Central bank liquidity swaps (13) $309,828 – $17,864
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Category Archives: Fed
Fed swap lines a touch lower
Liddy testimony at the Fed
Congressional testimony from Mr. Liddy, the AIG CEO:
Liddy testimony
Mar 18 (CNN) —
KANJORSKI: Thank you very much, Mr. Liddy.
I guess my first question is, you’ve just announced that some of your members or employees that received those bonuses after Saturday this week have agreed to return it. Why couldn’t that have been negotiated for the last two months? And why couldn’t that information have been made available to both this committee, to the secretary of the treasury, and to the chairman of the Federal Reserve?
These are the allegations that have made AIG subject to the wrath of the media, the administration, and the ‘American public’.
LIDDY: I think there’s two parts to that question, sir. Let me see if I can address them in turn.
We’ve been working on this issue of what to do with these retention payments. We’ve made the information publicly available in our various 10-K filings and 8-Ks and (INAUDIBLE). The decision we made — I made — was as much one of risk assessment as it was blindly following legal advice. The risk assessment was we’ve made great progress in winding down this business, but there is still $1.6 trillion of stuff in that portfolio.
There’s risk that that could blow up. And if it were to explode, it can cause irreparable damage to that progress that we’ve already made.
KANJORSKI: Necessitating, Mr. Liddy, a further investment of the American taxpayers in (INAUDIBLE) with equity if we were to keep you solvent.
LIDDY: Would you repeat that, sir?
KANJORSKI: The risk is if those assets deteriorate or blow up, you would either go into total destruction or have to come back to the United States government and this Congress for additional funds.
LIDDY: Yes. I think that’s exactly correct, sir.
So the judgment that we made, in cooperation with the Federal Reserve — we treat the Federal Reserve as our very important partners. The decision we made was that we could preserve that unit and continue to wind it down in a very orderly fashion and not expose the taxpayer and the company for the risks that, heretofore, they’ve been exposed to.
I know $165 million is a very large number. It’s a very large number. In the context of $1.6 trillion and the money that’s already been invested in us, we thought that was a good trade.
KANJORSKI:Am I to understand you’re saying that Chairman Bernanke or his designated person at the Federal Reserve was informed that you were going to make these payments and acquiesced in that decision?
LIDDY:Yes. Everything we do, we do in the partnership with the Federal Reserve. The Federal Reserve is at our board meetings, at our compensation committee meetings, at our various meetings on strategy. And they have the ability to weigh in either yea or nay on anything that we decide.
So why hasn’t all that venom been redirected to the Fed?
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Fed swap lines up $15.7 billion
Fed USD swap lines outstanding increased $15.7 billion to $329.6 billion last week.
Not good! It’s only one week’s data, but the Fed doesn’t want to see this moving up.
They recently extended the lines from April to October, and likely realize there is no way
they can let the outstanding loans mature and demand payment without market disruptions that would make the rest of the financial crisis look like child’s play.
And if the rest of the world catches on to the notion that the Fed can’t call these loans without serious market disruptions, market forces will cause the lines to expand continuously and only stop when the Fed finally does call a halt either on their own or via Congressional order.
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Fed discussing how to ‘inject credit’
Problem is those things cut rates, they don’t ‘inject credit’ or alter net financial assets held by the non government sectors.
It’s about price, not quantity.
Fed Wrestles Over How to Inject Credit Into Economy
by Steve Matthews
Mar 18 (Bloomberg) — Fed officials will debate how to provide further stimulus to the economy, from purchasing more mortgage bonds to buying Treasury securities, and will also keep the benchmark interest rate as low as zero percent, according to economist projections. At least three of the 17 top Fed officials want to buy Treasuries or target the supply of money, while Chairman Ben S. Bernanke has favored reviving specific credit markets. Policy makers have disagreed on just how to be more aggressive. They have at least three options: increase the $1 trillion Term Asset-Backed Securities Loan Facility aimed at restoring consumer and business lending; expand purchases of mortgage-backed securities and agency securities; or begin purchasing long-term Treasuries.
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Bernanke March 10 speech
Financial Reform to Address Systemic Risk
Bernanke:
In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations.
