Fed Watch Thread

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There is no logical reason for the exclusion of Large Time Deposits at Commercial Banks, repurchase agreements at CBs (those in excess of $100,000), & Euro-Dollar borrowings at CBs, from the money stock measures.

There is reason to exclude retail MMMFs, and Institututional money market funds, from the aggregates.

There is no reason for the exclusion of the Treasury's General Fund account from the money stock.

Whether Large Time Deposits at Thrifts, repos, & Euro-dollar borrowings at the thrifts shoud be excluded is muddy - hence the money supply is mud pie (unknown & unknowable).

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In the beginning we had Central Reserve City Banks, Reserve City Banks, & Country Banks. These designations were later eliminated & the classifications combined. During this period we also had member Federal Reserve System banks & non-member banks.

Over time the assets of the non-member banks grew at a faster rate because there were fewer banking restrictions & regulations - until they held 35% of all assets (making controlling the money supply less effective -- because the non-members reserve requirements were less stringent).

Then came the DIDMCA which made membership in the system compulsory. It also provided the non-banks (the S&Ls, CUs, & MSBs), with the legal authority to join the system and become money creating commercial banks.

So today we have a system where the thrifts & credit unions (formally non-banks) compete side by side. And reserve requirements aren't binding for either group.

Commercial bank credit has declined since the Great Recesssion. The question is whether the growth from the thrifts & CUs have more than offset this decline? I.e., is bank credit actually growing?

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Seasonals should turn up by mid-month. Stocks should resume their rally (depending upon oil).

Correction, did that from memory. Should be 3rd week in March.

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A Lack of Understanding About Banks' Excess of Reserves
By Barbara A. Rehm, American Banker
March 10, 2011

Excess reserves present a juicy target for critics who claim the banking industry is depriving the economy of the fuel it needs to grow.

These funds, deposits at the Federal Reserve that exceed required minimums, exploded from less than $2 billion in August 2008 to an unprecedented, staggering $1.2 trillion last week — a total that is only headed higher. According to the Fed's latest data, required reserves were just $71.6 billion; add that to the excess reserves and the total is now nearing $1.3 trillion.

Many people view these figures as proof that banks are hoarding cash rather than lending it.

It happened again last week at a House Financial Services subcommittee hearing on what Congress could do to get credit flowing to small businesses.

David Borris, an entrepreneur who was representing the Main Street Alliance, pointed lawmakers to the reserves banks keep with the Fed beyond the minimum requirements.

"Those excess reserves represent money that could be out circulating in the economy on productive loans, including loans to small businesses," Borris testified. "Instead, those excess reserves are sitting at the Fed and the banks are collecting 0.25% interest for holding more money out of the economy."

But the reality is more complicated, and experts agree that huge amounts of reserves tell you little about lending volumes.

The Fed alone — not actions by banks — dictates how large the reserve number is. And it is the Fed's expansion of its balance sheet, begun in the fall of 2008, that has ballooned reserve levels at banks.

Here is a simple example: When the Fed buys financial assets like government debt or mortgage-backed securities from banks, the act of the Fed paying for the assets actually creates the reserves. Say it agrees to buy $20 billion of such assets from a primary dealer. When the transaction settles, the Fed will make an accounting entry on the books of the primary dealer's bank and voila, bank reserves are created.

And that's why it's easy to predict the aggregate figure will go higher. The Fed is only halfway through its QE II strategy. It still plans to buy another $300 billion of Treasury securities by the end of June, and that will drive existing reserve levels to $1.6 trillion. (To be sure, the aggregate figure could be offset by other Fed moves or driven even higher. It will depend on future Fed decisions.)

So the more the Fed buys, the more reserves it creates. But those reserves do not prevent or encourage an individual bank from making a loan. When we talk about individual banks all we're talking about is the distribution of reserves, not overall levels.

"All the banks could be making loans like they have never done before and there is still going to be $1.3 trillion" [in reserves], a person familiar with the matter told me. "Or every single bank could decide, 'I am not lending anything' and just sit on their funds, and you are still going to have $1.3 trillion."

New York Fed President William Dudley tackled the topic recently.

"In terms of imagery, this concern seems compelling — the banks sitting on piles of money that could be used to extend credit on a moment's notice," Dudley said in a Feb. 28 speech to NYU's Stern School of Business.

"However, this reasoning ignores a very important point. Banks have always had the ability to expand credit whenever they like. They didn't need a pile of 'dry tinder' in the form of excess reserves to do so."

He added: "In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves on their own balance sheet."

One reason this topic is so misunderstood is it's still relatively new.

The Fed has long required banks to hold reserves against their deposits but only won the right to pay interest on those reserves in 2006. The Financial Services Regulatory Relief Act said the Fed could start paying interest on bank reserves, including excess reserves, in October 2011. But the law that authorized the Troubled Asset Relief Program in 2008 accelerated the effective date to October of that year.

The financial crisis had hit, and the Fed needed new tools to control the cost and supply of money. Paying interest on reserves was an effective way to get banks to hold on their balance sheets many of the assets that the Fed was creating through its new credit facilities, like its Large-Scale Asset Purchase program.

Initially the Fed paid banks 75 basis points on reserves, but that rate has been scaled back to 25 basis points.

While making a loan could provide a higher return to banks, three other factors are depressing lending. One is the lack of demand from creditworthy borrowers. Higher capital rules are another. And finally many banks are just too busy sorting through the pile of defaulted loans sitting in their existing portfolios.

So while it may be true that some banks are stockpiling cash, high reserve levels are more a consequence of the reluctance to lend than the cause. And aggregate reserve levels will fall only when the Fed decides to change its monetary policy course and tighten up.

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Net interest margins (NIM) at all U.S. banks finished Q4, 2010, at 3.70%, down from a peak of 3.83%. You might think that’s bad news for banks, right? Well, it's actually good news.
Lately, there has been a lot of media chatter regarding bank profit risk tied to a flattening yield curve. Bank pundits argue a narrowing spread will kill profits because it means bank margins are getting squeezed. Sounds right. But, it isn’t.
Why? Because, net interest margins always peak exiting recessions and shrink as economies expand. Why? Because the Fed hits the brake to slow economic activity and rising activity means rising loan growth. In short, bank loan growth far outpaces declines in net interest margin and that means bigger, not smaller, profits for banks.
In 2011 we’ll actually witness the sweet spot of this dynamic play out. Banks will be able to capture relatively high net interest margins across a return of loan demand growth. And banks will outperform the market as a result. The exact thing pundits worry will cause banks to sell-off will actually support the basket into 2012.
At 3.70%, NIMs are the highest since 2003. In fact, NIMs peaked in 2002 at 4.1%, well before the post-Internet bust boom. NIM’s trended down all through 2003, 2004, 2005 and 2006. And, financials outperformed. In 2006, only utilities returned better than financials yet NIMs averaged 3.46%, well below the 4.06% they averaged in 2002.
And, financials outpaced the SPX in 2005 too, despite NIMs falling from 3.67% exiting 2004 to 3.54% exiting 2005.
If you remain unconvinced, consider the correlation between quarterly net interest margins and quarterly adjusted closing prices of the Financials Spider ETF (XLF). If the pundits were correct, we would assume the two to be tightly correlated. Yet, going back to the XLF’s inception in 2009, the correlation between NIMs and the XLF is –0.134. Certainly, not a compelling argument for shorting banks on shrinking NIMs. Regional banks are even less correlated. Since the RKH inception in 2000, the correlation between quarterly NIMs and closing prices is –0.3377.
This isn’t a recent phenomenon either. The peak in NIMs in the 1980s occurred in 1985, in the wake of the failure of Continental Illinois, and again following Black Monday, 1987, and in 1988. The peak in the 1990s occurred at the back end of the Savings & Loan crisis in 1994.
Why does this happen? Simple. In recession, banks stop lending to all but the most credit worthy. To jump start economic growth, the Fed re-introduces greed by cutting short-term rates. As a result, NIMs go higher. Once bank lending returns, the Fed takes away the candy dish by raising short-term interest rates. As a result, NIMs go lower. The lag in changing economic activity and NIM contraction or growth is where banks make and, relatively speaking, lose money.The direction of NIMs is tied to the Fed interpretation of the direction and pace inflation. As a result, NIMs fall because the economy is getting stronger, not weaker. Banks make more money on the spread, but, overall, they make less total because no one is borrowing. For these reasons, if you want to short banks do it because you expect economic activity will rollover, not because you expect NIMs to shrink. Personally, I’m unwilling to make that bet and instead think long investors will be better rewarded.

