Category Archives: Email

Re: Fed goes ballistic

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(email exchange)

>   
>   This morning the Fed announced a massive expansion of its dollar liquidity
>   facilities. Three measures were announced: (1) an increase in total TAF
>   auctions from $150 billion to $300 billion, all coming in 84-day funds (2)
>   forward TAF auctions of an additional $150 billion, with the auctions to be
>   conducted in November for funds available for one or two weeks surrounding
>   the year-end and
>   

The TAF would be unlimited, unsecured, and the Fed would set the rate in advance if they had a clear understanding of reserve accounting and monetary operations. It’s about price, not quantity.

>   (3) an increase in the currency swaps with foreign central banks (ECB, BoE,
>   BoC, BoJ, SNB, RBA, and the Scandis) taking the total outstanding from $290
>   billion to $620 billion. In addition, these swap lines were extended through
>   April 30, 2009; previously they were authorized through January 30, 2009.
>   

This is a different matter, and more serious and disturbing- foreign central banks borrowing $ from the Fed to support the $ needs of their local banking systems.

Should those banking systems go down and this program gets large enough it could take down their currencies like any other external debt.


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Re: Amendment of ERISA

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(an email exchange)

Good find!

yes, this had to have contributed to the boom/bust and encouraged/sustained the rampant lender fraud that has resulted in the elevated defaults.

hopefully the pension funds have learned their lessons (the hard way, unfortunately but as always seems to be the case) and will dig deeper than just using the ratings agencies and diversification when they invest.

Warren

>   
>   On Wed, Sep 24, 2008 at 2:50 AM, Eric Tymoigne wrote:
>   
>   
>   All,
>   
>   I have finally found what I have been looking for a while.
>   
>   ERISA was amended on November 2000 to allow Pension Funds and Employer
>   benefit program to buy ABSs with investment grade below A, and to buy senior
>   tranches of CDOs as long as they have an investment grade of at least AA (at
>   least is how I interpret the sentence “the Amendment permits inclusion of
>   assets with LTVs in excess of 100%. However, securities backed by such
>   collateral (a) must be senior (i.e., non-subordinated) securities and (b) must
>   be rated in either of the two highest generic ratings categories by a rating
>   agency.”).
>   
>   All this, it seems to me that this is what has allowed, or at least initiated,
>   what we have seen in the 2000s. CDS, CDOs-squared, under-regulated
>   mortgage companies etc. were all there already but not until this came up did
>   the all thing got out of hand and subprime mortgage started to boom.
>   
>   Any thoughts?
>   
>   Best,
>   Eric
>   


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Reuters: Obama says bailout may delay other programs

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(email to J. Galbraith – one of Obama’s economic advisers)

Hi,

The ‘bailout’ adds nothing to aggregate demand and should not be a factor regarding other spending initiatives.

Any chance you can straighten him out on this?

Warren

Obama: Wall St bailout may delay spending programs

by Steve Holland
NEW YORK, Sept 23 (Reuters) – Democratic presidential nominee Barack Obama said on Tuesday a $700 billion Wall Street rescue plan would likely delay some campaign spending promises, as the reality sank in of the costs of the mammoth bailout.

Obama, who faces Republican John McCain in their first face-to-face debate on Friday in Mississippi, said if elected he might have to phase in some of his plans such as an overhaul of the U.S. health care system.


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Re: Impressions regarding the financial crash

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>   
>   On Mon, Sep 22, 2008 at 7:40 AM, Dawn wrote:
>   
>   Amen! 30% of homes in Riviera Beach are in foreclosure because mortgage
>   companies wrote loans to anyone with a heart beat. We are now stuck with
>   three fairly new housing developments along Congress Avenue that are quickly
>   turning into ghettos.
>   

Hi Dawn, good to hear that from someone on the inside!

Somehow the mainstream has mysteriously ignored the prime role of fraudulent applications, loan officers working on a commission basis, etc. all to make loans by misleading the lenders and the ratings agencies.

