Off the highs, in line with the equity rally.
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The worst of the ‘great repricing of risk’ that followed the discovery of the ‘great sub prime mortgage fraud’ could be behind us.
The aggregate demand from the expansion phase of the mortgage fraud episode caused output and growth to expand faster than it otherwise would have, and when that lending stopped and that source of aggregate demand was removed all was suddenly thrown into reverse- slowly at first as mainly housing reversed, and more recently with a rush as the Mike Masters commodity liquidation gave it all a final push down and even consumer lending dried up, as today’s Mastercard report reflects.
Not to mention the various blunders along the way by policy makers who continuously demonstrated a lack of a fundamental understanding of monetary operations. Seems with Citibank the government had learned something as they broke their pattern and didn’t take 79.9% of the equity.
This policy change itself serves to reduce systemic risk for the financial sector, as government assistance may no longer automatically mean the elimination of that much shareholder equity above and beyond ‘payback’ to the government.
The blowout ‘bottom’ for this cycle may have come in the credit products, where it all started,
rather than equities as had generally been the case in previous cycles.
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Remains elevated.
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Outstanding advances under Fed ‘unlimited’ swap lines to the 4 foreign CB’s plus several lines with limits no totals $615 billion and accelerating!
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(email exchange)
>
> On Wed, Nov 12, 2008 at 11:37 PM, Morris wrote:
>
> The Muni stuff is more interesting… See the data…if the USA loses AAA.,
> what does that make states with Budget Gaps of over 10pct of GDP and
> NO capability for a funding mechanism to print money????
>
Dependent on the US government/banks for credit, like the rest of us- (we may now need both a payroll tax holiday and a trillion or so of revenue sharing for the states).
And restoring growth and employment is no big deal, actually, if government sustains demand at reasonable levels, which it always, readily, can do.
We sent men to the moon 40 years ago, cram mind boggling technology into cell phones, do robotic surgery, and don’t understand how a simple spreadsheet called the monetary system works.
Remarkable!
US May Lose Its ‘AAA’ Rating
The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.
Yes, that may happen, as ratings agencies have no clue how it all actually works.
“The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system” and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.
With government spending not constrained by revenue, any such event would be an unnecessary political response.
“In the United States there is already a funding crisis,
Not for government.
And a close look at actual monetary operations shows government best thought of as spending first and then borrowing or collecting taxes. Any constraints are necessarily self imposed (debt ceilings, no overdraft at Fed provisions, paygo policy).
and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off,” Hennecke told CNBC.
No, the Fed government sells bonds after they spend, not in order to spend.
In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.
No, to stem the slowdown the US has to increase its deficit- increase spending and/or cut taxes.
Fortunately, this is already underway via the ‘automatic stabilizers’ as tax revenue slows and transfer payments increase.
Unfortunately we still don’t have the good sense to do this proactively.
>
> On Thu, Nov 13, 2008 at 6:53 AM, Morris wrote:
>
> Your theories are quite interesting- why wouldn’t the G20 announce
> this sort of massive WW stimulus package of say, 10 trillion dollars to
> restart all local economies?
>
They might.
Two points:
1. Deficits need to be ongoing to sustain the financial equity that supports credit structures. It’s not just a matter of ‘jump starting’ though that certainly doesn’t hurt.
We got into this mess by letting deficits get too low. We have yet to recover from the surplus years of the late 90’s that reduced private sector financial equity by maybe a trillion USD, back when that was a lot of money.
2. Any nation is better off by doing it unilaterally in sufficient quantity to restore output and employment. The last thing anyone needs is foreign consumers competing for scarce resources.
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Still watching for the trend to head south.
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Stability???
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Stocks may have nowhere to go until these spreads narrow
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Bernanke may seek new ways to ease credit as Fed rate nears 1%
By Craig Torres
Oct. 23 (Bloomberg) — Federal Reserve officials are likely to bring interest rates down so aggressively over the next few months that they will have to search for fresh tactics to continue easing credit.
All that’s left is the Fed buying longer term treasury securities to attempt to flatten the curve, get mortgage rates down, and add reserves.
This will ‘flood the market’ with reserves that now pay interest, so they can do this without a zero interest rate policy.
Their theory is that with more reserves banks will lend more, which is not the case, both in theory and practice, as Japan proved not long ago.
Instead of the Fed buying long term securities the treasury should simply stop issuing them and issue more bills. The treasury not issuing longer term securities is functionally the same as the treasury issuing them and then the Fed buying them. But with a lot fewer transaction costs.
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Ironically (?) after reading all the criticism of private sector lenders relying on ratings agencies rather than internal analysis I see this:
GE to use Fed’s commercial paper facility next week
By Rachel Layne and Scott Lanman
The Fed is setting up the special fund to buy commercial paper, and will start the program on Oct. 27. The U.S. Treasury will make a $50 billion deposit into the fund as an indication of support. The Fed said the maximum amount of commercial paper that could be funded by the facility is about $1.8 trillion.
The central bank will buy only debt with the top short-term ratings of A-1, F1 and P-1 given by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service respectively. The facility provides for 90-day borrowing which may help lengthen the time periods for which liquidity is available.
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