TODD CAMPBELL

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The money stock & its rate of utilization is unknown & unknowable. Even if you could categorize & list deposit types, by depository institution, the figures would still be prone to error. As Mises might say: there has been a confusion of money & credit (i.e., the FED's research staff has decided that there is no difference between liquid assets & money).

But there is a technical difference between the supply of money & the supply of loan-funds. It has to do with the context in which lending occurs, whether lending & investing is performed by money creating depository institutions, or by the financial intermediaries (non-banks). I.e., the differentiating factor is the financial institution's ability to create new money & credit (or simply transfer existing savings). The differentiating factor is not confined to the deposit type properties (the focus of the Austrian school).

This presents 2 questions. Which institututions create new money & how fast are these institutions COLLECTIVELY growing?

The DIDMCA gave the S&Ls, MSBs, & CUs the legal authority to become money creating depository institutions. Thus you cannot use the commercial bank credit (member bank loans & investments), figures in isolation (as CB credit is now also created by the thrifts). E.g., "bank credit proxy" (total bank liabilities),was used as a FOMC directive between 66 & 69. In fractional reserve banking, system-wide assets approximate system-wide liabilities - because as MMT'ers say "loans create deposits".

I.e., changes in total bank credit are almost exclusively reflected in changes in deposit liabilities. This can be explained as follows: time/savings deposits (in money creating depository institutions), rather than being a source of loan funds, are the indirect consequence of prior bank credit creation. And the source of time/savings deposits is almost exclusively the transfer from other types of customer deposits (primarily transaction deposits).

The ability of the thrifts to create new money is why the BOG combines "(4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions" with CB system deposits.

So omitting large CDs, repurchase agreements, Euro-dollar borrowings (& the Treasury's General Fund account), from the money stock measures, understates the growth rate of the aggregates (most retail & institutional MMMFs deposits are not traceable to deposit creation).

The last piece of the money puzzle is how fast is money being spent? The historical behavior of money suggests that the speed its moves - travels in just one direction - up. Even if it fell, the large shift in the composition of deposit types (from interest-bearing to transaction based accounts) would increase the current volume of transactions - and generate higher levels of gDp.

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Editor's note: For additional commentary, visit the website of Atlantic Capital Management.


Consumer credit for January 2011 delivered a good headline on Monday as non-revolving consumer credit increased at a healthy 6.9% annual rate. But, as usual, beneath the headline was another matter.

First, and more importantly for consumer spending, revolving credit fell at a 6.4% annual rate. Second, if we adjust for a ridiculous $24.9 billion increase in credit from the government, non-revolving credit actually fell. Outside of the federal government and a small increase from savings institutions, total consumer credit balances declined, again, for every major category of holder (commercial banks, finance companies, credit unions, nonfinancial business, and pools of securitized assets).

Despite the ongoing recovery, weak as it may be, banks still do not want to lend. Worse, despite a zero interest rate policy (ZIRP) and money printing through quantitative easing (QE), the Federal Reserve’s monetary efforts have done nothing to shake banks out of their lending slumber.

Since QE2 was first hinted at in late August 2010, the banking system has shed $130 billion in total loans, including $73 billion in consumer credit (both revolving and non-revolving). Instead of traditional lending, banks added $54 billion in securities (mostly US Treasuries) through November 10, 2010, in anticipation of the implementation of QE. Due to QE banks have sold half of that increase to the Fed.

So, on net, the banking system has continued to regress despite the Fed’s full efforts. The process of deleveraging has yet to find its nadir.

If we take total bank assets divided by total bank liabilities we get a basic sense of bank leverage and credit creation. Before the credit crisis began in July 2007 that ratio was a bit above 1.11. By comparison, the ratio was 1.09 in 2000 and 1.075 at the trough of the savings and loan crisis in 1992. The current reading for February 23, 2011, is 1.127. But that level is skewed by the Fed’s creation of reserve balance cash.

In July 2007 the Federal Reserve placed $10.8 billion in reserve balances at banks included within their total cash holdings of $321 billion. Those reserve balances with the Fed are created dollars and have no offsetting liability. So when the Fed expanded its balance sheet in the wake of the Panic of 2008, it exponentially expanded the cash balances at member banks without creating additional liabilities.

The current aggregate cash balance for the banking system is $1,342 billion. Of that, $1,265 billion is directly from the Fed. If we adjust our leverage ratio for the cash balances at banks we get a completely different picture of the banking system.

The cash-adjusted ratio of banking system assets to banking system liabilities expanded from about 1.04 in late 2002 to a high of 1.09 in early 2008, and remained above 1.08 until mid-September when Fannie Mae and Freddie Mac succumbed. From October 2008 to the bottom of the crisis in March 2009, the ratio stayed at just over 1, before expanding back to about 1.3 at the start of QE2 last November. The ratio has now fallen back to 1 again with most of the decline coming in 2011 alone.

Some of the implications for this deleveraging are counterintuitive but extremely important. Foremost, the Fed’s creation of reserve balances with member banks do not seem to be looked upon by those banks as equivalent to cash.

From 1997 until 2008, the banking system held between $270 billion and $340 billion in free, non-Fed created cash. That balance stayed within the range over that 11-year period, quickly adjusting back closer to the period average after every movement. So it is safe to assume that the $300 billion in non-Fed cash was/is looked upon as a minimum cushion.

At today’s levels, that cushion is almost completely gone. Even though the banking system shows $1,342 billion in cash, remember $1,265 billion belongs to the Fed. That leaves a non-Fed cushion of only $77 billion.

What this means is that if the Fed completely exits ZIRP and its expanded balance sheets (reversing both quantitative easing programs), banks would be left with only $77 billion in cash. If $300 billion was an appropriate cushion for less trying times, then what would be appropriate for financial institutions that still see elevated risks everywhere?

Charge-off rates for consumer credit cards have come down from a peak of 10.9% in the second quarter of 2010 to 7.7% at the end of 2010, but that remains extremely high. For American Express (AXP) charge-off rates have recovered more quickly (American Express’ customers are typically more affluent) while Capital One’s (COF) rate of 6.8% has remained closer to the average. During “normal” economic climates these loss rates would be closer to 3.8%.

The picture is even uglier for mortgages, as one would expect. Write-offs hit a high of 2.89% in the last quarter of 2009 for residential and commercial mortgages combined. While the improvement to 2.03% in the fourth quarter of 2010 (the latest available figures) is significant, that is still 10 times higher than the average rate from the savings and loan crisis, and 20 times higher than “normal” economic conditions.

The inclination for a cash cushion is extremely rational and not unexpected. But the trillion-dollar question is, what will banks do if the Fed is forced to end its loose monetary policies? Potentially, this would mean more determined deleveraging coupled with liquidations to increase non-Fed cash. The non-Fed cash cushion can only be rebuilt through more reductions in aggregate bank credit.

Without persistent credit growth, it is pretty clear that inflationary pressures are coming from outside the banking system itself. So the net effect of all this might be a situation where inflation continues to harass consumer spending and business profitability at the same time bank credit withdrawal kicks into a higher gear.