>   
>   Do you think banks would be amenable to providing low money down/low
>   interest rate mortgages to municipal employees with at least a five year
>   employment history, proper credit, etc? Mortgage payment could be deducted
>   from pay checks. This would allow police officers, firefighters, etc to have a
>   vested interest in the community and help the banks get the real estate off
>   their books.
>   

Yes, I don’t see why not?

They are still in business to make profits by making loans to credit worthy borrowers. Try speaking to the local lenders and mortgage bankers?

Thanks!

Warren

>   
>   Thx
>   
>   Dawn
>   


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Re: Comments on Thoughts on Treasury plan

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(an interoffice email exchange)

>   
>   On Fri, Sep 19, 2008 at 9:50 AM, David wrote:
>   So creating liquidity for toxic assets RTC style.
>   

maybe, jury is still out on how that might work

>   
>   Make the government a little money and inspire confidence in banks, ok.
>   
>   We are thinking that this is overtly inflationary for financial assets (maybe all
>   assets?)
>   

supports a lot of equity value by removing a large element of risk, but cost to shareholders still unknown

fixed income going higher in yield, prices there going down

>   
>   Should I expect this to re-inflate the commodity asset bubble in the medium
>   term???
>   

not directly. crude price up to the Saudis.

>   
>   Do you think the dollar’s rally will help cap any commodity asset price rise???
>   

yes, in the competitive markets. crude is not a competitive market. saudis merely set price and let quantity adjust

>   
>   PS- I expected to come in today to $110+ crude, $8+ gas, and $900+ gold.
>   

as above. crude up even with dollar up, but gold down.

warren


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From Professor Mitchell

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The JG is job guarantee, and it’s identical to ELR which is simply offering a national service job to anyone willing and able to work.

Bill is based in Australia, and his book can be ordered from this website.

He is one of the few who is ‘in paradigm’.

Excerpts from Bill’s email to me:

>   
>   I have been in South Africa and now in Europe. Today I gave workshops to
>   senior policy managers at the ILO in Geneva on employment guarantees. I have
>   some further meetings tomorrow with managers of ILO programs in Nepal and
>   Mozambique and they are keen to map out an agenda to introduce JGs in those
>   countries.
>   

Well done!

>   
>   I will provide a full report about all the workshops and meetings I have had in
>   the last 3 weeks when I get back home on Tuesday.
>   
>   Hope all is getting back to normal. The financial markets certainly are going
>   crazy. No-one has really said that the US government cannot afford to pump 82
>   billion here and some more there etc into defending financial capital. That issue
>   - of financial solvency and capacity of the Govt hasn’t come up. interesting.
>   

There have those giving warnings about solvency, and that the US will get downgraded if it goes too far.

And there are those that say ‘pumping in all that money’ is inflationary.
 
 
All the best!,
Warren


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NYT: Treasury bills program

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>   
>   On Thu, Sep 18, 2008 at 4:21 PM, Eric Tymoigne wrote:
>   
>   One former FOMC member at least gets it (From the NYT) (well, at least if you
>   replace “can create money” by “can create reserve”):
>   

I’ve heard him before, and he definately doesn’t quite get it. See my comments below:

September 18, 2008, 3:15 pm

Will Government Bailouts Lead to Inflation?

by Catherine Rampell

A reader asks about inflation concerns, and finds a divided response from our panel:

I’m worried about how much the government is intervening. It appears that the last remaining weapon the government will have is printing more money. Is hyperinflation a real concern down the road? — Geoffrey Bell

The question is about hyperinflation.

From Bob McTeer of the National Center for Policy Analysis:

All the offsets do is to alter the resulting interest rate. The offsets have nothing to do with inflation. Fed operations are about pricing, not about inflation per se. The only connection Fed policy has regarding inflation is the further effect of the interest rate they select. It has nothing to do with quantity.

The Fed’s ability to lend is limitless because it can create money.

All Fed lending is ‘creating money’ (changing a number in a member bank’s reserve account).

So it’s not that it’s limitless because it ‘can’ ‘create money,’ it’s limitless because it always/only does ‘create money’.

