(email exchange)
>
> On Tue, Dec 30, 2008 at 5:53 PM, Andrew wrote:
>
> The Fed chose as investment managers; Blackrock, GSAM
> (Goldman Sachs Asset Management), PIMCO and Wellington
> Management.
>
More foxes in the hen house?
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>
> from: Warren Mosler
> to: CNBC
>
> The long end is higher than ‘equilibrium’ due to the Treasury
> issuing longer term paper.
>
> This adversely alters investment and price signals.
>
> When the Fed buys it the curve returns to where it would
> have been if the government had stayed out of it in the first
> place.
>
>
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Recession Opens U.S.-China Rift Paulson Talks Bridged
By Kevin Hamlin and Mark Drajem
Dec. 29 (Bloomberg) — The global recession is re-exposing fissures in U.S.-China relations that Treasury Secretary Henry Paulson spent more than two years smoothing over.
Hoping Obama lets the world export their brains out to us and sustain domestic demand with fiscal policy.
Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion
Hopefully more than that.
that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities.
No sign of this ridiculous rhetoric changing yet.
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(email exchange)
Thanks- good heads up by Matt Franko!
With this clarification the ECB seems to recognize the systemic support these swap lines provide, and will have to find other means of keeping a lid on the euro if that’s what they want to do.
>
> On Tue, Dec 23, 2008 at 9:21 AM, Cesar wrote:
>
> I agree with Franko comments.
>
> See press release from Dec 19th below.
>
> The Governing Council of the ECB has decided, in agreement
> with other central banks including the Federal Reserve, to
> continue conducting US dollar liquidity-providing operations at
> terms of 7, 28 and 84 days. These operations will continue to
> take the form of repurchase operations against ECB-eligible
> collateral and to be carried out as fixed rate tenders with full
> allotment. Given the limited demand, the operations in the
> form of EUR/USD foreign exchange swaps will be discontinued
> at the end of January but could be started again in the
> future, if needed in view of prevailing market circumstances.
>
>
> n Mon, Dec 22, 2008 at 8:05 PM, Warren wrote:
>
> Cesar, please check this out, thanks!
>
> W
>
Matt says:
Mr Mosler,
I think the swap lines between the ECB and the US Fed may not be the same swap operations that last week the ECB talked about terminating at the end of Jan 09.
The ECB currently offers term US$ liquidity (US$ that has been provided from the Fed via a previous swap between central banks) 2 ways. 1 way is via a collateralized operation, and 2 is a swap of euros for dollars.
On 15 October the ECB announced the swap facility:
“Provision of US dollar liquidity through foreign exchange swaps: As from 21 October 2008, and at least until the end of January 2009, in parallel with the existing tenders in which the Eurosystem offers US dollar liquidity against ECB-eligible collateral, the Eurosystem will also offer US dollar liquidity through EUR/USD foreign exchange swaps. The EUR/USD foreign exchange swap tenders will be carried out at a fixed price (i.e. swap point) with full allotment. Further details on the tender procedures for EUR/USD foreign exchange swaps will be released shortly.”
These “swap” type of transactions look like they never caught on (real Euros would have to be provided after all!), as most of the USD provided by the ECB ($100s of billions) have gone the “collateralized” auction route. For instance last week they did a 28-day where the collateralized operation had 47 bidders for $47.5 billion and the swap had one bidder for $70 million. So I think the ECB is just eliminating this liquidity swap vehicle because of “lack of interest”, but plans on providing US$ liquidity via collateralized auctions until at least the April 30 current expiration of the overall ECB to US Fed swap lines.
I could be mis-reading this but I offer my observations.
Hi Jason,
I have proposed giving states $300 billion in revenue sharing funds on a per capita basis, rather than responding to specific projects and needs.
That way each state is accountable to it’s own voters for how it spends the Federal funds.
What I would not recommend is having the states compete for Federal funds based on specific projects, which puts the accountability on the federal side.
I would also not let this allocation interfere with any other Federal priorities, such as funding an energy policy.
Thanks,
Warren
States Would Get Free Hand in Stimulus Plan to Speed Spending
by Lorraine Woellert and Angela Greiling Keane
Dec. 17 (Bloomberg) — The economic stimulus package headed to Congress in January would let states and localities, rather than the federal government, decide how to spend the bulk of the money, lawmakers and lobbyists say.
