's - using safe-assets as "money" as opposed to depositor's money), legislation will be enacted to ensure that the Shadow banks also become back-stopped (are TBTF).

    The Great-Recession was only midly disruptive compared to what the future holds. The Fed can rescue a few banks but it cannot rescue the system. The Fed's IOeR alternative (floor system of interest rates) will cause stagflation (business stagnation accompanied by inflation).
    Jan 19, 2013. 10:58 AM | 1 Like Like |Link to Comment
  • Playing With Money Printing Rules [View article]
    Stocks discount either future advances in, or concurrent growth in, some mix of inflation & real-output (nominal-gDp). It is obvious that the Fed's modeling in the short-run is providing enough impetus to achieve an upward path in economic activity (at least for the next several months). Stocks should continue to follow suit.
    Jan 19, 2013. 10:05 AM | 2 Likes Like |Link to Comment
  • Repoed, Part 2: A Deeper Look At Banks' Source Of Dry Powder [View article]
    Can't follow all the put & take, but as I understand it conceptually, QE expands CB excess reserves & then reserves are used by the CBs to buy riskier assets. Used means IBDDs exchange hands (have reserve velocity).

    You wouldn't be able to measure this activity in absolute volumes on the Fed's balance sheet as the CB's clearing balances (from an individual bank’s perspective), are either re-deposited within the same institution, or shifted to (clear thru) other CBs (reflecting the distribution of reserves from the system’s perspective).

    I.e., they are either derivative or primary inter-bank demand deposits (IBDDs) to member banks, but just a change in the composition of (IBDDs) for the system. Even with CB credit expansion, total reserves remain the same, but their form may change if excess “or precautionary?” reserves need to be converted to legally “required” reserves.

    Thus IBDDs are indeed "lent" from the standpoint of an individual bank (have reserve velocity) but are not destroyed as demonstrated from the system's perspective (unless Federal Reserve Bank credit on the Fed’s balance sheet changes).

    CB/FRB reserves may be depleted (if not offset by the “trading desk”), as “factors that affect reserve balances change” (as currency is issued or as System Open Market Account securities are sold or “run off”, etc).

    So without other evidence to the contrary, correlation implies causation by default. I.e., pledging & re-pledging (the velocity of collateral) allows the CBs & shadow banks to create lawful (re-hypothecated) money (& then clean cash is swapped for equities), but not legal tender (like the unregulated, prudential reserve, Euro-dollar banking system).

    In the E-D market, t-bills represent a medium of exchange, a unit of account, & a standard of value, (though not a store of value). And treasuries have a common repository for pyramiding (offshore banks). Fractional reserve banking is a function of the velocity of money, & not a function of its volume.

    Commercial bank credit didn't expand at corresponding rates to excess reserves because the composition of CB credit changed conterminously (loans were replaced by securities). Likewise QE changed the composition of SOMA's portfolio by swapping the shorter-dated securities used for creating clean cash for longer-dated ones (re-invigorating the repo-feeding frenzy propping of riskier assets).

    The QE evidence relies on how much the Fed buys & when it buys vs. when stock prices move. I'll keep your article for re-reading until I understand it better.
    Jan 17, 2013. 11:34 AM | 1 Like Like |Link to Comment
  • Deflationary Recessions Are Different [View article]
    "it is necessary to keep in mind the structural background in which it was developed"

    Nominal, real, zero-bound, Wicksellian-equilibrium, & uniquely Japanese? Wow, we’re in deep doo-doo now. One thing's sure, you can't use interest rates (or their spreads) to make accurate economic forecasts.

    Wicksell’s Natural Rate (see):
    http://bit.ly/VhPDWa

    (http://bit.ly/mQvm42) The “natural,” or equilibrium, real rate of interest = [1-2]

    1. medium-term financial-market real interest rate (=’s e.g., 10-year Treasury inflation-indexed bond)

    2. long-term “natural,” or equilibrium, rate of return on the economy’s capital stock

    Ergo: inflation will be approximately constant when these two rates of return are equal is an extension (I think not).

    I only read non-fiction.

