flow5
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Post by flow5 on Jun 23, 2013 8:26:56 GMT -5
Remember. The caveat is: POMOs between the FRB-NY & the CBs create reserves, & POMOs between the CBs & the non-banks create new money. If you lower IOeR, then the CBs will buy securities from the non-banks (as they always did between 1942 & 2008).
Lowering the IOeR, as professor Lance Brofman says: "would set off a scramble for competing riskless instruments such as t-bills and repos which would significantly reduce the leveraged mREITS borrowing costs"
See SA: "Federal Reserve Actually Propping Up Interest Rates: What This Means For mREITs" Fri, Jun 21
Credit growth will resume in multifaceted ways (dis-intermediation will decline), when the remuneration rate is lowered.
Remember also that lending by the CBs is inflationary - but lending by the NBs is non-inflationary, or for the NBs, where investment serves as an outlet for savings (other things equal).
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flow5
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Post by flow5 on Jun 24, 2013 9:04:10 GMT -5
The FED held the money stock constant for nearly 4 years (2 years too long - Bernanke's fault). With limited upward & downward price flexibility in our labor & product markets, unless money flows expand at least at the rate goods & services are offered, output can't be sold, & hence the work force will be cut back.
"The farther from a final good a business’s output is, the more it relies on credit markets and the more it is subject to distortions on the savings and investment side" - John Papola: 'Think Consumption Is The 'Engine' Of Our Economy? Think Again'
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flow5
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Post by flow5 on Jun 25, 2013 15:54:53 GMT -5
Some would agree: "You are correct that the non-banks have suffered what could be called dis-intermediation as a result of the FED paying .25% on reserves. If the FED did not do that the banks would use their idle cash to among other things finance non-banks like mREITS via repos and thus lower the cost of funds for non-banks like mREITS"
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Aman A.K.A. Ahamburger
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Post by Aman A.K.A. Ahamburger on Jun 25, 2013 23:33:43 GMT -5
Not me, you are literally saying that instead of the banks cleaning up and creating a sound foundation, they should have been allowed to use the money the FED injected to buy more property, that they helped cratered in the first place... For fiscal 2013, however, the CBO estimates the deficit at -$642 billion. And, the projections fall to -$560 billion and -$378 billion for fiscal 2014 and fiscal 2015, respectively. If those figures are anywhere near accurate, do we need the Fed to continue buying $500 billion of bonds each year? My answer is an emphatic NO! The private sector should have first call on those securities, with the Fed stepping in only if private demand isn’t enough. Applying the percentages of the past couple of years, the Fed should consider tapering off to $25 billion per month ($300 billion annually) this year and just $10 billion to $15 billion per month, or even less, in the following years. What do you think? Exactly Jarrett, I would have to go looking for it to find the quote, but I was saying about a month or so ago that one of the ways the Fed could taper is with reduced bond sales coming from the UST, and the fact is they could very easily say that the private sector gets first crack.. What would that headline look like? "FRB is Shut Out of Bond Auction: Is the USA Back on Top?" Something like that eh?
The markets popped today because the reality is starting to finally set in that the USA is growing. Housing prices are up double digits again, consumers are more confident in the economy, and good paying construction jobs are now going unfilled; along with high paying oil and gas, trucking and manufacturing jobs. The farm economy is growing, and I know that the Chinese are buying farmland for future growth in the whole feeding of their slaves thing.
This is all happening while banks are being forced to build capital requirements. In other words, banking backed up by capital reserves and a consumer driven economy built on solid good paying jobs that support an entire service industry. This is what people that truly understand economics call a sound foundation to grow LONG TERM on. (damn Ben B. and his "forced" hoarding, as some would say.)
Just think there is around 4 trillion dollars that will be paid back with interest to the UST over the next 10-30 yrs. If you add that with reduced deficits, and massive amounts of high interest debt maturing form the 80's and 90's that is now being refinanced at super low rates. The sum is why people that think the USA will be crushed by just the interest on govt debt in the future, are just flat out wrong. It's amazing what happens when the consumer is the one that is control of the economy eh?
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jarrett1
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Post by jarrett1 on Jun 26, 2013 7:43:37 GMT -5
All this crap and nothing has even happened yet...jeez!