The stimulus measure being worked out by aides to President- elect Barack Obama and congressional staff members calls for much of the cash to be pumped into existing transportation and energy programs without federal directives on how to spend the money.
Advocates of the approach say it would speed congressional approval of Obama’s push to inject into the economy what some senators say may surpass $700 billion over the next two years.
Lawmakers in Congress would forgo their more time-consuming practice of loading the measure with thousands of pork-barrel projects known as earmarks.
The strategy also raises the possibility that state and local officials would use the money to finance their own wish lists of projects that wouldn’t necessarily create the most jobs or serve all of Obama’s goals.
The approach, part of an effort to get the bill to Obama by the time he takes office Jan. 20, sidesteps what could be a protracted negotiation over potentially thousands of specific projects.
Block Grants
“Instead of Congress earmarking funding, I am expecting that we will give block grants to states, giving them discretion over which projects to prioritize,” said Senator Jeff Bingaman, a New Mexico Democrat and chairman of the Energy and Natural Resources Committee.
Groups representing state highway officials, transit systems and energy agencies say the approach would allow them to break ground on billions of dollars’ worth of projects as soon as the legislation passes.
Among critics, the concern is that writing checks to states and localities could shortchange Obama’s public transit and clean-energy programs in favor of spending on roads, which get the bulk of transportation spending under current formulas.
Closed-Door Talks
Funneling the money into existing programs would keep lawmakers from haggling over the merit of thousands of individual projects.
Energy-saving projects, for example, would be financed through programs at the federal Energy and Interior departments, which would then send the money to states and localities.
“There are a number of state funds and programs that do renewable energy deployment and energy infrastructure retrofits,” said Bracken Hendricks, an Obama campaign adviser and analyst at the Center for American Progress, a policy group in Washington helping with the transition. “It’s an existing spending infrastructure and it’s been very, very effective.”
Billions for Roads
House Transportation and Infrastructure Committee Chairman James Oberstar, a Democrat from Minnesota, wants to allocate at least $45 billion in infrastructure improvements to states based on current highway spending formulas.
Horsley of the state highway and transportation group said state officials would know how best to spend any stimulus funds.
“Congress isn’t going to attempt to earmark these projects,” Horsley said. “If speed is of the essence, the states have documented, ready-to-go projects.”
Mayors met last week with Oberstar and House Ways and Means Committee Chairman Charles Rangel, a Democrat from New York, to make the case for their $73.2 billion list of projects. The group says these projects could create as many as 848,000 jobs over the next two years in 427 cities.
The projects “will immediately employ people, support small businesses, and stimulate Main Street economies,” said Miami Mayor Manny Diaz, president of the mayors’ conference.
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(email exchange)
>
> On Fri, Dec 19, 2008 at 9:25 AM, Scott wrote:
>
> ECB says to discontinue US dollar swap OPS from end Jan.
>
> I guess they don’t want euro to strengthen!
>
Exactly!
This is the new century version of ‘competitive devaluations.’
Paulson moved first by talking foreign CB’s out of buying USD reserves.
Bernanke thought he was helping with rate cuts.
China said ‘no mas’ a while back started ‘letting’ the yuan depreciate, probably via USD purchases.
Japan recently announced ‘no mas’ and that they were prepared to resume USD buying to abort yen appreciation.
If the ECB in fact cuts off its banks ‘cold turkey’ from the Fed’s $ the shock can be enormous.
Ramifications:
Upward pressure on USD LIBOR.
Downward pressure on the euro.
Upward pressure on eurozone credit default premiums.
Falling US equities.
Etc.
ECB to Discontinue Dollar Swap Tenders From the End of January
By Jana Randow
Dec. 19 (Bloomberg) — The European Central Bank said it will discontinue its euro-dollar foreign exchange swap tenders at the end of January due to “limited demand.”
Right! Only $300 billion outstanding.
The ECB will continue to loan banks in Europe as many dollars as they need for terms of 7, 28 and 84 days in exchange for eligible collateral, the Frankfurt-based central bank said in a statement today. Dollar swaps “could be started again in the future, if needed in view of prevailing market circumstances,” the ECB added.
Those circumstances being the strong euro?
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Deleveraging involves nothing more than ‘reintermediation’ back to the banking system (as described in more detail previous posts).