This is not a good start. There were no ‘imbalances’ nor can there be for a nation like the US with floating exchange rates and non convertible currencies.
The global imbalances were the joint responsibility of the United States and our trading partners, and although the topic was a perennial one at international conferences, we collectively did not do enough to reduce those imbalances.
He’s saying we should have done more to reduce the trade deficit.
The macroeconomic fundamental is that exports are real costs and imports real benefits.
Reducing our trade deficit reduces our standard of living and real terms of trade.
However, the responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States.
Stuck in loanable funds theory.
He still thinks the US somehow uses ‘imported dollars’ for funding purposes.
He’s got the causation backwards.
Causation runs from ‘loans to deposits’ and not vice versa.
The details of the story are complex, but, broadly speaking, the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that the inrush of capital was prudently invested, a failure that has led to a powerful reversal in investor sentiment and a seizing up of credit markets.
So in his world view we get dollars from overseas to invest, and the problem is we failed to do it prudently?
This is not how the monetary system works.
In certain respects, our experience parallels that of some emerging-market countries in the 1990s, whose financial sectors and regulatory regimes likewise proved inadequate for efficiently investing large inflows of saving from abroad.
Those flows were in external currencies.
Again, he’s got it all very much confused.
When those failures became evident, investors lost confidence and crises ensued. A clear and highly consequential difference, however, is that the crises of the 1990s were regional, whereas the current crisis has become global.
No, the difference was that of external vs domestic currency.
And here is the 7th deadly innocent fraud to be added to my draft:
Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn.
Yes, the payments system is useful, as are banks that service deposits and originate and hold loans for housing and consumer credit.
Beyond that, however, little or none of the rest of the financial infrastructure is a necessary to support a ‘sustainable economic recovery’. In fact, the reverse is largely true- it’s the real economy that supports the financial infrastructure. Failure to recognize this means a continuation of nominal wealth flowing to the ‘investor class’ as the economy recovers, while high unemployment helps insure those working for a living struggle with downward pressure on real incomes.
At the same time that we are addressing such immediate challenges, it is not too soon for policymakers to begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future.
Yes, like doing away with most of it?
Developing appropriate resolution procedures for potentially systemic financial firms, including bank holding companies, is a complex and challenging task.
Only because they have been allowed to engage in activities far beyond any concept of public purpose.
In light of the importance of money market mutual funds–and, in particular, the crucial role they play in the commercial paper market, a key source of funding for many businesses–policymakers should consider how to increase the resiliency of those funds that are susceptible to runs.
No, policy makers should consider alternative funding models, such as a return to using banks- the designated agents of the Federal Reserve- to accommodate lending and depository functions deemed to serve public purpose.
Procyclicality in the Regulatory System
It seems obvious that regulatory and supervisory policies should not themselves put unjustified pressure on financial institutions or inappropriately inhibit lending during economic downturns.
Banks are pro cyclical, as is the private sector in general, and forcing them to act otherwise is counterproductive.
Only the public sector can act counter cyclically, and should stand by to do that to sustain aggregate demand, output, and employment at desired levels.
Another potential source of procyclicality is the system for funding deposit insurance.
Why not eliminate it entirely??? What public purpose does it serve???
The financial crisis per se was the direct result of people not making their payments for a variety of reasons.
The direct way to address it was to restore aggregate demand from the ‘bottom up’ rather than from the ‘top down’.
That’s why I was recommending an immediate payroll tax holiday, revenue sharing with the states on a per capita basis with no strings attached, and a federally funded, $8 per hour job that included full health care benefits for anyone willing and able to work.
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Fed USD swap lines to CBs still coming down some
Higher crude prices will make USD easier to get overseas:
Central bank liquidity swaps (13) $313,869 – $6,520
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Re: Bernanke missing the point on repo
(email exchange)
The Fed already has thousands of designated agents, the banks, to lend and take in deposits.
If I were in charge I’d eliminate the cap on FDIC insured bank deposits and legislate any insured pension funds keep their excess cash in insured deposits.
And borrowers can go to the banks as well.