    Garbage in, garbage out. But economic prognostications are INFALLIBLE.
    Jan 15, 2013. 07:12 PM | Likes Like |Link to Comment
  • Repoed! How The Fed And Depositors Fund Banks' Big Bets [View article]
    "lens of Basel3's"

    That's an old article. B3's been watered down.
    Jan 15, 2013. 03:17 PM | 1 Like Like |Link to Comment
  • Resolving The Safe Asset Shortage Problem [View article]
    "both reduce the excess demand for safe assets (because of greater nominal income certainty going forward) while at the same time catalyze financial firms into making more safe assets (because of the improved economic outlook and the related increased demand for financial intermediation)"
    ---------------

    Sounds right. But the shortage of safe assets initially developed as the Fed tentatively introduced its Credit & Liquidity Funding Programs & Facilities. As the Fed defined its eligible collateral requirements, terms, reserve impact, etc., it set the tone for liquidity (risk aversion) in the money markets (what's safe for the lender of last resort "is good for the gander").

    See:

    http://bit.ly/P1wSQS

    But the CB system's lack of security & loan demand was the direct result of transforming excess reserves (IBDDs) from cash (or non-earning assets), into earning assets via the remuneration rate.

    IBDDs now serve as "close substitutes" for Treasury bills in terms of safety & return. The payment of interest on excess reserve balances today is analogous to the rate differential that existed in favor of the CBs during the 1966 credit crunch crisis (the shadow banking system today represents the S&L's & MSB's of yesteryear).

    Commercial banks need clearing balances to lend (from an individual bank’s perspective), but these “reserves” are either re-deposited within the same institution, or shifted to (clear thru) other CBs (reflecting the distribution of reserves from the system’s perspective). I.e., they are either derivative or primary inter-bank demand deposits (IBDDs) to member banks, but just a change in the composition of (IBDDs) for the system. Even with CB credit expansion, total reserves remain the same, but their form may change if excess “or precautionary?” reserves need to be converted to legally “required” reserves.

    Thus IBDDs are indeed "lent" from the standpoint of an individual bank (have reserve velocity) but are not destroyed from a system's perspecitve (unless Federal Reserve Bank credit on the BOG’s balance sheet changes). I.e., “Base money is what’s left over after all assets & liabilities cancel out. It is, in other words, the system’s tangible equity. Or the equity of the system” - Izabella Kaminska

    Excess reserves may be depleted (if not offset by the “trading desk”), as “factors that affect reserve balances change” (as currency is issued or as System Open Market Account securities are sold or “run off”, etc).

    Note: the unregulated, prudential reserve, E-D bank lending (credit creation) is based on the velocity of collateral (not deposits).
    Jan 15, 2013. 02:43 PM | Likes Like |Link to Comment
  • Repoed! How The Fed And Depositors Fund Banks' Big Bets [View article]
    MY NOTES:
    The Central Bank's (FRBNY) open market operations (QE's) should be divided into 2 separate classes (#1) purchases from, & sales to, the commercial banks (CBs, respondent & correspondent); & (#2) purchases from, & sales to, others than banks (non-bank client/customer accounts):

    Note: “Repos & reverse repos are conducted with primary dealers via auction”. Safe-assets are pledged, re-pledged in the inter-bank market & in the wholesale money market (short-term borrowing & lending with original maturities from one year or less)

    http://bit.ly/Q4Q3xZ
    http://bit.ly/VHpIbz

    (#1) Transactions between the Reserve banks & the commercial banks directly affect the volume of bank reserves (inter-bank demand deposits -IBDDs) without bringing about any change in the money supply (see: H.3 Aggregate Reserves of Depository Institutions & the Monetary Base)

    Notes: [1] IBDDs, as defined, aren't included in the tabulations of the money stock. [2] IBDDs are liabilities on the BOG’s balance sheet (see: H.4.1 Factors Affecting Reserve Balances of Depository Institutions). [3] IBDDs are assets owned by the CBs (see: H.8 Selected Assets and Liabilities of Commercial Banks in the United States) which are held at their District Reserve bank.

    The “trading desk” “credits the account of the clearing bank used by the primary-issuance broker/dealer or direct-bidders (PDs) from whom the security is purchased ("clean cash")”.