The government has failed to facilitate this transition back to a banking model to allow it transpire in an orderly fashion.
All that needed to happen was for credit spreads to go to levels that represented competitive returns on equity for banks, as banks picked up loans and securities no longer wanted by the non bank entities.
The move to mark to market from mark to model for banks, however, effectively added ‘spread risk’ to holding longer term loans and securities.
This mark to market risk also effectively raised bank capital requirements (as required by bank investors) in order to invest in the suddenly higher volatility investments.
This also increased the risk to investors of banks already holding securities that were subject to mark to market accounting.
The Fed allowed this risk to interfere with banks ability to fund their liabilities, as the Fed lends to member banks only against specific collateral.
Faced with a potential liquidity crisis, banks were compelled to respond by restricting lending that would otherwise have been considered profitable.
This led to the (continuing) downward spiral of the real economy.
The downward spiral is also characterized by a general (deflationary) inventory liquidation of housing and commodities.
I have been proposing (for the last 15 years) the Fed as Congress to remove the collateral requirement for member bank borrowing (it’s redundant in any case).
I have also proposed they extend their lending to member banks to include longer dated lending to set the term structure of rates as desired.
The Fed continues to slowly move towards this ‘target’ with it’s ‘new lending facilities’ and polices, but it continues to fall short.
The failure to act on the mark to market issue keeps risk for bank shareholders ‘artificially’ elevated which keeps credit spreads wider than otherwise.
I have also stated that while taking the right steps to facilitate the ‘great repricing of risk’ and the reabsorbtion of lending by the banking system would end the ‘financial crisis,’ it does not address the accelerating shortage of aggregate demand that’s been evidenced by rising unemployment and the widening output gap.
The near universal belief that lower interest rates sufficiently add to aggregate demand to restore output and employment and the numerous ‘deficit myths’ have delayed the substantial fiscal adjustment required to sustain aggregate demand at full employment levels in the current environment.
I have therefore proposed a ‘payroll tax holiday’ where the Treasury makes all FICA, medicare, etc. payments for employees and employers, along with a $300 billion revenue sharing program for the States to immediately fund operations and infrastructure programs.
Additionally, any economic recovery not associated with a program to reduce crude oil consumption risks a sudden shortage of supply and re escalation of prices.
Our govt’s ongoing mismanagement of the economy since q2 08 can be entirely attributed to a fundamental lack of understanding of our monetary system by govt, the mainstream financial and academic economic community, and the media that promotes this misunderstanding to the political leadership and general public.
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Federal Reserve Press Release
Release Date: December 16, 2008
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Geitner ought to be able to hit that one..
Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Aggregate demand continued to fall
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
Inventory liquidations to continue and OPEC not expected to hike prices
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Low interest rates per se are believed to promote growth and employment.
The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.
A larger balance sheet promotes growth, employment, and marketing functioning.
As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.
This implies the purchases have some benefit other than from keeping interest rates for these securities lower than otherwise, as it didn’t say the purpose was lowering mortgage interest rates.
The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Seems they still don’t grasp that it’s about ‘price’ (interest rates) and not ‘quantity’.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent.
They are still keeping it higher than the Fed Funds rates and still demanding collateral.
In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
No mention of the USD swap lines to foreign central bands that was last reported to be well over $600B.
Still no evidence of a working understanding of monetary operations and reserve accounting.
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(email exchange)
The Fed has no way of ‘pumping money into the economy’ = they only alter interest rates.
Except by making loans they don’t plan on collecting (the swap line advances to CB’s?)
Which is functionally equivalent to fiscal spending which does add income and financial assets to the economy.
>
> Rodger wrote:
>
> You and I were talking about a 0% fed funds rate. Almost there, now. Last I
> heard, down to .25%. It will have no benefit. Wait, correction on that. There
> will be one benefit. It gets us almost to the point where the Fed will stop
> focusing on useless interest rate cuts, and start pumping money into the
> economy. I hope.
>
> Rodger
>
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(email exchange)
Thanks, way up!
Probably means USD credit is tightening up for non-US institutions, and maybe the unlimited lines are starting to get used for a lot more than just funding previously existing assets.
>
> On Fri, Dec 12, 2008 at 9:53 PM, Cesar wrote:
>
> Fed swaps up $85.6 to $628B.
>
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