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Purchase schedule:

the Desk plans to purchase approximately $102 billion. This represents $80 billion in purchases of the announced $600 billion purchase program and $22 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-March and mid-April

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Major holders --- G.19 release

Total ending balances..........2433.2

Commercial banks................1083.6
Finance companies..................514.1
Credit unions............................225.7
Federal government..................342.0
Savings institutions....................87.2
Nonfinancial business.................54.7
Pools of securitized assets.......126.0


Not all of the growth in consumer credit represents bank credit creation and additional money (e.g., finance co, Federal gov., etc.).

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Mother of all Carry Trades Faces an Inevitable Bust
Nouriel Roubini Nov 1, 2009 10:22PM From the FT:

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

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Following “Near Money” Shows What’s Happening with QE2

Moebs Study Shows How Deposits Have Shifted and Stagnated Prompting the Fed to Pump Money into the Monetary System

LAKE BLUFF, Ill.--(BUSINESS WIRE)--The Amidst the inordinate amount of public emphasis and fear of excess money in the economy stemming from the Federal Reserve’s decision to initiate quantitative easing again (QE2), bank deposits have: Shifted significantly from certificate of deposits, to shorter term checking accounts, and have become stagnant. These numbers are reflected in the Flow of Funds Report issued by the Federal Reserve yesterday.

“We found that Banks have restricted their lending due to this significant consumer shift towards short term deposits, and banks’ efforts to increase capital to asset ratios.”
.A decline in real money is a real fear

A new study by Moebs $ervices shows how this societal focus on money, or the asset side of the American Balance Sheet, has missed the real causes of concern – Banks rely on “Real Money,” or insured deposits and uninsured deposits at Money Market Mutual Funds, to lend to small businesses and create jobs.


“Near Money” Analysis


,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 2010 ---2007

Checking..................................... 4.4 % --2.6 %
Interest Checking...................... 3.3 % --2.6 %
Money Market Deposit Accts.... 43.9 % --33.5 %
Retail CDs................................... 7.6 % --11.1 %
Ira & Keogh Deposits.................. 3.0 % --2.4 %
Jumbo CDs................................... 14.8 % --20.6 %
MMMF Retail................................ 5.7 % --8.4 %
MMMF Ira & Keogh Accts........... 1.8 % --1.9 %
MMMF Institutional..................... 15.5 % --16.9 %
Total............................................. 100.0 % --100.0 %

Note: MMMF = Money Market Mutual Funds

Sources: Fed Z1 Rpt Flow of Funds & Moebs $ervices

“There have been dramatic shifts in deposits causing lenders to lend less and to only high quality borrowers,” said Michael Moebs, economist & CEO at Moebs $ervices. When banks and credit unions know their deposits are stable and will be around for many months they lend. When money supply contracts for many months and/or moves to very short term deposits, as is the case, bankers stop lending because they are uncertain what the economy is going to do.

“We found that Banks have restricted their lending due to this significant consumer shift towards short term deposits, and banks’ efforts to increase capital to asset ratios.”

Deposits have shifted to checking and money market deposit accounts at financial institutions from traditional stable sources of retail CDs and Jumbo CDs. The Money Market Mutual Funds have lost their uninsured deposits both retail and institutional to banks.

Checking account deposits have increased for both interest and non-interest types from 5.2 percent in 2007 for both to 7.7 percent in 2010. More significantly Money Market Deposit Accounts have gone from 33.5 percent in 2007 to 43.9 percent in 2010. “This represents $1.48 trillion dollars in deposits shifting to Money Market Deposit Accounts,” stated Moebs. “This money has come from Money Market Mutual Funds who have lost $1.08 trillion dollars to the banks. Even the very stable Ira & Keogh funds have left Money Market Mutual Funds, and have been absorbed up by banks and credit unions.”

Near Money is Stagnate Too

The total of insured and uninsured deposits has gone from $13.1 Trillion in 2007 to $12.3 Trillion at the end of 2010. According to Moebs, “The overall monetary system is not just down $800 Billion in near money, but short an additional $2 trillion to maintain growth in the economy and population.” “Banks and Credit Unions, especially the Main St. institutions, are being hammered by the FDIC to increase capital. They do not want deposits and are actually shedding them to shrink their balance sheets and increase capital. If not reversed, this will cause the ‘Great Recession’ to continue.”

=====================

"Prompting the Fed to Pump Money into the Monetary System"

Doubtful. Shifts are associated with a faster turnover of existing deposits & higher number of transactions "prompting" higher levels of gDp.

[vl]

Data is showing the public is fully disenchanted with the financial sector in general. Since 99% of the public has no money in the markets or no control over their money in the markets, I'm not sure the data means much. It's more likely that your information suggests the realm for gain is shrinking as the number of participants does as well. Does that not suggest that the Whipsaw Effect we see now will become attacks by one fund on another to keep profits generating?

[Aman A.K.A. Ahamburger]

I don't understand why you get to just through things out there, and talk people down when you aren't taken seriously. 99% of the public has no money? Nothing but exaggeration, which sound like it's coming from bitterness.

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NEW YORK (Reuters) - A top Federal Reserve official signaled on Friday the central bank won't tighten monetary policy any time soon, even as the jobs recovery looked set to quicken.

Money banking textbooks written before 2008 are "now obsolete", as the Fed now has the ability to pay interest on excess reserves, he said in response to an audience question.

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Latest data on the Federal Reserve’s balance sheet reveals that depository institutions are adding excess reserves at the fastest pace since the months surrounding the Lehman Brothers bankruptcy.

According to today’s data, reserve balances have increased by $356bn since 5 January 2011, most of which occurred after February.

Possible drivers for the rise in excess reserves may include recent increases in implied volatility and higher implied 5-year spot inflation rates.

Interbank lending in recent weeks is around $20bn lower than its level at the end of the year. Government securities purchases by commercial banks have been flat since the beginning of 2011 after a substantial rise of around $200bn over the course of last year.

At the same time, Federal Reserve Bank of New York Open Market Operations data suggests that the Fed has purchased $418.5bn in securities as part of the current asset purchase program. The Fed is purchasing securities from the private sector, which is in turn adding to already-substantial excess reserve holdings instead of conducting long-term investments. This will make the exit strategy from extraordinary monetary policy increasingly difficult.

================================

"purchasing securities from the private sector"

It is more accurately purchasing securities from the commercial banks (not the public sector).

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The break-even rate for 10-year Treasury Inflation Protected Securities, the yield difference between this debt and comparable maturity Treasurys, rose to 2.57 percentage points on March 8, the highest since July 2008 and up from 1.63 percentage points on Aug. 27, the day Bernanke said additional securities purchases might be warranted. The rate is a measure of the outlook for consumer prices during the life of the securities

The extra yield, or spread, investors demand to own high-yield, high-risk securities instead of Treasurys has narrowed to 4.71 percentage points from 6.81 percentage points in the same period, according to Bank of America Merrill Lynch index data.


www.moneynews.com/InvestingAnalysis/FedGivesMarketsCluesonExitPathFromUnprecedentedEasing/2011/03/10/id/389053

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Hot Math Chart Porn: Bill Gross Isn't the Only One Dumping Treasurys

Bill Gross is either trying to call the government's bluff or is serious about keeping his money safe. Either way, this might be the chance the Caribbean Banking Centers have been waiting for to finally surpass China as our second biggest creditor. First, as we all know, is the Federal Reserve. Oh sorry, that's not really common knowledge but I'm sure that's not on purpose or anything.

Bloomberg:

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company’s website. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.

Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

WC Varones asks the important question:

If the world's biggest bond fund manager won't touch the $1 trillion-plus in new issuance every year, to say nothing of rolling maturing debt, who's going to buy Timmy's junk when the Dirty Fed stops its QE2 monetization? That debt ain't gonna monetize itself, you know.