And if I wanted spreads narrower that could also be done via adjusting capital requirements and risk weights as desired.
>
> On Tue, Mar 10, 2009 at 10:00 AM, Pat wrote:
>
> Bernanke is lending credence to our idea of a centralized, regulated exchange for repo which
> we have been calling the RPX project.
>
Chairman Ben S. Bernanke — At the Council on Foreign Relations, Washington, D.C.
Mar 10 (Federal Reserve) — The Federal Reserve and other authorities also are focusing on enhancing the resilience of the triparty repurchase agreement (repo) market, in which the primary dealers and other major banks and broker-dealers obtain very large amounts of secured financing from money market mutual funds and other short-term, risk-averse sources of funding.
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Bernanke to ‘deploy all tools’ except the right ones
The right tools have yet to be deployed:
- Lending to member banks on an unsecured basis (demanding collateral is redundant).
- Providing banks with term financing at rates set by the FOMC (mortgage rates, etc. can be directly set as desired).
- Prohibiting bank sales of financial assets (buy and hold only and no interbank markets).
Instead we have the results of a government that doesn’t understand its own monetary arrangements and has implemented policy that for the most part has made a difficult situation all the more difficult.
Feel free to distribute for comment!
Bernanke Says Fed to ‘Deploy All Tools’ for Economic Revival
by Steve Matthews
March 7 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the central bank will “forcefully†use every resource to restore financial-market stability and revive U.S. economic growth.
“We will continue to forcefully deploy all the tools at our disposal as long as necessary to support the restoration of financial stability and the resumption of healthy economic growth,†Bernanke said in prepared remarks for an event today in Dillon, South Carolina. The Fed chief returned to his hometown to attend a ceremony naming a highway interchange after him.
Bernanke didn’t comment on specific Fed policies in his remarks. He said he was aware Dillon now “faces challenges†with the economy in a recession.
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Bernanke Testimony March 3
Let your Washington contacts know I’m available to help them formulate their questions!
SENATE COMMITTEE ON THE BUDGET HOLDS A HEARING ON ECONOMIC AND BUDGET CHALLENGES
MARCH 3, 2009
WITNESSES:
FEDERAL RESERVE SYSTEM BOARD OF GOVERNORS
CHAIRMAN BEN BERNANKE
GREGG: Thank you, Senator Wyden.
And thank you, Mr. Chairman, for attending this hearing today.
I think Senator Wyden, as acting chairman, has touched a core of one of the primary issues I’m interested in, which is the question of confidence. Whether or not the economy recovers depends in large part on the confidence of the American people in the value of their homes and in the fact that they’ll keep the job, confidence of those people
who buy our instruments that are debt is solid and sound, confidence that our currency is strong.
Wrong. It depends on having sufficient income to buy their own outputs and to net save as desired.
In the short run, one can accept the fact that debt is going to go up significantly because of the need to address this economy with the liquidity that only the government can put into it.
But in the long run, one has to ask how can this country sustain a debt to GDP ratio of 67 percent, deficits of over 3 percent, or as far as the eye can see, and expect to maintain the value of the dollar or the ability of people to come and buy our debt?
Like Japan? The yen seems strong enough to me with ratios twice that high.
There is a tsunami of debt headed at us — $66 trillion in unfunded liability. It will essentially overwhelm the capacity of our children to pay it and the ability of this nation to sustain it.
The usual mainstream nonsense.
BERNANKE: By December the Federal Open Market Committee had brought its target for the federal funds rate to an historically low range of zero to .25 percent, where it remains today.
(Which has removed maybe $200 billion annually in net interest income for the non government sectors)
Unfortunately,
Here we go. Deficits per se are bad.
the spending for financial stabilization, the increases in spending and reductions in taxes associated with the fiscal package, and the losses in revenues and increases in income- support payments associated with the weak economy will widen the federal budget deficit substantially this year. Taking into account these factors, the administration recently submitted a proposed budget that projects the federal deficit to increase to about $1.8 trillion this fiscal year and to remain around $1 trillion in 2010 and 2011.
As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to more than 60 percent over the next several years, its highest level since the early 1950s, in the years following the massive debt buildup
during World War II.