    Note: [4] All the (PDs) are with bank holding companies, i.e., CBs. And the (PDs) are the FRBNY “desk’s” only trading counterparties. So the (PDs) would have to serve as agents for any “non-bank public” demand. I don’t know that process (although China, Switzerland, etc. are exceptions, also “direct bidders”, etc.).

    This alteration in the assets (IBDDs) of the commercial banks increase - by exactly the amount the (PD’s) government securities portfolio decrease.

    (#2) Purchases & sales between the Reserve banks & non-bank investors directly affect both bank reserves (IBDDs) & the money supply (M1, M2).

    (#2) If the proceeds from the sale of securities, is deposited (credited) to the non-bank public owner’s bank account, excess reserves will increase by less than total reserves (IBDDs), are increased, since the expansion in Reserve bank credit, will cause an equal increase, in the commercial banks’ deposit liabilities (i.e., can cause an increase in the commercial bank's required reserves - provided that the primary deposits are located within "bound" commercial banks).
    Jan 15, 2013. 05:25 AM | 3 Likes Like |Link to Comment
  • Repoed! How The Fed And Depositors Fund Banks' Big Bets [View article]
    "there is no evidence that this has much to do with QE or excess reserves"

    http://bit.ly/VGFmnG

    I learned this the hard way (start of QE2). Long-term money flows were rapidly decelerating (coinciding with the bottom in the roc for CPI-U less food & energy in Dec 2010). And stocks & the CPI-U began to diverge.

    "QE reduces the number of Treasuries owned by banks"

    QE took governments off the market - but the composition of commercial bank credit shifted (replacing loans with securities). The overall volume of gov't securities held by the CBs dramatically increased.

    Treasury and Agency Securities at All Commercial Banks (USGSEC)
    http://bit.ly/UlRKan

    Commercial and Industrial Loans at All Commercial Banks (BUSLOANS)
    http://bit.ly/VGFmnK
    ----------------------

    My Feb 17 2011 blog:

    "QE2 greased the wheels (velocity "of collateral"). It accelerated decision making. It redistributed financial investment (supported the Treasury Market - the FED's informal mandate). Once you change the risk value (swap or convert assets), you make the markets rebalance. Rebalancing alters the asset mix. It makes the market re-examine, and re-value, the linkages between financial & real assets. It increases the demand for loan-funds. It changes support & resistance lines.

    The Central Bank’s distribution channel (a.k.a. monetary transmission mechanism) is comprised of the Commercial Bank’s primary dealers & their customers (the investment banks & their mutual fund, hedge fund, pension fund, insurance company, sovereign wealth fund, corporate treasury, & wealthy investor, clients.

    These asset speculators (& the investment bank’s proprietary trading operations) are now vertically integrated, under the Gramm-Leach-Bliley Act passed in 1999 (& not segregated under the old Glass-Steagall Act which was put in place to minimize the stock speculation that characterized the late 1920’s).

    Indeed, the distribution channel is international. Today, commercial bank trading revenues, or profit centers, can be divided into fixed-income, currency, equity, & commodity classifications. If the FRBNY’s trading desk buys securities, then their owners will obviously buy riskier assets. That was Bernanke's gamble.
    Jan 14, 2013. 07:43 PM | 1 Like Like |Link to Comment
  • Repoed! How The Fed And Depositors Fund Banks' Big Bets [View article]
    Enjoyed the content. I was under the impression you had to buy a high priced subscription to some esoteric financial publication to get the scoop on hypothecation, etc.

    But the QE/repo (prop-up) or high/risk "investment-on" [stock, commodity, currency] CB->CB client distribution channel won't die out just because the FRBNY's "trading desk" stops its POMOs.
    Jan 14, 2013. 11:35 AM | 2 Likes Like |Link to Comment
  • Business Cycle Forecasting: The Superlative Results Of Robert F. Dieli [View article]
    "any model's static assumptions will lose their validity over time"

    Better spray the static out. Sure it's not philiosophically as George Santayana quiped: “Those who cannot remember the past are condemned to repeat it". In the area of economics its more accurate to say those who believe economic history contains eternal truths are doomed to error.