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bimetalaupt
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Post by bimetalaupt on Jun 26, 2013 20:02:16 GMT -5
All this crap and nothing has even happened yet...jeez! JARRETT, PLEASE EXPLAIN!!! GREEK SPAIN FRANCE AND LEHMAN Bi
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jarrett1
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Post by jarrett1 on Jun 26, 2013 21:10:26 GMT -5
No FED talk about what they INTEND to do
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bimetalaupt
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Post by bimetalaupt on Jun 27, 2013 6:09:54 GMT -5
No FED talk about what they INTEND to do The Fed was not the cause of the problem.. not Fed action..AS before..looks like a lot of delayed bond sales due to 100 base point raise in the 10 year T-Note!!
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bimetalaupt
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Post by bimetalaupt on Jun 27, 2013 6:42:09 GMT -5
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jarrett1
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Post by jarrett1 on Jun 27, 2013 11:31:19 GMT -5
Yes I agree...but watch the 7 and the 10...that will give you an indication of the pain to come
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bimetalaupt
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Post by bimetalaupt on Jun 27, 2013 11:50:02 GMT -5
Yes I agree...but watch the 7 and the 10...that will give you an indication of the pain to come Great topic..Thank-you for sharing!!
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jarrett1
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Post by jarrett1 on Jun 28, 2013 8:13:48 GMT -5
Anytime my friend...this is the place...that more than keeps pace!
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flow5
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Post by flow5 on Jun 28, 2013 9:43:50 GMT -5
May 29 was bank squaring day (the last day of the banker's reserve maintenance period, as well as a high-payment flow day). CB's legal reserve requirements had rotated & retraced to 111,414 in prior period. Required reserves then rebounded to 125,447 ending May 29th (a 13% swing).
The effective FFR (nominally the rate banks charge each other on overnight loans of deposits at the Fed), spiked on 6/18/13 @ .12% & has subsequently fallen to .09% on 6/26/13. I.e., interbank rate pressures are abating going into the next rotation.
Th effect of the Fed's lagged reserve accounting (as opposed to contemporaneous accounting), was responsible for the volatile & speculative move in rates across the entire yield curve. I.e., legal (required) reserves are based on a bank's liabilities 30 days prior (the 2 week computation period). The fact that bankers know this makes little difference in their planning (knowing ahead of time, i.e., since 1965, that the Fed will always accommodate any need for additional IBDDs in the maintenance period - within the BOG's policy range .00%-.25%).
The reversal (& intraday & overnight volatility), was exacerbated by "window dressing" (temporary balance sheet adjustments), inadequate clearing balances during high payment-flow days (affecting supply & reserve distribution), difficulty estimating accurate reserve asset demand (payment & settlement flows), within a maintenance period (the only type of bank asset the Fed is in a position to constantly monitor & control are IBDDs held by the member banks in their District Reserve bank), anticipation of new QE targets, absence of routine domestic OMO intervention used to peg (smooth) the desired FFR target based on the FOMC’s directives, focus on securities lending & not reserve balances, the flattening of yield curve, & the substantial substitutability of short-term financing for long-term funds.
At present, all 3 rates-of-change [roc's] in money flows [MVt] have now dramatically turned south. Rates will soon follow.
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flow5
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Post by flow5 on Jun 28, 2013 9:47:10 GMT -5
Gov'ts & reserves can't be "perfect substitutes". Neither the Fed, nor the DFIs, are financial intermediaries (& there's no liquidity trap).
SOMA held gov'ts aren't "more liquid" or more "fungible" (as they're impounded by the Reserve Bank via one-way flows). The "arbitrage opportunity" is buying T-Bills at repressed rates & then selling them to the FRB-NY for their higher policy yield. The Fed withdrawals liquidity by buying gov'ts - then replaces them with idle, unused, illiquid (non-tradable), & contractionary: IBDDs.
No, the solution is to reverse the flow of funds...to get the CBs out of the savings/collateral business [by lowering the remuneration rate & thereby narrowing the corridor (& arbitrage opportunities), thus reducing the NB’s core retail & wholesale funding liabilities costs].
This course of action would not reduce the size of the CB system, the volume of earnings assets held by the CB system, the income received by the CB system, or the opportunities of the CBs to make safe & profitable loans. Quite the contrary in fact. By promoting the welfare & health of the most important lending sector of the economy (the NBs), the health & vitality of the whole national economy will improve. The aggregate demand for loan funds will expand, the volume of CB “bankable” loans will grow, & so will the CB system, - the Federal Reserve being willing.