It gets better. Whereas previously we had a good reference point to see how much debt China has been dumping, we're now stuck from July 2010 on, when the Treasury changed the math. When I last checked major holders of U.S. debt in November of 2010, the chart looked like this:

But looking at it last night, it now looks like this:


www.jrdeputyaccountant.com/2011/03/hot-math-chart-porn-bill-gross-isnt.html


If you didn't know any better, you might think China gobbled up a whole bunch of new debt, but obviously the larger number is not reflected in the earlier chart, which clearly shows China adding only $3 billion in Treasury debt.

The explanation as to the huge disparity in numbers is a footnote buried on the chart as "New series reflect new benchmark survey taken in this month. Estimated positions based on the previous survey are shown for comparison." which can be roughly translated as rewriting the rules in the middle of the game. The Treasury revises its foreign debt estimates every 5 years and the New York Fed has a convenient explanation for why the Treasury doesn't have more specific data about our foreign owners (via the May 1998 issue of Current Issues in Economics and Finance):

Knowing exactly which foreigners own specific amounts of U.S. Treasury debt in a global market of about $3.4 trillion in outstanding issues, however, is simply not possible. This inability to identify the ultimate foreign owners of Treasury securities does not reflect a lack of effort by the U.S. government to collect data on the foreign ownership of its debt. Nor is it the result of any governmental unwillingness to make data available to the public. Rather, the inability of both policymakers and private sector analysts to determine with full accuracy the foreign ownership of U.S. Treasury debt—whether held by private or official investors—stems not only from the Treasury Department’s obligation to respect the confidentiality of individual respondents but also from the nature of the reporting requirements themselves.

It seems ridiculous, from an economic security standpoint, that we would not have an more accurate number to work with and would have to rely on a benchmark survey undertaken every five years to figure out how much debt is out there and who owns it. But there must be rhyme behind that reason, rhyme which obviously escapes regular folk like us.

Too bad the Fed is still our largest creditor. The Fed holds $1.2 trillion in Treasury debt according to their latest balance sheet release as of March 10. According to these magic new numbers from the Treasury, China holds $1.1 trillion.


Me thinks we're still fucked, magic Treasury math and all.

Psst, dear Treasury, mark Bill down as holding a big fat $0. You're welcome to revise that however you like.

[decoy409]

flow5, I am happy you stuck around and kept this thread alive!

Quote: It seems ridiculous, from an economic security standpoint, that we would not have an more accurate number to work with and would have to rely on a benchmark survey undertaken every five years to figure out how much debt is out there and who owns it. But there must be rhyme behind that reason, rhyme which obviously escapes regular folk like us.

Too bad the Fed is still our largest creditor. The Fed holds $1.2 trillion in Treasury debt according to their latest balance sheet release as of March 10. According to these magic new numbers from the Treasury, China holds $1.1 trillion.



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Only the Game Mathamatician knows flow5, only the Game Mathamatician. And I agree with your footnote at the end.

[flow5]

This Is How QE Really Works

Posted: 11 Mar 2011 09:30 AM PST

By Edward Harrison

If you want an accurate explanation of quantitative easing, here it is. I am going to describe the basic mechanics and the transmission mechanism to the rest of the economy. To the degree there is official documentation on the mechanics, I will refer to it here in order to use the Fed’s own voice in describing QE. Let’s start with the mechanics.

The Mechanics of QE
In March of 2010, the Fed described QE this way in a paper written by Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack on the New York Fed’s website:

Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy.

So quantitative easing is simply large scale asset purchases (LSAP) by the central bank. The central bank is permitted by law to purchase a wide range of assets including but not limited to Treasury securities, mortgage-backed securities, or municipal bonds (see Blanchflower: The Fed Should Buy Munis And Monetize State Debt). Before the first round of quantitative easing, the Federal Reserve’s asset base consisted mostly of Treasury securities. However, as bond market liquidity dried up, the Fed stepped in and purchased a panoply of assets in the first round of quantitative easing including many mortgage-backed securities.

Brian Sack remarked in December 2009:

The Fed is currently in the process of purchasing nearly $1.75 trillion of Treasury, agency, and agency mortgage-backed securities through the LSAP programs. We have already completed our purchases of Treasury securities, totaling $300 billion. And our purchases of agency securities and mortgage-backed securities (MBS) are well advanced. Indeed, we have completed purchases of $155 billion of agency debt securities to date, out of a target level of $175 billion, and of just over $1 trillion of MBS, out of a target level of $1.25 trillion.

The second round of quantitative easing was concentrated on purchases of Treasury securities. While the Fed had about $800 billion in assets in mid-2007, the first round of QE swelled this to $2.25 trillion by December 2009. The Fed’s asset base is now moving toward $3 trillion.

In the March 2010 paper, the NY Fed goes on to say:

We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.

But this is a subjective conclusion. The purpose of the paper is to provide the intellectual underpinnings to defend the Fed’s large scale asset purchases. Therefore, one should view the mechanics presented as objective and the conclusions as subjective. For example, In Sack’s December 2009 speech, he said:

The LSAPs were not aimed at supplying liquidity to financial institutions or at reducing systemic risk. Instead, they were intended to support economic activity by keeping longer-term private interest rates lower than they would otherwise be.

A primary channel through which this effect takes place is by narrowing the risk premiums on the assets being purchased. By purchasing a particular asset, the Fed reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others. In order for investors to be willing to make those adjustments, the expected return on the security has to fall. Put differently, the purchases bid up the price of the asset and hence lower its yield. These effects would be expected to spill over into other assets that are similar in nature, to the extent that investors are willing to substitute between the assets. These patterns describe what researchers often refer to as the portfolio balance channel. [EMPHASIS ADDED]

Sack is telling us that the Fed did not intend to perform a lender of last resort role, a legitimate Fed function. Rather, the Fed’s intention was to artificially supress risk premia to support economic activity. This is important to remember.

The money used to purchase these assets is created specifically for the transactions. That is to say the money did not previously exist before the transactions. This fact is what is behind the view that the Fed is ‘printing money’, a term Ben Bernanke, the Fed Chair also used when describing QE in 2009 (see Jon Stewart: The Big Bank Theory).

The Fed uses permanent open market operations (POMO) to conduct its large scale asset purchases. The Fed explains POMO this way:

The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

On March 18, 2009, the FOMC announced a longer-dated Treasury purchase program with a different operating goal, to help improve conditions in private credit markets.

On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

On November 3, 2010, the FOMC decided to expand the Federal Reserve’s holdings of securities in the SOMA to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Note, August 2010 was when the Fed started QE2. November 2010 was when QE2 was first announced as the Fed decided to expand its balance sheet.

That’s the mechanics.

Transmission Mechanism
How QE actually works is the more subjective part of quantitative easing. Brian Sack told us in 2009 that the Fed was not performing its role as lender of last resort but rather it was ‘manipulating’ risk premia in order to lower long term interest rates to boost the real economy. I use the term ‘manipulate’ rather deliberately as I believe QE introduces a distortion into the markets by making price signals difficult to read for investors and businesses alike. The Fed is attempting to lower interest rates artificially. By that, I mean it is not saying that risk premia are elevated because of liquidity since Mr. Sack has already told us it is not performing a lender of last resort role. The Fed is trying to supress risk premia dictated by market forces through its own activity.

Now, in fairness to the Fed, this is exactly what it does with short-term interest rates by setting the Fed Funds rate. However, with short-term rates at zero percent and the economy still not firing on all cylinders, the Fed is telling us short-term rates at zero percent is not enough stimulus. It wants long-term interest rates to be lower than the market-determined rate as well. Clearly, this is a massive attempt at central planning and is, thus, likely to have unintended consequences like excess leverage and speculation.

You can read Ben Bernanke’s views on the QE2 transmission mechanism in my post "The government has a printing press to produce U.S. dollars at essentially no cost". I take a benign approach to Bernanke’s comments there. However, Marshall is less flattering in "Amateur Hour at the Federal Reserve". But, go back to QE1 and read Marshall’s piece "Bernanke doesn’t understand the basic economics of central banking" from December 2009. I think this got to the heart of the matter when Marshall told us loans create reserves and warned that QE would have nearly no impact on lending – which proved true.

