Tag Archives: Fed

NYFed

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Good find!

I recommended this years ago when Karim first introduced me to his Treasury contacts.
It moved forward and was passed around for discussion, but the dealers quashed it.

An unlimited lending program could replace much of the generic libor swap market.

Wish they would revisit it.

Why Is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities?

“A backstop lending facility turns this understanding on its head: the Treasury would be issuing securities not because it needs cash, but because market participants need securities.”

They don’t notice a difference between gold standard and “modern money”, actually they draw a parallel:

“… the markets for borrowing and lending Treasury securities in the 21st century are broadly analogous to the 19th century market for borrowing and lending money. Dealers and other market participants today have short-term liabilities denominated in Treasury notes; 19th century banks had deposit liabilities. Additionally, there is limited elasticity in the supply of individual Treasury securities today, just as there was limited elasticity in the supply of base money in the 19th century. A backstop securities lending facility would enhance the elasticity of supply of Treasury securities in the same way that the Federal Reserve Banks enhanced the elasticity of currency a century ago. It would mitigate chronic settlement fails, just as the Federal Reserve System mitigated suspensions of convertibility of bank deposits.”

They don’t discuss interest on reserves (and they should, these being functionally equivalent to Tsy securities).

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Bernanke on government spending

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Just added this to my 7 Deadly Innocent Frauds draft where I had described the process of government spending in a similar manner:

(PELLEY) Is that tax money that the Fed is spending?

(BERNANKE) It’s not tax money. the banks have– accounts with the Fed,
much the same way that you have an account in a commercial bank. So,
to lend to a bank, we simply use the computer to mark up the size of
the account that they have with the Fed.


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Re: Fed swaps up $85.6 to $628B

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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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Review of today’s government actions

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Two ‘bailouts’ today, the Fed asset purchase program and Citibank:

Comments on the asset purchase program:
Major theme- the answer to the housing and automobile issue is consumers with enough income to be able to afford their mortgage payments and car payments along with expanding employment prospects to ensure the ability to repay in full over time.

The Fed’s function is to set the interest rate. This is all in the realm of monetary policy. Income adjustment at the macro level is a function of fiscal policy.

Specifically on the securities purchase announcement:
They finally got it right – the Fed purchases the financial assets, not the treasury. The TARP should have been a Fed operation.

What the fed does is set interest rates. It’s about the price of money, not quantity of money.

Buying agency collateral will lower the interest rates on agency mortgages. It does not ‘pump in money’ or anything like that.

Buying other collateral will lower interest rates for those types of lending.

This is what ‘monetary policy’ is all about – setting interest rates in the economy, and not quantity adjustments.

This does not directly add to the demand for mortgages or the demand for other loans.

It does lower interest rates for those loans with the hope that the lower interest rates increase borrowing to spend on houses, cars, and other purchases.

They could have done this a year ago before it became a crisis with no ill effects if there was no crisis.

Letting the crisis happen first did not serve public purpose.

This foot dragging due primarily to not fully understanding the fundamentals of monetary operations has contributed to the crisis.

While this ‘top down’ approach does improve the operations of the financial sector, it does not give them what they fundamentally need, which is borrowers with sufficient incomes to make their payments, aka declining delinquency rates.

This is directly achievable by the likes of a payroll tax holiday where the treasury makes all FICA contributions, or direct spending via revenue sharing to the states for their operating budgets and infrastructure projects.

Comments on the Citibank bailout:
What they did right is break the pattern of taking 79.9% of any remaining shareholder equity, which has meant the government has been the hand of death for shareholders. There is enough risk priced into stocks with that questionable addition.

What they did wrong is complicate matters by doing more than buying a sufficiently large preferred equity position to accomplish exactly what the rest of the relatively complex package accomplished.

This was probably done to minimize usage of funds allocated under the TARP.

They are also perhaps starting to acknowledge that a substantial part of Citibank’s difficulties are due to the failure of government to sustain reasonable levels of output and employment.

Assets that were not problems a year ago have become problems today as the economy has deteriorated due to a lack of aggregate demand.

This might be a good first step towards government fessing up and taking responsibility for the collateral damage of its own fiscal and monetary policies, and stop blaming the victims by putting them to death when they require assistance. In fact, if I were Obama I would take this approach.

The government already gets 30% of all earnings through the corporate income tax. If they want more, they can raise that tax rather than demand a percentage of the outstanding shares.


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Re: more on Fed swaplines

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Yes, with their unlimited Fed swap lines euro credit is ‘improved’ but seems only for as long as the Fed keeps that window open?

Two problems with what the Fed is doing:

1. External currency (dollar) debt is moved from ‘private banks’ to the ECB if those banks fail.
If they hadn’t done this, bank failures would mean the banks default to their lenders who become general creditors and maybe equity holders when the smoke clears. The ECB can’t ‘fail’ without the entire europayments system shutting down. Before that happened it would probably sell euros for dollars to service it’s dollar debt if the Fed caps its lending to the ecb.
Yes, if the Fed never caps its lending to the ECB this can go on forever, with the ECB borrowing more and more to pay the dollar debt service, which is ponzi and will end one way or another.