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bimetalaupt
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Post by bimetalaupt on Jun 28, 2013 10:14:12 GMT -5
Flow5, This part of my answer as to why the growth of M2 has slowed from 9.6% year over year (June 14,2012) to 7% yeaR OVER YEAR YESTERDAY. 13 WEEK YESTERDAY WAS 3.9%...SAVINGS RATE IS DOWN..MAY WAS 2.5% SAVING VS 10% after WWII.THAT IS REAL BAD FOR GROWTH..
YOUR THOUGHTS SIR, BiMetalAuPt
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usaone
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Post by usaone on Jun 28, 2013 12:01:48 GMT -5
Ben made his statement way early because he knew that the market would panic. The first step in easing is still months away at the earliest. Even then he will only go from 85B to maybe 50B at the worst.
Selloff is way over done....for now.
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jarrett1
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Post by jarrett1 on Jun 28, 2013 20:54:33 GMT -5
or re deuce by $5 Billion per month
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bimetalaupt
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Post by bimetalaupt on Jun 28, 2013 21:45:21 GMT -5
or re deuce by $5 Billion per month J1!!!, BUT IF THE BUY IS HELD AT$85 BILLION/MONTH THEN THE INCREASE WILL BE DECREASING AS A VECTOR...M2 AND M3 GROWTH ARE NOW ON THE DECREASE...SECOND DERIVATIVE OF POSITION ...IE NEGATIVE ACCELERATION!!! IE 6.38% / YEAR NOW VS 5.92% FOR JUNE 2014...BASED ON M3 =16,173.64 DATA JUNE 28,2013 Just a thought, BiMetalAuPt
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flow5
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Post by flow5 on Jun 29, 2013 2:02:44 GMT -5
bimetalaupt: "This part of my answer as to why the growth of M2 has slowed from 9.6% year over year (June 14,2012) to 7% yeaR OVER YEAR YESTERDAY" ----- In 1/1998 total time deposits were .48% of m2. Small time deposits were .33% of m2. Today total time deposits are .85% of m2. Small time deposits are .07% of m2. Subtract balances > $100,000 + IRAs & Keoghs = small accounts Very disturbing. Corporations sitting on cash & Joe sixpack dis-saving? Transfer of wealth. ----- In 1998 m2 was .38% vs. m1. Today m2 is .30% vs. m1. In 2007, the ratio of currency to dds was 2.8%. Today it's 1.2%. A higher cash drain factor represents higher economic activity (determined by "needs of trade"). Disturbing. ----- Makes no sense. The NBs do not compete with the CBs: It's classic. The CBs outbid the NBs for durations (funding) under the Central Bank's remuneration rate. That's what the FRB-SLT's paper implies. Just like the 1966 S&L crisis. Remember the caveat is: POMOs between the FRB-NY & the CBs create reserves, & POMOs between the CBs & the non-banks create new money. I.e., if you lower IOeR, then the CBs will buy securities from the non-banks (as they always did between 1942 & 2008). In other words the eligible securities the "desk" bought were owned by the CBs (not the NBs). Ergo, the NB's ownership of wholesale funding was largely transferred to the CBs before the Fed acquired any SOMA securities - or the NBs funding sources couldn't be renewed or matured, etc. (that's dis-intermediation, not deleveraging). I.e., directly or indirectly, the NBs assets fell by c. 6 trillion while the CBs assets have offset roughly half that decline (grew by c. 3.6 trillion). Lowering the IOeR, as professor Lance Brofman says: "would set off a scramble for competing riskless instruments such as t-bills and repos which would significantly reduce the leveraged mREITS borrowing costs" It began with the General Theory where John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.” Never are the CBs intermediaries in the savings-investment process. In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. ----- See also: "Low Inflation in a World of Securitization" FRB-STL "U.S. credit conditions may not drastically improve until sources of market funding start to recover. The Bank of England has moved away from asset purchases toward incentivized lending schemes that loan high-quality collateral (gilts) to banks, which can then be used to obtain cheap funding in repo markets. Given the U.S.’s reliance on market-based credit, similar policies to subsidize repo borrowing may have more impact than continuing to increase bank reserves" bit.ly/101eSiC See also: "Securities purchased (and sold) by the Fed, for example, could be absorbing assets that were held by the non-bank private sector or by the banking system itself." But the Fed's research staff missed the corollary - IOeR's "could be absorbing assets that were held by the non-bank private sector or by the banking system itself." IOeR's induce dis-intermediation where the financial intermediaries shrink in size -- but the commercial banking system stays the same). www.chicagofed.org/digi... summarized in The Daily Bail: . . . [T]he NY Fed’s own data show that interbank lending during the period from September to November did not “freeze,” collapse, melt down or anything else. In fact, every single day throughout this period, hundreds of billions were borrowed and paid back. The decline in daily interbank lending came only when the Fed ballooned its balance sheet and started paying interest on excess reserves.