The loan desk of commercial banks have no interaction with the reserve operations of the monetary system as part of their daily tasks. They just take applications from credit worthy customers who seek loans and assess them accordingly and then approve or reject the loans. In approving a loan they instantly create a deposit (a zero net financial asset transaction).

Bernanke often speaks as if he believes reserves create loans. I prefer Janet Yellen, the Fed Vice Chair, and the way she recently explained how QE is transmitted to the real economy. She writes:

Some General Observations

It is important to recognize at the outset that conventional and unconventional monetary policy actions bear many similarities. Forward guidance concerning the path of the federal funds rate, for example, is explicitly intended to influence market expectations concerning the future trajectory of shorter-term interest rates and thereby affect longer-term interest rates. That said, standard monetary policy actions also typically alter not just current short-term rates, but the anticipated path of short-term rates as well, influencing longer-term rates through the identical channel. In fact, central bankers have long recognized that this “expectations channel” operates most effectively when the public understands how policymakers expect economic conditions and monetary policy to evolve over time, and how the central bank would respond to any changes in the outlook.

The transmission channels through which longer-term securities purchases and conventional monetary policy affect economic conditions are also quite similar, though not identical. In particular, central bank purchases of longer-term securities work through a portfolio balance channel to depress term premiums and longer-term interest rates. The theoretical rationale for the view that longer-term yields should be directly linked to the outstanding quantity of longer-term assets in the hands of the public dates back at least to the 1950s.(2)

Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar. My reading of the evidence, which I will briefly review, is that both unconventional policy tools–the use of forward guidance and the purchases of longer-term securities–have proven effective in easing financial conditions and hence have helped mitigate the constraint associated with the zero lower bound on the federal funds rate.

-Unconventional Monetary Policy and Central Bank Communications

What she is discussing is something called the expectations theory of interest rates.

It works like this:

long-term interest rates can be expressed as a series of short-term interest rates, such that if you know long-term rates, you can calculate expected future short-term interest rates. This is important because it tells you what people believe the Federal Reserve is likely to do with interest rates in the future.

-MMT: Market discipline for fiscal imprudence and the term structure of interest rates

The Fed telegraphs how short-term rates will or will not be affected by the real economy and expectations shift accordingly. Therefore, to the degree the Fed is successful in getting long-term interest rates to move, it is because it has adjusted those expectations. That’s how it works.

The reason this is true is market arbitrage. Any market participant could go out into the market and purchases zero coupon treasury strips as an arbitrage against long-term Treasury yield mispricing if long-term rates did not reflect the path of future expected short rates. Let me repeat that: if long-term rates don’t reflect the expected path of short-term rates, you have a sure fire arbitrage opportunity. If the Fed is destined to keep rates at zero percent for the next five years and I am sure of it, but the yield on five-year Treasuries don’t reflect this, all I have to do to make money is buy the five-year and sell Treasury strips and leverage that trade up in the Repo market. Isn’t that what some investment banks are doing right now – ploughing their POMO acquired money into a leveraged bet on Treasuries? That is exactly what happened after the first jobless recovery in 1992-1994 before Greenspan caused a huge bear market in Treasuries by raising rates.

Look, quantitative easing is an asset swap. The Fed creates electronic credits and swaps them with existing financial assets. If the Fed is buying government paper, it is essentially trading one government liability for another, swapping a demand deposit electronic credit for a longer-dated government liability.

From the government’s perspective, there is no functional difference between any of its obligations like bank notes, electronic credits, or treasury bills and bonds. As the Ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency].

-If the U.S. stopped issuing treasuries, would it go broke?

So QE2 Is Equivalent to Issuing Treasury Bills. In actual fact, all QE2 does is drain the real economy of interest income by swapping an interest-bearing government liability for a non-interest bearing government liability. This decreases aggregate demand in the economy. So the real economy effects of QE are to slightly lower aggregate demand. This is offset by changing interest rate expectations, which alter private portfolio preferences and risk premia, leading to credit growth, leverage and speculation, forces which should pump up the real economy. The Fed had intended to lower interest rates via the lowered risk premia. To date, the Fed has lowered risk premia. But this has also provided the tender for speculation and leverage. Moreover, the Fed has also raised inflation expectations to boot, causing interest rates to rise and working at cross-purposes with the lowered risk premia. Thus, QE2 has only been successful insofar as it has increased business credit and raised asset prices. In my view, QE2 has been a bust as it adds volatility to the system and will have negative unintended consequences down the line.

sn117w.snt117.mail.live.com/default.aspx?n=1903016364&wa=wsignin1.0

[vl]

Thus, QE2 has only been successful insofar as it has increased business credit and raised asset prices. In my view, QE2 has been a bust as it adds volatility to the system and will have negative unintended consequences down the line.

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Agreed. Too bad the assets it raises aren't tangible to Main Street, thus draining it of cash flow. So... in a nutshell, QE and QE2 have managed to keep the Financial Sector cadaver with it's head blown off-- alive but not conscious, at a cost of draining all life and movement from everything else on Earth. What was the point?

[flow5]

CoreLogic® Home Price Index Shows Year-Over-Year Decline for Sixth Straight Month Home Prices Down 5.7 Percent as Negative Equity, High Unemployment and Shadow Inventory Continue to Impact Recovery

SANTA ANA, Calif., March 10, 2011 – CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its January Home Price Index (HPI) which shows that home prices in the U.S. declined for the sixth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.7 percent in January 2011 compared to January 2010 after declining by 4.7 percent* in December 2010 compared to December 2009. Excluding distressed sales, year-over-year prices declined by 1.6 percent in January 2011 compared to January 2010 and by 3.2* percent in December 2010 compared to December 2009. Distressed sales include short sales and real estate owned (REO) transactions. The January data shows home prices continuing to slide. Mark Fleming, chief economist with CoreLogic, said, “A number of factors continue to dampen any recovery in the housing market. Negative equity, which limits the mobility of homeowners, weak demand and the overhang of shadow inventory all continue to exert downward pressure on housing prices. We are looking out for renewed demand in the coming months as the spring buying season gets underway to hopefully reduce the downward pressure.”

=========

www.corelogic.com/uploadedFiles/Pages/About_Us/ResearchTrends/CoreLogic_January_Data_HPI.pdf

[flow5]

Americans’ net worth rose 3.9% in 4Q
By Dow Jones Newswires
Posted Thursday

The net worth of Americans rose toward the end of last year as stock market portfolios surged, and overall household debt declined as mortgage liabilities waned.

In its “Flow of Funds” data, the Federal Reserve said Thursday that U.S. households’ total net worth rose 3.9 percent in the October through December period, to $56.823 trillion. Net worth represents total assets such as homes and stock portfolios, minus liabilities such as mortgages and credit card debt. Rising stock market assets offset declines in real estate holdings in the third quarter, the Fed report showed.

The Fed report also said total debt in the U.S. non-financial sectors grew 5.1 percent in the fourth quarter, boosted by increased government and business debt.

Household debt fell by about 0.5 percent, the 11th straight quarterly decline.

Home mortgage debt fell 1.25 percent while consumer credit rose 2.0 percent.

Another Fed report this week showed that consumers added to their non-mortgage debts for the fourth-straight month in January, driven by loans for autos, boats and education. But credit-card debt fell to a new six-year low as consumers continued to pay down debt or default on loans.

The “Flow of Funds” report Thursday said household net worth edged up to about 4.9 times disposable personal income in the fourth quarter from about 4.8 times income in the third quarter.

[flow5]

In the US living standards for some 16% of the population is already at poverty levels equal to the 1930s. Can you imagine where it would be without food stamps and extended unemployment, etc. this is caused by the wages of debt, accompanied by the disparity and inequality between the rich and the poor. That 16% is a total of some 45 million Americans.

www.marketoracle.co.uk/Article26887.html

[flow5]

US economic indices point to continuing slump By Barry Grey
WSWS
Saturday, Mar 12, 2011


The US Labor Department reported Thursday that initial jobless claims rose substantially in the latest week, deflating efforts by the government and media to present the economy as broadly rebounding from the deepest slump since the Great Depression.