Its ability to offset the lending is limited by its portfolio. Hence, its request to the Treasury to sell some extra Treasury bills. — Bob McTeer

Yes, and this is a self imposed constraint put on by government.

Functionally and operationally, a treasury security is nothing more than a credit balance in a security account.

Current law doesn’t allow the Fed to take funds into a securities account of its own creation.

This is one of many self-imposed constraints by government that are contributing to ‘the problem’.

warren


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Re: Commentary

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>   
>   On Wed, Sep 17, 2008 at 8:54 AM, Pat wrote:
>   
>   Summary of Michael Cloherty (BoA) assessment this morning:
>   
>   Following Reserve’s Primary Money Mkt Fund breaking the buck, we are looking
>   at possible structural changes to the funding markets depending on how the
>   money investor’s perception of Money Mkts funds safety is. Massive
>   withdrawals from this $4.6 trillion market could be devastating most of the
>   money would go to T-bills and bank deposits.
>   

all the t bills are already sold so what it does is bid up t bills to new indifference levels. quantity stays the same

yes, bank deposits would go up, and banks would invest in what the money funds were investing in, though perhaps at different spreads

the move to money markets was a disintermediating event.

instead of putting funds in banks, they put them in money funds

since ‘loans create deposits’ this changed the entire financial landscape

repo, commercial paper and other funding instruments replaced bank lending to create the newly desired money fund balances.

>   
>   This is rattling the repo markets which were already under enormous pressure.
>   The repo market relies on the MMKT funds cash to back it. “If withdrawals are
>   large enough we will head towards a bank financed system (as if balance sheets
>   weren’t crowded enough already). Liquidity could get worse”.
>   

with the falling desire for money fund balances vs bank deposits funding returns to the banking system.

>   
>   At the very least money market funds will be defensive and cash will be
>   expensive in the mornings as they switch to O/N repos and CP.
>   

yes, it’s all returning to bank funding at the moment, which means wider spreads for borrowers

we are now in the endgame of the great repricing of risk as previous business models go by the wayside and new ones emerge.

warren

>   
>   -Pat–
>   


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Re: The Sunny Side

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(an email exchange)

>   
>   On Tue, Sep 16, 2008 at 10:24 AM, Tom wrote:
>   
>   Hi Coach,
>   
>   While financial markets are in a meltdown not unlike the post 9/11
>   experience,
>   

yes, major deleveraging going on

>   
>   the good news is that central banks around the world are providing
>   coordinated liquidity injections along with other positive actions that may
>   create a new basis for global financial rescues.
>   

yes, but all that does is set the fed funds rate and term fed funds rate. it’s about price, not quantity

>   
>   The creation of the League of Nations was an example of how the world
>   responded to WWI.
>   
>   Tom
>   
>   P.S. But it is still not time to buy stock.
>   

agreed!

watch for fiscal policy to do the heavy lifting to support GDP and employment.


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Re: Agency details

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(an email exchange)

>   
>   On Sun, Sep 7, 2008 at 8:33 PM, Mike wrote:
>   
>   
>   In exchange the Treasury receives a quarterly fee, dividend payments and
>   ”warrants representing an ownership stake of 79.9% in each GSE going
>   forward.”
>   
>   Support of Agency MBS market: The Treasury will set up an investment fund
>   to “purchase Government Sponsored Enterprise (GSE) mortgage-backed
>   securities (MBS) in the open market.” The scale of this program is yet to be
>   determined. The Treasury noted that it “is committed to investing in agency
>   MBS with the size and timing subject to the discretion of the Treasury
>   Secretary. The scale of the program will be based on developments in the
>   capital markets and housing markets.” This should eliminate the majority of
>   investor concerns about the functioning of this market, improve liquidity and
>   lower borrowing costs.
>   
>   Credit facility: The Treasury has agreed to create a back-stop short-term
>   lending facility for the Agencies. In light of the other programs being put into
>   place, this seems unlikely to be utilized, in our view.
>   

Shareholders give up 79.9% of their residual value as the agencies wind down.

Must have been some technical reason the government used that % and left the shareholders just north or 20%.


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