2. It’s likely the Fed will be faced with rapidly increasing demands from the CB’s for the ‘unlimited’ dollar borrowings as the CB’s have banking systems that will utilize infinite USD loans if available to stay afloat and use new borrowings to service the old dollar debt unless/until they are declared insolvent, in which case the CB’s have the debt to the Fed.

3. This means the unlimited dollar lending will continue to grow until the Fed says no mas. Just like the classic emerging market dollar debt where it always tried to go parabolic before being cut off.

>   
>   On Sat, Oct 18, 2008 at 12:06 PM, wrote:
>   
>   Of course, they can now do everything, now that the Fed is
>   effectively backing them via these unlimited swap
>   arrangements.
>   


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Fed to lend to CBs in unlimited quantities (day 2)

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I’m keeping an eye on crude prices rising a lot more than the USD is falling; so, I suspect the great Mike Masters inventory liquidation has run its course.

Inventories are at record or near record lows.

If there has been net demand destruction, it hasn’t yet showed up in OPEC or Saudi production numbers.

The Saudis only pump on demand, at their price, so as swing producer it’s their production that should fall, not anyone else’s.

However, there can be 90 day type lags; so, October Saudi production could be down but not be reported until early November.

___________________________________________________________________________________________________________________

This latest swap line expansion should be a target of Obama and McCain, but neither are touching it.

It’s a financial blunder, potentially of epic magnitudes.

It’s also an oversight issue of epic magnitudes that could dwarf the subprime issue at the first ECB USD auction tomorrow.

The $620 billion swap lines currently in place could swell to well over a trillion USDs.

It will reduce eurobanks cost of USD funds, bring down LIBOR, and normalize bank liquidity.

And the reduction of bank credit risk is bringing in credit spreads which makes room for equities to appreciate as well.

But that’s an empty victory that changes the lack of aggregate demand very little, if any.

And it adds a new element of systemic risk.

Unrestricted/’currency secured’ international USD lending has been tried before in the emerging markets.

Yes, this type of initial lending reduces financial stress, but then it must be sustained and increased to avoid a subsequent collapse, which then becomes inevitable.

Remember Mexico and the rest of Latin America?

It took a growing level of external USD debt to hold it together, until the number got too large and the controls impossible. And then it all fell apart.

All of these ‘top down’ measures that carry the hopes and anticipations of markets should continue to be let downs as no one addresses demand.

This happened in Japan after the banks were recapitalized and ‘healthy’ and nothing happened regarding lending.

Obama and McCain have a window to jump on this opening but don’t seem to be. McCain as the watchdog and Obama as the reformer are both letting us down. Again, as they show no insight and instead keep to their canned rhetoric.

Bush and congress missed a historic opportunity to move the US away from ‘materialism’ after 9/11.

I got a call from Congressman Gephart at the time, and I said this is an opening to show a different kind of leadership as people had turned ‘inward,’ with the following type of statement:

A nation is not richer because people sleep in hotels instead of staying at home. A nation is not richer because we eat out rather than have family meals at home. And now that we have become more introspective on life itself, we can continue this enlightened change of course, back to our real core values, and steer our efforts to educating our children and improving our health care service, etc. etc.

But instead, our leadership telling us:

“Get out of Church and get into the shopping malls!” in order to ‘save the economy’, etc. etc. Gephart didn’t do it. And we went back to the malls.

This go round was also an opportunity to make a fundamental change away from a lending based model to a more cash based model which seems to me has proven more stable over time and a lot more beneficial to human peace of mind.

We could have let most of our lending institutions go by the wayside and kept the banks that would be allowed to make more conservative home loans, installment loans, checking and savings accounts, and not much else. And the housing agencies operating a bit like the old savings and loan’s used to do, but this time with sustainable, matched treasury funding.

And rather than relying on lending for aggregate demand, which is inherently unstable, we could have supported aggregate demand with a fiscal package to provide sufficient income to buy our output and sustain growth and employment.

But instead we are first ‘fixing’ the lending institutional structure, without addressing aggregate demand.

It’s unlikely that costly (in terms of lost output and employment) credit bubbles will be reduced by first supporting the lending institutions and then supporting demand.


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Fed to lend to CBs in unlimited quantities unsecured (Update2)

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Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.

This defies comprehension.

It’s potentially functionally a fiscal transfer.

Interesting they have the authority to do that.

They wouldn’t even do it for the US banks where the Fed demands collateral for loans.

It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.

Somehow this got under Congress’ radar screen.

Watch for the size of the first USD auction.

The ECB and other CBs are going to set a rate and fill all requests at that rate.

Could be over $1 trillion?

Should bring USD LIBOR down to near the Fed Funds rate.

Helps the euro vs the USD at first.

However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.

USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.

Still trying to comprehend all the ramifications, but they are very large.

This also means no government should default in the eurozone due to bank funding issues.

As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.

It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.

They could snowball into the trillions, and be very difficult to shut down.

Which would also mean accelerating inflation.