    And it's also not the same as in the science of quantum mechanics, where the Heisenberg "Uncertainty Principle" states: that certain pairs of physical properties, like position & momentum, cannot both be known to arbitrary precision.

    Ken Arrow might have been right in that "all analysis is a model" but his "impossibility theorem" doesn't apply to economic forecasts.

    Explain how one knows what can't be known - clairvoyance.

    Maybe it's that we self-impose our own limitations (on 2nd thought there are no maybe's about it).
    Jan 13, 2013. 08:10 PM | Likes Like |Link to Comment
  • Business Cycle Forecasting: The Superlative Results Of Robert F. Dieli [View article]
    Freddy, the markets turn because the momentum (conclusions) turns. You repeatedly run into writers & commentators (like House) that say nobody can predict squat. But as I remember - it seems there is always a crowd on the "right side" of trades (e.g., the "turtiles").
    Jan 13, 2013. 07:40 PM | Likes Like |Link to Comment
  • Business Cycle Forecasting: The Superlative Results Of Robert F. Dieli [View article]
    Douglas W. House:

    Your dead wrong. Already have 97 years of positive proof. You think that the Earth will stop rotating on its axis every 24 hours? Go fish.
    Jan 13, 2013. 07:30 PM | Likes Like |Link to Comment
  • Business Cycle Forecasting: The Superlative Results Of Robert F. Dieli [View article]
    Let me quote "Wild Bill" long ago:

    "Professor John Kenneth Galbraith, giving an interview recently to a London journalist, volunteered that his was forced to admit it: that, whereas 15 years ago he and his colleagues at Harvard had been pretty well satisfied that there were no serious problems left unsolved in the field of economics, now he recognizes how much, in fact, there is left to discover..." Of course JKG's Keynesian orientation was wrong.

    The "weightings" of economic factors may change but their inherent "nature" hasn't. The published data is less reliable but I agree with Buckley - our "analytical resources" have multiplied.

    There is no ambiguity in forecasts. Forecasts are mathematically "precise”. R2's haven't deviated as long as the data has been available.

    Solutions change as the "weightings" change (my forecasts are changing even more rapidly):

    2012-09 ,,,,,,, 0.04
    2012-10 ,,,,,,, 0.02
    2012-11 ,,,,,,, 0.03
    2012-12 ,,,,,,, 0.05
    2013-01 ,,,,,,, 0.04
    2013-02 ,,,,,,, 0.04
    2013-03 ,,,,,,, 0.06 peak
    2013-04 ,,,,,,, 0.05
    2013-05 ,,,,,,, 0.03
    2013-06 ,,,,,,, 0.02
    2013-07 ,,,,,,, 0.02
    2013-08 ,,,,,,, 0.01 trough
    ----------------------...

    "the facts from August become the forecast for May 2013"

    That makes your forecasting values "ex-ante" not "ex-post". Keep up the good work.
    Jan 13, 2013. 01:09 PM | Likes Like |Link to Comment
  • Business Cycle Forecasting: The Superlative Results Of Robert F. Dieli [View article]
    "future events in a complex system are, by definition, random and unforecastable"

    Forecasts are mathematically infallible. What's unpredictable is how our economic leaders react to current & expected economic conditions. You can't make accurate economic forecasts without knowing if, when, & how these people are thinking about changing the inputs. Other than those variables forecasting is a slam dunk.

    And the "five year business plan" isn't an economic forecast. I'm certain that Jeff is going to laugh all the way to the bank.
    Jan 12, 2013. 07:54 PM | Likes Like |Link to Comment
  • Shadow Rates Prove 'Too Easy' Monetary Policies [View article]
    Sure it would be foolish to "swim upstream" (esp. if leveraged in the short-run) - if, e.g., the FOMC decides to engage upon a new gov't bond buying or Treasury bill/bond "twisting" program. But there's dissent within the policy makers (& the FOMC doesn't always guess right on the economy either). Market rates still fluctuate based upon actual economic fundamentals & expected performance (as well as are influenced by technical trend analysis).

    My point is that the Fed can't use interest rates as its monetary transmission mechanism (even if its goal is to temporarily "peg" rates or "validate" prices).
    Jan 12, 2013. 06:52 PM | Likes Like |Link to Comment
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