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flow5
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Post by flow5 on Jun 29, 2013 15:34:14 GMT -5
My posts aren't taking because I use an ampersand?
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flow5
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Post by flow5 on Jul 17, 2013 10:58:52 GMT -5
The IOeR policy is the "Highway to Hell" --- 6.7% kenneth.saindon@atkinsgloba... (a blogger): The interest on the excess reserves has not received enough attention. Misinformation by the Fed is standard operating procedure. A perfect example pertains to the interest on excess reserves. A quarter percent doesn't sound like much for an interest rate, and I would typically agree. But I only recently realized that it is a quarter percent paid every 2-weeks, which equates to 6.7% annual when including the compounding. Shame on me for not seeing the reality sooner! With roughly $2 Trillion in excess rerserves in the system, that equates to $134 Billion annually (not chump change). We've been at this for 4.5 years now. Where is this money going? Since the published excess reserves appear at first glance to match the Fed's balance sheet, it appears the interest on the reserves is not being added to the reserves. This would imply the CB's are speculating with it in risk assets"
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flow5
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Post by flow5 on Jul 18, 2013 8:50:08 GMT -5
Not 6.7%.
The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204). -----
"Beginning with the maintenance period ending July 10, 2013, the schedule for paying interest...for a given maintenance period will be shortened. Interest will be paid one business day after a maintenance period ends" -----
§ 204.10 Payment of interest on balances.
(a) Payment of interest. The Federal Reserve Bank shall pay interest on balances maintained at Federal Reserve Banks by or on behalf of an eligible institution as provided in this section and under such other terms and conditions as the Board may prescribe.
(b) Rate. Except as provided in paragraph (c) of this section, Federal Reserve Banks shall pay interest at the following rates--
(1) For balances up to the top of the penalty-free band, at 1/4 percent;
(2) For excess balances, at 1/4 percent; or
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flow5
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Post by flow5 on Jul 26, 2013 9:02:28 GMT -5
Extend your train of thought. From the period 10/1/2008 until the present: 87% of Reserve Bank Credit (“manna from Heaven”), became excess reserves. But required reserves grew by only 5.45% (& required reserves are based on transaction type deposit classifications 30 days prior – i.e., our "means-of-payment" money, where 93-96% of all demand drafts clear thru). That corresponds to a 5.67% increase in Commercial Bank credit (where from the system’s standpoint, loans=deposits).
The Fed’s “open market power” has been emasculated by the IOeR policy. As of Oct. 9 2008, the FRB-NY’s “trading desks” POMOs can be likened to “pushing on a string”. And QE stimulus is becoming ever less effective. Given a dollar’s worth of bond purchases in 7/2009, .75% were converted to excess reserves. But today given a dollar’s worth of bond purchases in May 2013, 1.37% are converted to excess reserves. I.e., 83% more IBDDs are created today by the Fed than 5 years earlier. Is QE becoming contractionary?
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flow5
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Post by flow5 on Jul 29, 2013 21:47:11 GMT -5
IS doesn’t equal LM. S never equals I. Debt financed from voluntary savings, which is all debt (except the CB’s & RB’s), provide an outlet for savings. The stimulating effect of this type of debt expansion arises entirely out of the fact that it is the catalyst which changes idle savings into active funds. This is a velocity relationship.
And only debt growing out of real investment, or consumption, makes an actual direct demand for labor & materials.
Bernanke destoyed the savings-investment process by destroying the non-banks), or, pre-Great Recession, 82% of the lending market (Z.1 release). Bernanke destroyed the non-banks by intoducing the payment of interest on reserves.
Keynes’s liquidity preference curve (demand for money) is a false doctrine. A “liquidity preference” curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this has little or nothing to do with the real world, a world in which interest is paid on checking accounts.
Interest is the price of obtaining loan funds, not the price of money. The price of money is the inverse of the price level. If the price of goods & services rises, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of, & the demand for loan-funds.
The demand for money is a paradox (see: Cambridge economist Alfred Marshall). All motives which induce larger holding’s, will tend to increase the demand for money, & reduce its velocity.