Confounding economists’ predictions of a modest increase, claims rose 26,000 to 397,000. The jump in filings followed three consecutive weeks of declines. The four-week moving average of jobless claims also rose, climbing by 3,000 to 392,500.

The Obama administration has hailed the employment report for February, released last Friday, as evidence that its policies are significantly easing the jobs crisis. That report, which showed a net gain in US payrolls of 192,000 and a drop in the official unemployment rate from 9.0 percent in January to 8.9 percent, in fact reflected an economy failing to generate anywhere near the number of new jobs needed to seriously reduce the unemployment level.

The total of new jobs was only marginally higher than the number required just to keep pace with the normal growth in the labor force. The decline in the official unemployment rate had more to do with hundreds of thousands of discouraged workers dropping out of the labor market than with a serious rebound in hiring. (See: “February jobs report shows tepid growth in US payrolls”).

The polling firm Gallup released its own survey March 3 of the employment situation for February, measured without seasonal adjustment, which concluded that the jobless rate had risen to 10.3 percent from 9.8 percent at the end of January. Gallup reported that the unemployment rate was essentially unchanged from 10.4 percent at the end of February 2010.

The report noted a sharp increase in so-called underemployment, a figure that includes those working part-time who would like a full-time job. Gallup said underemployment hit 19.9 percent in February, up a full percentage point from 18.9 percent at the end of the previous month.

“The percentage of part-time workers who want full-time work worsened considerably in February,” Gallup wrote, “increasing to 9.6 percent of the workforce from 9.1 percent at the end of January. A larger percentage of the US workforce is working part-time and wanting full-time work now than was the case a year ago.”

The report concluded, “the real US jobs situation worsened in February. That is, jobs are relatively less available now than in January.”

The Labor Department released a report Thursday on the January unemployment rates of the 50 states and Washington, DC. The survey showed that 24 of the states and the District of Columbia had a jobless rate above 9 percent. Of these, ten had an unemployment rate above 10 percent. Four states had a jobless rate higher than 11 percent: Nevada (14.2 percent), California (12.4 percent), Florida (11.9 percent) and Rhode Island (11.3 percent).

Also on Thursday, AOL announced that it would cut 20 percent of its employees in a cost-cutting move bound up with its purchase of the Huffington Post web site. Some 900 jobs will be eliminated—200 in the US and 700 in India.

The real policy of the Obama administration is to keep unemployment high in order to aid big business in slashing the wages, benefits and conditions of US workers. The attack on wages in the private sector, which began with the White House Auto Task Force’s forced bankruptcy of General Motors and Chrysler, has now spread to the public sector, with savage cuts in jobs, pensions and health care being carried out in one state and city after another, under Democratic as well as Republican administrations.

At the same time, Obama has frozen the pay of federal workers and is proposing to reduce domestic non-defense discretionary spending by $700 billion over the next ten years, while promising as yet unspecified cuts in Medicare and Social Security.

The jobs crisis, soaring home foreclosures and falling wages are now joined by skyrocketing gasoline and food prices. It is hardly surprising that the Reuters/University of Michigan gauge of consumer sentiment for March, released Friday, fell to a five-month low. The measure dropped to 68.2 from a final February reading of 77.5. The 9.3 point drop was the biggest since the height of the financial crisis in October 2008.

The Federal Reserve’s Flow of Funds report, issued Thursday, provides insight into the manner in which the economic crisis is being used to further impoverish the working class and concentrate wealth even more massively at the very top of the economic ladder. The report showed that net worth for households and non-profit groups increased by $2.1 trillion in the fourth quarter of 2010, but this was largely due to a huge increase in stock prices.

During the same three months, the Standard & Poor’s 500 stock index rose 10.2 percent. The value of corporate equities owned by American households grew by $1 trillion in the period.

This windfall went overwhelmingly to the richest layers of the population, which largely monopolize ownership of stocks and bonds. The corporate elite is benefiting from the Fed’s policy of providing cheap credit by keeping the benchmark interest rate near zero and, in effect, printing hundreds of billions of dollars. This drives up the stock market while doing little to lower the jobless rate.

The Fed reported that corporate profits have risen every quarter since the first three months of 2009 and grew 2.8 percent from July through September 2010. Thus, the corporations have pushed up their profits even as mass unemployment has driven down the living standards of large sections of the population.

That high unemployment is the desired policy of the ruling class is underscored by one statistic reported in the Fed survey: Companies were holding $1.9 trillion in cash at the end of the fourth quarter of last year—a record. They are hoarding their profits rather than using them to hire new workers in significant numbers.

Other figures reported by the Fed provide a measure of the rising social distress affecting broad sections of the population. US household debt declined by $208.8 billion last year, but over half of this decline, $118 billion, was accounted for by mortgage, credit card and other consumer debt written off by commercial banks, i.e., by consumers unable to meet their debt payments.

The value of real estate held by households fell by $244 billion in the fourth quarter, following the previous quarter’s decline of $629 billion. This points to the continuing collapse of home values, the chief asset of working class and many middle class families. While the net worth of the richest layers is increasing, that of tens of millions of Americans continues to fall.


axisoflogic.com/artman/publish/Article_62490.shtml

[flow5]

Saturday, March 12, 2011

Can the Fed realistically shrink its burgeoning balance sheet in the current economic environment?

Please note carefully the chart I have created here detailing the growth in the Federal Reserve Balance Sheet in comparison to the level of the S&P 500, the broader level of the US equity markets. I should point out here that I have chosen to use the actual amount of Securities being held by the Fed as representative of its entire balance sheet since it is mainly these that we are interested in for our purposes instead of overall reserve credit. The reason for this is because all of the growth in the Fed’s balance sheet has either come from the purchase of MBS securities, Treasuries and US Agency Debt.

The first thing to note about this chart are the two points noted on the chart; where QE1 began and then when QE2 was announced and then later commenced.

traderdannorcini.blogspot.com/

When the credit crisis erupted in the summer of 2008 and the S&P 500 began to crash, you will notice that the Fed’s Balance sheet was flatlining at a very low level for the remainder of that year and on into early 2009. It was at that point that QE 1 began in which the Fed began buying up these MBS securities (Mortgage Backed Securities) that were the derivatives behind the collapse of several major institutions and brokerage houses.

Notice that was the exact bottom in the S&P 500 index which then began a nearly uninterrupted run higher from near the 700 level to near the 1100 level in January 2010. It then moved lower but found further buying running to 1200 in April 2010 where it stalled out and fell off quite sharply surrendering nearly 200 points before it bottomed again in July 2010. If you notice just after its fall the growth in the Fed’s Balance Sheet began flatlining once again and actually began to shrink somewhat.

The reason for the plummet in the S&P 500 was the fact that the Fed’s first Quantitative Easing program was coming to an end and traders began to fear the worst as it meant the end of the liquidity injections into the banking system that the Fed had been providing. It was this liquidity which had fueled the enormous rally in US stock markets over the course of the past year.

From that April 2010 to August 2010, the stock market went basically nowhere. Traders were believing that the worst of the credit crisis fallout was behind them but they could not see any signs of strong economic growth, at least growth in sufficient size to justify taking the stock indices any higher. You might remember that it was during the time preceding the April 2010 drop in stock prices that the phrase, “green shoots” was in vogue. Those green shoots died on the vine when it appeared that QE1 was ending and there was nothing to take its place. Note once again, during this time frame the Balance Sheet of the Federal Reserve was shrinking.