Of course, all else equal, this is a development that all of us would have preferred to avoid.
He’s obviously in a fixed FX paradigm
We are better off moving aggressively today to solve our economic problems. The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation,
As if that’s the larger issue
but would also imply lower output, employment and incomes for an extended period.
Of secondary importance to the deficit issue.
With such large near-term deficits, it may seem too early to be contemplating the necessary return to fiscal sustainability. To the contrary, maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance.
Not true.
As the economy recovers and resources become more fully employed, we will need to withdraw the temporary components of the fiscal stimulus. Spending on financial stabilization also must wind down. If all goes well, the disposition of assets acquired by the Treasury in the process of stabilization will be a source of added revenue for the Treasury in the out years.
How about instead:
Whatever it takes to sustain output and employment is the right fiscal and policy.
Determining the pace of fiscal normalization will entail some difficult judgments. In particular, the Congress will need to weigh the costs of running large budget deficits for a time
What costs?
against the possibility of a premature removal of fiscal stimulus that could blunt the recovery.
That’s a real cost.
We at the Federal Reserve will face similar difficult judgment calls regarding monetary policy.
In particular, policy-makers must remain prepared to take the actions necessary in the near term to restore stability to the financial system and to put the economy on a sustainable path to recovery. But the near-term imperative of achieving economic recovery and the longer-run desire to achieve programmatic objectives should not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances.
Why are they imbalances???
There are no gold reserves that can be depleted due to a convertible currency.
Without fiscal sustainability,
Fortunately, that isn’t an operational issue.
in the longer term we will have neither financial stability nor healthy economic growth.
Thank you for your attention. I’m happy to take your questions.
Senator Gregg?
GREGG: Thank you, Mr. Chairman.
And after that is all said and done, four years from now, when one certainly hopes, presumes and expects that we will be beyond these dire economic situations, we will be looking at a government which is taking up 22 percent of the gross national product,
(Probably the lowest in the world)
has a 67 percent ratio of publicly held debt to the GDP, and no end in sight and, in fact, it continues to work its way up, with deficits running at three to four percent, minimum, from 2013 to 2019, which is the end of the
window for this budget.
Reads like conditions for stability to me.
BERNANKE:GREGG: But your place is to protect the value of the dollar and protect the ability …
GREGG: … to sell the debt…
BERNANKE: … go on to say my concern here, as I expressed, was that there needs to be fiscal sustainability. If government spending is higher, it needs to be recognized that that will involve higher taxes in order to maintain a close reasonable balance between revenue and outlays.
So his target is a ‘close reasonable balance’.
That does have some implications for efficiency of the economy.
Does have some implications for efficiency? Is that all? Not that there is such a thing in the first place.
BERNANKE: Well, Senator, the CBO, for example, has done simulations which show that in 2030, under current laws, Medicare, Medicaid and Social Security would take up about, alone, would take up about 16 percent of GDP, which is pretty close to non-interest spending. It’s pretty close to the entire federal non-interest budget.
So it’s clear that in order to get control over the overall budget situation, we’re going to need to look at entitlements.
We don’t have the real resources to give the elderly a modest minimum standard of living and we don’t have the real resources to look after our health???
The current excess capacity alone is more than enough to do both.
If we don’t get a sustainable fiscal situation and deficits continue in large amounts for a long period, then it will become more difficult to sell our debt and interest rates will rise and it will be counterproductive.
Like Japan?
BERNANKE:Yes. So there’s been a lot of talk about banks and their ability to lend. In fact, for many types of credit, nonbank securitization markets are the main source of funding and those markets have largely closed down.
And so by restoring and re-stimulating activity in securitization markets, we hope to get credit flowing for a number of different critical areas.
We can’t ‘get credit going’ without securitization?
Of course we can!
The Fed could easily enable the banks, their legally designated agents, to do this with similar funding and guarantees.
Senator Cardin?
GRAHAM: Thank you, Mr. Chairman.
I’m trying to ask Senator Gregg’s question a little bit differently. Is there any outer limit on the federal government’s ability to borrow money?