In contrast, the demand for loan-funds reflects the advantages of spending borrowed money.
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flow5
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Post by flow5 on Jul 29, 2013 21:48:52 GMT -5
Milton Friedman's "way-cool"
Friedman “stopped Viner in his calculus and finally went to the blackboard and worked the whole problem out, which Viner was unable to do”…In Mints’ class “Price and Distribution” Friedman “discovered some of the errors in Keynes’ fundamental equations. Mints wrote Keynes in Friedman’s behalf – & for the class. That Keynes admitted the errors and this gave him, at least in part, the impetus to write the General Theory.”…”Keynes’ subsequent repudiation in the General Theory of those parts of the Treatise on Money grew out of these criticisms.”
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flow5
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Post by flow5 on Nov 19, 2013 15:52:14 GMT -5
Bankrupt you Bernanke confessed:
"Like most crises, the recent episode had an identifiable trigger--in this case, the growing realization by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures. As the economy slowed and housing prices declined, diverse financial institutions, including many of the largest and most internationally active firms, suffered credit losses that were clearly large but also hard for outsiders to assess. Pervasive uncertainty about the size and incidence of losses in turn led to sharp withdrawals of short-term funding from a wide range of institutions; these funding pressures precipitated fire sales, which contributed to sharp declines in asset prices and further losses"
Bankrupt you Bernanke was entirely responsible for the decline in housing prices. Bankrupt you Bernanke was the sole cause of the Great-Recession. He drained legal reserves for 29 consecutive months upon his appointment (where roc's in MVt = roc's in nominal-gDp). Then in Dec 2007, the rate-of-change in money flows forecast that there would a recession in the 4th qtr of 2008 (due to a shortfall in the money stock). So just as gDp was contracting, Bankrupt you Bernanke introduced the payment of excess reserve balances (which induced dis-intermediation within the non-banks, but left the member banks unaffected). I.e., with the short-end segment of the yield curve inverted, the non-banks shrunk by 6.2 trillion dollars, which the FOMC tried to offset by expanding the commercial banking system by 3.6 trillion dollars. Totally perverse.
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flow5
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Post by flow5 on Nov 19, 2013 16:06:01 GMT -5
Money flowing <through> the intermediaries (non-banks) actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know (outside money vs inside money). The growth of the intermediaries/non-banks, cannot be at the expense of the commercial banks; & why should the commercial banks pay for something they already own, i.e., - their interest expense, on their time/savings deposits (which is the largest expense item on their balance sheet)?
The economist that wrote that the DIDMCA would not have an inflationary impact, & that the correspondent bank’s “pass thru” contractual arrangements were as equally “reserve constraining” as IBDDs (FRB-STL’s Alton Gilbert), also wrote
“Requiem for Regulation Q; What It Did & Why It Passed Away”
I.e., Congress converted 38,000 NBs, into 38,000 CBs, via the DIDMCA of March 31st 1980 (in addition to the 14,000 we already had). The forward remark in the FRB-STL’s “Review” was: “depository institutions lost deposits whenever market interest rates rose above the ceiling rates”. LOL!
Note: The non-member banks could hold a part of their legal reserves in the form of interbank demand deposits (IBDDs) in correspondent member banks; the S&Ls, as IBDDs in the Federal Home Loan Banks; & the Credit Unions, as IBDDs in the National Credit Union Administration Central Liquidity Facility. Presumably in order to prevent the pyramiding of reserves, the Act required all institutions holding these particular IBDDs to redeposit the funds in Federal Reserve Banks. Unfortunately, pyramiding wasn’t eliminated because the Fed didn’t impose a 100 per cent reserve ratio on these accounts. But the Act specifically exempts all (except correspondent member banks), from any reserve requirements (& contractual clearing balances weren’t yet disclosed). There was no possible way for the Fed to get a “handle” on the money supply unless it had (& properly exercised), direct control over the volume of legal reserves, & the reserve ratios, of all money creating depository institutions. This the Act did not provide
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flow5
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Post by flow5 on Nov 19, 2013 16:08:21 GMT -5
"All studies show that the lower the ratio of time to demand deposits the higher the ratio of profits to the net worth of banks irrespective of the size of the bank."