Enter the Fed to the rescue of the markets once again. In September 2010 it was announced that since the economy was still encountering strong headwinds, another tool would be needed to stave off deflationary pressures and provide more liquidity to “gradually increase inflationary pressures” which would be necessary to break any deflationary mindset. Even though the QE2 program was not to be implemented until November 2010, the stock markets went giddy with delight immediately launching into another rally which took the S&P 500 past the old April high and onto new heights near 1300 where it now currently sits.

Again, you will notice that the correlation between the further expansion of the Fed’s Balance Sheet with QE2 and the upward movement of the S&P 500 is nearly exact.

The conclusion we can draw through all of this is very simple – it is the expansion of the Fed’s Balance Sheet through both QE1 and QE2 which has supplied the liquidity driving equity markets higher. Without this liquidity the economic expansion has been far too fragile to continue on its own merits. For any talk about the Fed supposedly withdrawing this liquidity one has to believe that the economic recovery is of sufficient strength to hold its own without it. Just look at what happened to the S&P 500 in April 2010 when QE 1 was drawing to a close and the economic data showed an economy going nowhere without any signs of another QE program on the way - it plummeted 16% in 3 months time!

But even this is only a half truth. The other side of that coin is that it is one thing to not have any further liquidity injections; it is an altogether different matter to actually begin WITHDRAWING what was in place. In other words, just as the Fed has been attempting to keep interest rates artificially low and make credit cheap and plentiful (hasn’t worked by the way) any attempt to withdraw the liquidity by selling off the Treasuries they hold as a result of the QE purchases will have the opposite effect and push UP RATES beyond the short end of the curve. That will have the effect of tightening credit and slowing its growth precisely at a time in which higher energy costs as crimping both businesses and consumers. In other words, the rising crude oil price is acting as a drag on the entire economy and slowing growth which is EXACTLY THE LAST THING that this economy needs.

Can anyone seriously believe that if crude oil prices remain near current levels and gasoline subsequently stays closer to $4.00 that the Fed is going to actually attempt to shrink the size of its balance sheet by selling off Treasuries which will have the effect of lowering bank reserves and pushing up interest rates? How does one think this will impact the moribund real estate sector which stubbornly refuses to respond to stimulus? If you think the rate of job hiring is anemic now, just wait and see what happens if interest rates start moving higher on some supposed withdrawal of liquidity.

The other last point I wish to make and is a bit unrelated to this but is relevant - The unstated purpose of the Fed’s QE2 program was to keep interest rates low to LOWER BORROWING COSTS for the US federal government. When your national debt is over $14 TRILLION and rising, when annual budget deficits are above the $ ONE TRILLION mark and the rate of economic growth is not generating sufficient tax revenues to give any hope of seriously closing these budget deficits in the immediate future, it becomes a simple exercise in math that the cost of servicing this huge sum of debt is far easier in a low interest rate environment. When you dealing with numbers of this magnitude, a measly 1% raise in rates carries enormous consequences for US borrowing costs and interest rate payments.

I am not so sure that Mr. Bernanke would long hold his current position were he to actually attempt to withdraw any liquidity by shrinking the balance sheet of the Fed. If he were foolish enough to try in the current environment, every politician in the country would take aim at him with both barrels and begin blaming their budgetary woes and any economic woes on rising interest rates. What a convenient scapegoat he would then become.

The situation is that the Fed is stuck. It cannot withdraw any liquidity without creating an entirely new set of problems that would more than likely have to be once again dealt with by adding more liquidity and repeating the cycle. Lather, Rinse, Repeat!

If this were not already enough, the Japanese are now selling US Treasuries to repatriate money back to their country for rebuilding purposes (Japanese insurance companies hold large numbers of US Treasuries which they will need to sell and convert to yen to pay claims – that is the reason for the big rally in the yen on Friday and the weakness in the Treasuries). Toss in the fact that if China were to float the yuan higher upwardly revaluing it as some US politicians are demanding – a move which they think will shrink the US trade deficit with China – and US imports of Chinese goods were to then follow such a move by shrinking, China would need to purchase less US Treasuries to sterilize a shrinking trade surplus with the US. We would then have a situation where the TWO LARGEST BUYERS OF US TREASURIES would be curtailing purchases or outright selling Treasuries at the same time that the Fed might be wanting to begin selling what is going to eventually end up being over $1.5 TRILLION IN Treasury holdings. Just who in the world is going to buy them all? Bill Gross?

[flow5]

Q4 2010 Flow of Funds: Household leverage down, wealth effect dead, and equities surge

Angry Bear | Mar. 10, 2011

The Federal Reserve released the Q4 2010 Flow of Funds Accounts for the US. On the household balance sheet, net worth (total assets minus total liabilities) was estimated at $56.8 trillion, which is up $2.1 trillion over the quarter.

Notably, household net worth has increased $6.4 trillion since the recession's end (Q2 2009). Moreover, personal disposable income increased another $918 billion over the quarter, which dropped household leverage (total liabilities/disposable income) 1.1% to 116%.

Personal saving as a percentage of disposable income rose markedly in Q4 2010 to 10.9% (based on the BEA's measurement of saving using flow of funds data - see Table F.10, lines 49-52).

The chart above illustrates the the wealth effect - the wealth effect is the propensity to consume (save) as wealth increases/decreases. In the Flow of Funds data, this is best approximated by the ratio of net worth (wealth) to disposable income. In Q4 2010, wealth rose 0.15 times disposable income to 4.9, while the saving rate surged 6 pps to 10.9%.

I conclude from the near-term times series illustrated above, that the wealth effect is very weak, and the incentive to save outweighs the desire to consume one's wealth. Better put: households are increasing consumption, but that's due to increased income not wealth.

Of note, since 1997 the volatility of household net worth to disposable income is near 2.5 times that which preceded 1997. Households are fed up; and at least for the time being, the positive wealth effect may be effectively dead.

As an aside, I put something out there: the 'measure' of saving is becoming increasingly unreliable. Spanning the years 2008-current, the average discrepancy between the Flow of Funds measure of saving and the BEA's measure of the same definition of saving (the NIPA construction) is more than 2 times what it was in the 2 years leading up to the recession. This is worth more investigation; but historically, the FOF measure (the change in net worth) has been more reliable.

Breaking down household assets from liabilities, you see what's driven most of the cumulative gain in net worth: financial assets, which are up near 16% since the recession's end. During the recovery to Q4 2010, pension fund assets are up 22%; mutual fund holdings gained 32%; and here's the Fed's baby, corporate equities (stocks) surged 41% (and more, of course, since this data is truncated at December 2010). Credit market instruments are up 6%.

The asset gains outweigh the drop in liabilities, as mortgages and consumer credit have dropped near 4% and 2%, respectively, since the end of the recession. Consumer credit is making a comeback, though, growing 1% over the quarter, while households continue to reduce mortgage liabilities.

I will comment sometime over the weekend or next week about corporate excess saving, which also is constructed using the Flow of Funds data.

Rebecca Wilder

www.businessinsider.com/q4-2010-flow-of-funds-household-leverage-down-wealth-effect-dead-and-equities-surge-2011-3?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29

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Data Note: U.S. - Flow of Funds [2010 Q4]
Thursday, 10 Mar 2011 12:21 ET
By Phillip Thorne

Summary March 10, 2011 -- The following changes were announced by the Federal Reserve Board for the 2010 Q4 edition of the Z.1 "Flow of Funds Accounts."

Detail This period, a small number of codes have been (and therefore a larger number of series) have been renamed, and a larger number added. A list of changed codes is available in a separate Data Buffet News article. We will announce series changes later.

The following is quoted from the written documentation for the 2010 Q4 release, with our notes in brackets. Additional commentary may be found in footnotes attached to each Z.1 table. The "coded tables" are marked with numeric identifiers from which the DataBuffet.com mnemonics are derived.

The documentation field of each Data Buffet time series may identify at least one Z.1 table in which the series may be found; however, a series may appear in up to six cross-referenced tables. Use the "find in catalog" search mode to locate them all.