BERNANKE: Certainly, there are outer limits.
Really??
GRAHAM: What are they and how close are we to them?
BERNANKE:Well, it’s — it’s hard — it’s hard to — to judge in any kind of explicit way, since we don’t — don’t know. I mean there are countries have clearly — for short periods of time has clearly had very high levels of debt.
Like Japan? For almost 20 years?
The United States had more than 100 percent debt to GDP ratio during World War II. The Japanese during their financial crisis raised the debt to GDP ratio above 100 percent.
Above 150% for considerable periods of time.
But clearly, that’s not a healthy situation.
Clearly?
It’s one in which interest payments can become a very important part of the — of the government’s outlays.
The Fed sets those interest rates. And Congress taxes interest income.
Nor operationally is the ability to make payments revenue constrained.
We had been — over years had been bringing our debt to GDP ratio down to about 40 percent. Now we’re going to see a jump to 60 or 65 percent.
We need to be I think looking for a — what’s called a primary deficit — that is, the deficit excluding interest payments, a somewhere close to balance. That would be sufficient to stabilize our debt to GDP ratio. I think that would be a good objective.
Interesting, more gold standard rhetoric.
How about an objective like optimal output and employment?
It’s very hard to know how much higher — how much higher the debt to GDP ratio could be before the international financial markets begin to — to balk. And so I think the prudent thing to do is to try and maintain stability of the debt to GDP ratio.
Like Japan, where 10 year JGB’s are under 1.5%, outstanding securities are over 150% of GDP, deficits range to over 8% of GDP, and they’ve been downgraded below Botswana???
Government rates go to where the CB sets them, end of story.
GRAHAM: Has there always been a buffer zone to — between reality and this magical place? And is there a buffer zone today?
BERNANKE: Well, as — as I think the recent experience is showing, confidence and expectations are critical.
Yes, he truly believes this.
And I think the markets will be quite able to absorb, for example, the large amount of issuance we’re seeing in the next couple of years, if there is a reasonable expectation and confidence in the same markets that the United States is serious about getting its budget position under control in the longer-term.
He truly believes that’s the case.
GRAHAM: There are some projections that exist that in 2050 the debt to GDP will be 300 percent. What kind of effect will that have, if that became a reality?
BERNANKE: Well, I don’t think that’s going to happen. It can’t happen, because things would break down before then.
GRAHAM: Something has to change first.
BERNANKE: Something…
GREGG: Happen, but not to change.
BERNANKE:That’s right.
GREGG: For it not to happen, right? Something has to change.
BERNANKE: Something would change, whether it was either change in policy or change in the willingness of the — of the lenders to finance the debt.
What generally changes is inflation keeps the nominal debt to GDP ratio down, but that’s another story that he knows well. And the reason he doesn’t want to go there is because that story says the risks are inflation and not solvency or the ability to sell securities.
GRAHAM: I’ve only got 15 seconds. My question, basically, is will we ever know in this country whether or not we’re repeating the Japanese mistake? Do you have any test out there to let us in Congress know that we’re throwing good money after bad, when it comes to certain institutions?
BERNANKE: The Japanese mistake was not acting quickly enough or aggressively enough, and I think that’s not our problem.
Yes, on fiscal policy.
SANDERS: Thank you, Mr. Chairman.
ALEXANDER: But — but they are (inaudible) to — to specify — the first risk is that you don’t get your money back. You think you will. The second risk would be that you’d — the more paper — the more money you print, the more likely we have inflation down the road…
(CROSSTALK)
BERNANKE: Senator, that’s aptly correct. So you’re absolutely right that in order for us to begin to raise interest rates and begin to stabilize the economy.
Now that they can pay interest on reserves they don’t have to ‘shrink the balance sheet’ to raise rates. Bernanke should know that.
At that time when the economy begins to grow again, we’re going to have to shrink the balance sheet and we are very comfortable — we’re watching that very, very carefully. It’s very important. We spend about half of our time at FOMC meetings, looking at the balance sheet and trying to make that evaluation.
Interesting use of FOMC time!
Worrying about something of no consequence whatsoever.
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