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flow5
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Post by flow5 on Nov 19, 2013 16:09:50 GMT -5
In the pundit's article: “A Primer on the Shadow Banking System”:
The author’s emphasize: (1) “Intermediated lending is the service banks provide: taking deposits from customers (the ultimate lenders) and making loans to consumers and businesses (the ultimate borrowers” & (2) “traditional banks served as the primary intermediary between the source of loanable funds and borrowers”, etc. -----
This is the pervasive error that characterizes the Keynesian economics. Never are the CBs intermediaries in the savings-investment process. Every time a CB makes a loan to, or buys securities from, the non-bank public: it creates new money & credit – demand deposits – somewhere in the commercial banking system (& the principal source of all time/savings deposits to the system – are previously created transaction based deposits, directly or indirectly via the currency routes, or thru the bank’s undivided profits accounts).
The CBs may act as a source of loan-funds for the NBs (with lines of credit or a “liquidity put)”. However, “core” bank deposits aren’t a source of loan-funds for the CBs as a group. An individual CB may compete for the delimited volume of bank deposits (which are explicitly controlled by the monetary authorities), with the other member banks within their system (esp. after the repeal of branch banking in 1992), but the CB’s transaction & savings deposits aren’t a source of loan funds for the system as a whole (as “loans create deposits”).
Therefore, the profitability of the individual CBs, as well as the profitability for the system as a whole (& simultaneously the welfare of both the CBs, NBs, & the economy), depends upon the CBs storing their liquidity - as opposed to buying their liquidity (i.e., getting the CBs out of the savings business altogether; by eliminating the largest expense item on the CB’s balance sheet, i.e., size isn’t necessarily synonymous with profitability). And money flowing through the NBs never leaves the CB system anyway.
Just like TARP & QE, the elimination of Reg Q ceilings (“equalization in the competition for savings”), was driven by the oligarchs (e.g., ABA), at the expense of society at large (public policy). “These measures should help the banking sector attract liquid funds in competition with non-bank institutions & direct market investments by businesses” [sic] - Testimony of Treasury. Note: the NBs do not compete with the CBs. The lending capacity of the CBs is dependent upon monetary policy, not the savings practices of the public.
Then, in response to oligarchs, Congress & their lobbyists (on the direction of the Fed’s research staff) created the legal framework for the addition of 38,000 more commercial banks in March 1980, to the 14,000 we already had, & in the process, the abolition of 38,000 intermediary financial institutions (NBs). To make matters worse, the Fed then eliminated legal reserve management (i.e., by 1995, the CBs were no longer reserve bound; today 85% of the CBs satisfy their reserve requirements thru applied vault cash, i.e., thru their liquidity reserves).
The Keynesian economists (aided & abetted by the oligarchs & the Financial Services Regulatory Relief Act of 2006), argued that this would eventually “allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system”. And: “Banks have long contended that the costs of reserve requirements (i.e., forgone earnings) put them at a competitive disadvantage relative to non-bank competitors that are not subject to reserve requirements” [sic] – Testimony of Treasury. A major credit crisis was thus inevitable (as Dr. Leland Pritchard predicted in June 1980 – along with predicting that the GSEs would end up dominating the mortgage industry).
The non-banks (or shadow banks), during Greenspan’s policy driven housing boom (excessive expansion of money & money velocity), acted thru boiler-room, mortgage underwriting, “broker-dealers” (deregulated wholesale brokered deposit & loan production lines - along with China pegging its exchange rate by purchasing $1 trillion in GSE’s MBS paper). In 1987 there were 7,000 mortgage brokers nationwide, by 2004 there were 53,000. In 1987 these brokers generated $110b in mortgage loans. In 2003 they generated $2.6 trillion in mortgage loans (& these brokers had no “skin in the game”). The accounting origination process (package & distribute), morphed into selling private-label MBS AAA rated paper onto Freddie’s & Fannie’s balance sheets (see “The Great Deformation” by David Stockman). The GSE’s balance sheets grew from $1.7 trillion in 1994 to c. $6 trillion in 2008.
I.e., the NBs are credit transmitters (not credit creators). Unfortunately, the NB speculators, seeking the higher yields that were associated with the riskier investments made possible through financial engineering (& fewer regulations, tax inducements, & a lower quality assets), also insulated themselves from self-perpetuated, loan-loss absorption.
After this fiasco, FASB 166 & 167 rule changes governing off-balance sheet vehicles required that these toxic assets be shifted back onto the originating balance sheets in January of 2010, necessitating that the CBs raise capital cushions (a countercyclical policy response that ran counter to reflation objectives, i.e., it destroyed money stock growth – a Bankrupt you Bernanke policy blunder).