Fed Releases Flood of Dollars, Market Rates Fall (Update2)

by John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.


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Fed to lend in unlimited quantites to foreign CBs??? (Update1)

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This is hard to believe. Those CBs don’t have unlimited USD.

So, if true, they will be borrowing them from the Fed via an extension of Fed swap lines.

The FOMC has approved lines of $620 billion as last reported.

This is functionally unsecured lending to these CBs.

Repayment can only come from selling their own currencies for the needed USDs.

(or by somehow net exporting to the US or selling assets to the US which are hard to imagine.)

Somehow, this high risk, unsecured, ‘back door’ lending has remained under all radar screens.

And, if true, we will soon see the total USD funding need in the Eurozone.

Fed Says ECB, Others to Offer Unlimited Dollar Funds

by John Fraher and Simone Meier

Oct. 13 (Bloomberg) The U.S. Federal Reserve led an unprecedented push by central banks to flood financial markets with dollars, backing up government efforts to restore confidence in the banking system.

The ECB, the Bank of England and the Swiss central bank will offer unlimited dollar funds in auctions with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. The Bank of Japan may introduce “similar measures.”


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Time to go unconventional?

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1. Fed needs to lend unsecured to any member bank in unlimited quantities and set term as well as ff borrowing rates.

This will normalize bank liquidity, and should have been done as soon as we went off the gold standard domestically in 1934(?).

To keep solvency accounting with FDIC the FDIC can insure all fed deposits at member banks.

This does not ‘create money’ or ‘inflation’ or have any macro economic effect beyond normalizing liquidity.

2. Congress needs to declare a ‘payroll tax holiday’ and drop the regressive social security and medicare deduction rates to 0% to restore demand from the bottom up.

This increases take home pay and cuts costs for business some, allowing both the means to make their payments to the financial sector and support it via reduced delinquency and rising credit quality.

It will also support growth and employment as the higher wages are also spent on real goods and services.

As this happens banks will very quickly resume lending to corps either directly or via commercial paper.

If people want to work and produce and not spend their income (for any reason) the government can either ‘spend it for them’ or increase their income via tax cuts until they spend sufficiently.

And don’t forget the need for an energy policy to prevent any recovery from merely driving up gasoline prices.

>   
>   
>   On Tue, Oct 7, 2008 at 9:19 AM, Davidson, Paul
>    wrote:
>   
>   Good comment — but what is the most unconventional thing
>   the FED can do? I think by now the FED can only prevent
>   things from getting exceedingly bad– but bad it will get–
>   What we need now is fast fiscal policy– but until a new
>   administration comes in, I do not see that happening.
>   
>   Anyone got something in there head that can save the world?
>   
>   By the way did you see Bill Black’s wonderful performance in
>   the Obama Keating 5 video released yesterday?

>   
>   Sent: Tue 10/7/2008 12:10 AM
>   
>   The U.S. economic data began to show signs of an outright
>   cumulative contraction before the September/October credit
>   crisis.
>   
>   The September/October events are a massive shock to the
>   system. The only thing I can compare it to is the combination
>   of a 20% Fed funds rate and a call for curbs on credit card use
>   in late winter 1980. In the months that followed aggregate
>   demand fell faster than at any time in the post war period.
>   
>   I believe the Fed realizes all of this.
>   
>   Bernanke realizes that if income falls the financial crisis, already
>   almost unimaginably severe, will also get much worse.
>   Fed Chairman Bernanke went before Congress and said that if
>   the Paulson Bailout Bill was not passed and the stock market
>   fell, there would be economic Armageddon. The Bailout bill has
>   passed. The stock market has fallen. Credit spreads have
>   widened. Based on Bernanke’s own public statements, he
>   should be thinking we are entering economic Armageddon. I
>   believe there is a raging hedge fund crisis, knowledge of which
>   is being suppressed. There are other unrecognized crises. I
>   think the Fed is aware of all of this.
>   
>   Meanwhile, the Fed has not changed its policy rate. But in
>   fact, Fed funds have been trading below the policy rate

>   target. Also, the Fed is expanding its balance sheet in a
>   spectacular way, and it has announced this morning that it will
>   expand it much further with newer, larger auctions.
>   
>   It would seem that Rome is burning and the Fed is fiddling. It
>   is my assessment that the Fed sees more of the burning than
>   we do. It realizes that all the conventional policy responses do
>   not fit the current monstrous circumstances. It is being held
>   back because it must come up with a more dramatic policy
>   response that we can conjure out of the precedents from the
>   past.
>   
>   Forget coordinated rate cuts. If it happens it will be cosmetic.
>   Japan has almost no interest rate to cut. The ECB will, but
>   Europe will prefer to resort to government guarantees of bank
>   deposits and will not hesitate to quasi nationalize banks.
>   
>   The Fed has no more time to stay its hand. Something will have
>   to be done very shortly.
>   
>   Based on Bernanke’s writings of the past several years, I would
>   expect a shocking policy change from the Fed which will
>   probably result in an almost unimaginable increase in its balance
>   sheet.


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