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Data revisions and other changes

The statistics in the attached tables reflect the use of new or revised source data. Most significant revisions appear in recent quarters; however, new source information resulted in changes to data for earlier periods.

1. A new interactive, web-based guide to the Flow of Funds Accounts is scheduled to be released on March 28, 2011. The tools and descriptions within this guide will help users explore the structure and content of the Z.1 and the Integrated Macroeconomic Accounts. Importantly, it will allow users to search for series, browse tables of data, and identify links among series within these accounts. It will also provide descriptions of each of the published tables and information on the source data underlying each series. Although this guide is separate from the release of the quarterly Z.1 data, it will also be updated quarterly and will be consistent with the most recently published data. The hardcopy Guide to the Flow of Funds Accounts published in 2000 [from which the current structure has diverged] will no longer be available for purchase. This new guide’s location will be announced at: www.federalreserve.gov/feeds/z1.html

2. All unpublished series that are necessary to compile the Flow of Funds Accounts [i.e., the new "S" tables] are available for the first time through the Data Download Program (DDP) at the following location: www.federalreserve.gov/datadownload/Choose.aspx?rel=Z.1

3. Corporate farms have been removed from the personal sector (table F.10). In addition, complete detail on the difference between the flow of funds concept of personal saving and the National Income and Product Account concept is now shown on this table.

4. In the nonfarm noncorporate business sector (tables F.103, L.103, B.103, and R.103), data have been revised from 2008:Q1 forward, owing to benchmark statistics available from the IRS/SOI for 2008.

5. The table for the farm sector (table F.104) has been redesigned to better show the split for gross saving between corporate and noncorporate farms. In addition, the sector now shows a corporate farm discrepancy.

6. In the bank holding companies sector (tables F.112 and L.112), data have been revised from 2006:Q2 forward, owing to the inclusion of bank holding companies with assets less than $500 million.

7. The property-casualty insurance sector (tables F.116 and L.116) has been modified to show security RPs separately as an asset and a liability. Previously security RPs were shown only as a net amount on the asset side of the balance sheet.

8. The life insurance sector (tables F.117 and L.117) has been modified to show security RPs separately as an asset and a liability. Previously security RPs were shown only as a net amount on the liability side of the balance sheet.

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johnbtaylorsblog.blogspot.com/2011/03/lessons-learned-from-ben-bernankes.html
Tuesday, March 1, 2011

Lessons Learned from Ben Bernanke's Policy Rule Discussion at the Senate

At yesterday's hearing before the Senate Banking Committee, Fed Chairman Ben Bernanke talked about monetary policy rules in response to a series of questions by Senator Pat Toomey. First, the Chairman stated that the Taylor Rule calls for interest rates “way below zero” and that this justifies methods such as quantitative easing. This is puzzling because I have reported for months that the Taylor Rule (see 1993 paper) does not call for an interest rate below zero. Second, when Senator Toomey then asked if Taylor believed the Taylor Rule called for rates below zero, Chairman Bernanke didn’t answer directly, but instead claimed that in 1999 I preferred a different rule to the one I published in 1993; he then said that the 1999 rule gives a much different rate. Senator Toomey then pressed on and specifically said the Taylor Rule called for rates higher than we have now, at which point Chairman Bernanke changed tack and argued that there were other policy rules that call for below-zero interest rates. Here is the relevant part of the transcript.

MR. BERNANKE: ... The Taylor Rule suggests that we should be, in some sense, way below zero in our interest rate, and therefore we need some method other than just normal interest rate changes to --
SEN. TOOMEY: Do you know if Mr. Taylor believes that?
MR. BERNANKE: Well, there are different versions of the Taylor Rule, and there's no particular reason to pick the one that he picked in 1993. In fact, he preferred a different one in 1999 which, if you use that one, gives you a much different answer.
SEN. TOOMEY: My understanding is that his view of his own rule is that it would call for a higher Fed funds rate than what we have now.
MR. BERNANKE: There are, again, many ways of looking at that rule, and I think that ones that look at history, ones that are justified by modeling analysis, many of them suggest that we should be well below zero. And I just would disagree that that's the only way to look at it.
But anyway, so I think there are some -- there is some basis for doing that.

There are several issues raised by this back-and-forth exchange.

Most important, at least from my perspective, is that contrary to what was claimed in the hearing, I did not say that I preferred a different policy rule in 1999 rather than the rule I originally published in 1993. I am not sure where this idea of my preferring another rule came from; I went back and looked at the academic papers I published in 1999 (here is a list); the paper on this list that Chairman Bernanke may have been referring to is A Historical Analysis of Monetary Policy Rules where I looked at two different policy rules during different periods of U.S. history. However, as I said in that paper (page 325), one rule was the “policy rule I suggested” and the other one was what “others have suggested.” The “others” were people at the Federal Reserve so for completeness I included that rule in the historical comparison. I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way. This is not just a matter of academic niceties and citations; it is important to correct the record because the “others have suggested” rule has a much larger coefficient on the GDP gap and is therefore more likely to generate negative interest rates and be used to rationalize discretionary actions such as quantitative easing.

Second, the exchange between Chairman Bernanke and Senator Toomey suggests that the Fed is unclear about what monetary policy strategy it is using for the interest rate. Is it the Taylor Rule, as in the first response? Is it the rule incorrectly attributed to me in 1999, as in the second response? Is it some estimated rule, as in the third response? Or is it something else? It would be useful to know what the strategy is. Greater transparency about the strategy would add greatly to predictability and would help markets understand whether quantitative easing will be extended or when the interest rate will break out of the 0-.25 percent range.

For example if the strategy was reasonably well described by the Taylor Rule the interest rate would equal about 1.5 times the inflation rate plus .5 times the GDP gap plus 1. The most recent quarterly data (through the 4th quarter of 2010, released by Bureau of Economic Analysis on February 25, 2011) show that the inflation rate is about 1.4 percent (change in GDP deflator over the last four quarters). According to the average of the most recent survey by the Federal Reserve Bank of San Francisco, (January 28, 2011, Williams-Weidner) the GDP gap is about 4.4 percent. This implies an interest rate of 1.5 X1.4 + .5X(-4.4) + 1 = 2.1 + -2.2 +1 = 0.9 percent, or about 1 percent, which suggests that the Fed should be raising the rate sometime soon, perhaps before the end of this year. But if it is one of the other rules mentioned by the Chairman we might have to wait longer.

Third, the exchange shows how it would be quite feasible and useful to restore some of the reporting and accountability requirements which were removed from the Federal Reserve Act in 2000. As I have proposed, with such requirements the Fed would establish and report to Congress its strategy or policy rule for monetary decision making. If it later deviated from that strategy it would have to provide an explanation to Congress in writing and at a public congressional hearing. With such a reporting requirement, the testimony at such a hearing would be like this exchange between Chairman Bernanke and Senator Toomey with the very important exception that the Congress and the American people would have some idea of what the Fed's basic strategy was.

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DAILY AVG IN MILLIONS
Two weeks ended % CHANGE IN WEEKLY AVERAGES

3/9/2011 2/23/2011..…………………………….…. 13-wk…26-wk…52-wk

Total reserves……………………………………......….124.0….....54.7….…11.5
Non-borrowed reserves……………………..……..140.2.…....64.4.….…19.7
Required reserves…………………………..…………....42.3….....14.7…....13.9
Excess reserves……………………………………....…136.4….....57.4….…11.4
Borrowings from Fed…………………………..….….-224.6...-125.7.….-79.8
Free reserves……………………………………….….…….…69.1…....33.4..………9.6

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An extraordinarily easy money policy.

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MONTHLY MONEY STOCK MEASURES
Daily Average, in billions % CHANGE

Seasonally adj ann rates

February January 3-mth 6-mth 12-mth

M1 SA................ 11.3.... 13.9.... 10.0
M2 SA................... 4.7...... 5.3....... 4.1

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Money growth temporarily slowing.