This “collateral chain”, or pyramiding scheme of securitization (SPV pooling & tranching), immensely accelerated the transactions velocity of bank deposits (concealing Greenspan’s “put”, or masking the extent of his repressed interest rates). I.e., ninety percent plus of all demand drafts clear thru transaction based accounts at the CBs (our payment & settlement system). And any increase in the NB’s loans/investments are reflected in an increase in money velocity (money that had already been spent->but never left the CB system). This vast acceleration in bank debits captured payments for both existing & new property sales (i.e., the G.6 debit & demand deposit turnover release would have exposed the loose money policy which financed the housing boom). See: 1938 Analysis of Committee Proposal “Member Bank Reserve Requirements”, declassified in 1983
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flow5
Well-Known Member
Joined: Dec 20, 2010 21:18:02 GMT -5
Posts: 1,778
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Post by flow5 on Nov 19, 2013 16:11:35 GMT -5
To the Keynesian economists on the Fed’s research staff (in Keynesian economics, aggregate demand is equal to nominal-gDp by definition: Vi = nominal-gDp), transactions velocity is a statistical “stepchild”, it is income velocity that matters (& a dollar bill which turns over 5 times can do the same “work” as one five dollar bill that turns over only once). Note1: Vt varied 2.5 times that of M over the last 50 year period reported. For those who need a reminder, Irving Fisher’s “equation of exchange”: M*Vt=P*T, is an algebraic way of stating a truism; that the product of the unit prices, & quantities of goods & services exchanged, is equal (for the same time period), to the product of the volume, & transactions velocity of money. Velocity is the rate of speed at which money is being spent. It is self-evident from the equation that an increase in the volume, & or velocity of money, will cause a rise in unit prices, if the volume of transactions increases less, & vice versa. Income velocity is calculated by dividing nominal-gDp for a given period by the average volume of money (M1, M2, & MZM), for the same period. A decline in the income velocity of money is supposed to suggest that the Fed initiate an expansive or less contractive monetary policy. This signal could be right – by sheer accident. Nominal-gDp is determined by the volume of goods & services coming on the market relative to the actual (transactions) flow of money. Note2: rates-of-change in monetary flows (MVt) for all transactions can serve as a reasonably good proxy for the rates-of-change (roc’s) of those money flows which finance real-gDp. Note3: MVt = our “means-of-payment money times its transactions rate-of-turnover. Moreover, the close association between roc’s in MVt, with roc’s in gDp can be clearly demonstrated using distributed lags. These lags have been mathematical constants for the last 100 years. (the “proof is in the pudding). The proxy for real-output is exactly 10 months (courtesy of the "Bank Credit Analyst's" debit/loan ratio. The proxy for inflation is exactly 24 months (courtesy of "The Optimum Quantity of Money" – by Dr. Milton Friedman. Note4: their lengths are identical [with the caveat that (1) the weighted arithmetic average of reserve ratios & reserveable liabilities remains constant, i.e., (2) as long as the data isn’t “non-conforming”, a.k.a., (3) “reserve simplification procedures”, (4) annual indexing of the low reserve tranche & the reserve requirement exemption amount, & (5) there are no outliers]. Note5: Divisia Aggregates & FRB-STL’s Monetary Services Indexes are obviously flawed as they discount lags’ two truistic effects. Any increase in transactions velocity, since it will tend to cause nominal-gDp to rise, will give the income velocity economists false signals (see: FRB-STL’s Fred database). This is true even though both the volume of money & transactions velocity tend to move in the same direction. The effect on money flows & nominal-gDp of an increase in both money & transactions velocity is obviously greater than an increase in either money or transactions velocity. Consequently, income velocity, mathematically & magically - declines (as it has continually during all of 2013). I.e., income velocity & transactions velocity, at times, deceptively move in opposite directions (e.g., this year). Lacking any means for making an estimate of money flows (the G.6 debit & demand deposit turnover release was discontinued in Oct 1996 due to Bill Clinton’s cost cutting measures), it is necessary to fall back upon commercial bank legal reserve data. Thus, the volume of credit (& money) the member commercial banks (MCBs or depository financial institutions -DFIs), can create responds roughly to changes in the volume of required (legal), reserves (RRs). Note6: 85% of all legal reserves are satisfied using CB’s applied vault cash, or the CB’s liquidity or prudential reserve balances (i.e., for the banking system, most individual banks are not “e-bound”). Transactions based accounts represent our “means-of-payment” money as upwards of 90 percent of al demand drafts clear thru these deposit classifications (thus, contrary to the pundits, M2 has no predictive power). RRs then are based upon transaction type deposit classifications 30 days prior. See: bit.ly/yUdRIZQuantitative Easing and Money Growth: Potential for Higher Inflation? Daniel L. Thornton FRB-STL An intelligent monetary policy requires that the FOMC (the Fed’s policy making arm), allow MCB legal reserves to grow at no greater rate than would allow the rate-of-increase in monetary flows (MVt) to equal the rate-of-increase in real-gDp. But given the noncompetitive elements in our market structure (resulting in limited upward & downward price flexibility in our product & labor markets), such a policy would produce an intolerable slowing in the economy. So rocs’ in MVt must exceed roc’s in real-gDp by 2-3 percentage points, otherwise production (due to the consumption gap), would fall off & jobs would be lost (this is why some economists advocate targeting nominal-gDp). The biweekly figures reported on the H.3 release are principally distorted by various payment & settlement related factors, e.g., large net shifts of funds from the public to the U.S. Treasury, or vice versa. When you write a check to Uncle Sam the money stock is reduced. When you get a check from Uncle Sam the money stock expands. This is because funds are credited (deposited) in the Treasury’s (TT&L ) accounts held at the commercial banks (expanding the money stock), & debited (withdrawn) via the Treasury’s General Fund Account held at the District Reserve Banks (depleting the money stock), as reported on the Fed’s H.4.1 factors affecting reserve balances. Distortions also include financial innovations, e.g., reserve avoidance techniques such as wide swings in sweep account activity. Wide swings in sweep accounts (beginning Nov. 1995), were also prevalent during the Great-Recession, as well as during its recovery (the largest swings were caused by first introducing unlimited FDIC insurance coverage – then its expiration). But the level of prudential reserve balances (& MVt’s correlation coefficient), remains predominately unaffected. Other distortions during this period include: (1) large shifts from interest-bearing accounts (non-reserveable) into non-interest bearing accounts (reservable), due to historically low rates of returns as well as due to (2), unlimited FDIC insurance guarantees (read flight-to-safety), & (3) the swing in reflation during the economic recovery. The large oscillations in payment & settlement balances are reflected in the alternating oscillations in the money stock figures reported on a non-seasonally adjusted basis on the Fed’s H.6 money stock release. But that is the way the Fed counts money (irrationally). These swings are exacerbated by increasing levels of social security payments in an aging population, unemployment insurance, welfare & disability payments (social insurance), etc. Note7: there is no justification for excluding Treasury balances in the Treasury’s General Fund Account from the assets included in the tabulations of transactions based accounts (with the exception of WWII). No one has established any unique price effect of federal outlays, as compared to state and local government outlays, or expenditures by the private sector. Distortions in the weekly H.6 release can be largely eliminated by calculating rates-of-change on the basis of a monthly moving average. I.e., historically, there has been a high positive correlation between roc’s in member CB legal reserves & roc’s in money flows. I.e., if MCB legal reserves increase (decrease), the volume of means-of-payment money, the transactions velocity of money, & the roc’ in money flows all tend to increase (decrease). And any large percentage-wise jumps in the RR figures simply “revert-to-mean” with the correlation between real, & nominal, gDp figures - just a few months later. If these relationships continue, & the Fed proceeds to “prime the pump” i.e., expand Reserve Bank credit & its corresponding balance sheet (i.e., QE3, or $85b of Treasury & MBS open market purchases each month), we should now expect an immediate rebound in the inflation indices to the top of the BOG’s PCE target, as well as increases in interest rates all across the yield curve, in spite of the “trading desk’s” offsetting large-scale debt monetization operations –LSAPs (inflation being the most important factor determining interest rates operating as it does thru both the supply of, & demand for, loan-funds). I.e., as the CPI fell in September, interest rates moved inversely. We know that to ignore the aggregate effect of money flows on prices is to ignore the sine qua non of the inflation process. And to dismiss the concept of (Vt) by saying it is meaningless because people can only spend their income once, is to ignore the fact that (Vt) is a function of three factors: (1) the number of transactions, (2) the prices of goods & services, & (3) the volume of (M). Inflation analysis cannot be limited to the volume of wages & salaries spent. To do so is to overlook the principal "engine" of inflation, viz., the volume of credit (new money) created by the Reserve & the commercial banks and the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.
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