Ben Benanke's Incompetent

[flow5]

2002:

"Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time — if it were credible — would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt ... Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities ... Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond- price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951. Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade"

Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, speech to the National Economists Club, Washington, D.C., November 21, 2002.

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

This came from zerohedge. But they share the same wrong opinion.

"If, say, the 10-year note were to be capped at 2 1/2%, where it was at ahead of the QE2 program last fall, compared with the current 3%-plus level, the total return for a 10-year strip would come to over 10% in a 12-month span. Now put that in your pipe and smoke it!"

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

Our excessive rates of inflation (especially since 1965), has been due to an irresponsibly easy monetary policy. Between 1965 and June of 1989, the operation of the trading desk has been dictated by the federal funds “bracket racket”. Even when the level of non-borrowed reserves was used as the operating objective, the federal funds brackets were widened, not eliminated. Ever since 1989 this monetary policy procedure has been executed by setting a series of creeping, or cascading, interest rate pegs.

This has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the Fed assures the banks access to costless legal reserves, whenever the banks need to cover their expanding loans – deposits.

Our monetary mismanagement has been the assumption that the money supply can be managed through interest rates. We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about

THE EFFECT OF TYING OPEN MARKET POLICY TO A FED FUNDS RATE IS TO SUPPLY ADDITIONAL (AND EXCESSIVE (AND COSTLESS) LEGAL RESERVES), TO THE BANKING SYSTEM WHEN LOAN DEMAND INCREASES.

Since the member banks have no excess reserves of significance the banks have to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion.

Apparently, the Fed’s technical staff either never learned, or forgot, how Roosevelt got his “2 percent war”. This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on “T” bills below one percent, and long-term bonds around 2 -1/2 percent, and all other obligations in between.

This was achieved through totalitarian means; involving the control of total bank credit and the specific rationing of that credit we had official price stability and “black market” inflation.

The production of houses and automobiles was virtually stopped, and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort. This plus controls on prices and wages kept the reported rate of inflation down.

Financing nearly 40% of WWII’s deficits through the creation of new money laid the basis for the chronic inflation this country has experienced since 1945. Interest rates, especially long-term, would have averaged much higher had investors foreseen this inflation. This was reflected in the price indices as soon as price controls were removed.

There were recently 5 interest rates (ceilings tied to the Primary Credit Rate @.50%), that the Fed could directly control in the short-run; the effect of Fed operations on all other interest rates is still INDIRECT, and varies WIDELY over time, and in MAGNITUDE.

The money supply could never be managed by any attempt to control the cost of credit (i.e., thru interest rates pegging governments, or thru "floors", "ceilings", "corridors", "brackets", etc). And the FED's new policy tool "IOeRs" will induce dis-intermediation among the non-banks and reduce the supply of loan-funds in the credit markets.

The FED cannot control interest rates, even in the short-end of the market, except temporarily. By attempting to slow the rise in the renumeration rate the FED will pump an excessive volume of costless legal reserves into the member banks.

THIS IS THE PROCESS BY WHICH GREENSPAN FINANCED OUR RAMPANT REAL-ESTATE SPECULATION.

[flow5]

FRB of KC Pres. Thomas Hoenig...said "the U.S. needs to raise interest rates to encourage individuals to save". No, I think workers need higher paychecks, or, higher disposable incomes, in order to save (not higher interest rates as an inducement to save).

It doesn't help the economy to have larger volumes of savings held as time/savings deposits within the CB system (savings held within the CB system actually retard economic growth). I.e., the member banks do not loan out existing deposits, nor the savings of their depositors, when they lend & invest.

Higher member bank rates only result in higher capitalization rates on company earnings, & a higher compounding interest rate which will move the interest payments ($244b as of April - 2011's budget), on the on the Federal Deficit from its current proportion, to the largest proportion of the Federal Debt.

[The Virginian]

Ben Benanke's Incompetent

I Agree!

[maui1]

i am not sure it is the men (greenspand/volker as well) as fed chairman, that makes them seem stupid, but the position itself that is stupid.

as i see it.........the baseless need for the fed, is the only need i see for the fed.

[flow5]

www.newyorkfed.org/research/staff_reports/sr497.pdf
"A Note on Bank Lending in Times of Large Bank Reserves"

"The analysis shows that, with these increasing costs, large quantities of reserves may, surprisingly, HAVE A CONTRACTIONARY EFFECT ON BANK LENDING."

I said that 3 years ago. They still don't get it. IOeRs induce dis-intermediation among the non-banks.

[flow5]

On October 3, 2008, Section 128 of the Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on both excess reserve balances as well as required reserves (making the opportunity cost of lending indifferent).

The Emergency Economic Stabilization Act of 2008 accelerated the effective date in the provisions for the Financial Services Regulatory Relief Act of 2006 (legislation whereby the Board of Governors of the Federal Reserve System (BOG), could pay interest on reserves - to October 1, 2008). The payment of interest on these accounts altered the character of the member bank's District Reserve Bank balances.

First, while the monetary base expands when the volume of excess reserves expands, the monetary base is not now, nor has ever been, a base for the expansion of new money & credit. Take currency, which comprised 92% of the base on Aug 2008, & subsequently fell to 43% of the base at present. An increase in the currency component of the base is contractionary - unless offset by open market operations of the buying type.

Second, with interest on reserves (IOeRs), (54% of the base), inter-bank demand deposits (IBDDs) held at the District Reserve banks (owned by the member commercial banks), have been transformed from cash assets, to highly liquid, bank earning assets.

Only excess & required reserves are remunerated. Contractual clearing balances receive earnings credits, but there is no FRB rebate (to the owner), associated with the currency component of the monetary base. I.e., neither currency held by the non-bank public, nor vault cash (& associated ATM networks), are paid interest on their holdings.

In this process, IOeRs have become the functional equivalent of required reserves, not short term T-bills. T-bills are settled upon maturity, or are liquidated at a discount.

IOeRs sport a "floating", remuneration rate (currently consonant with the 1 year "Daily Treasury Yield Curve Rate"). Interest is paid on the Deposit-Taking Financial Institution’s (DFIs) IBDDs balances averaged over the reserve maintenance period (7 or 15 days, depending upon the institution), & credited 15 days after the close of the respective maintenance period (unlike overnight FFs or repos).

I.e., the BOG’s policy rate "floats" (like an adjustable rate mortgage), via a series of either, cascading, or stair-stepping, interest rate-pegs. I.e., as with ARMs, a "note is periodically adjusted based on a variety of indices". Similarly, "Among the most common indices (for ARMs), are the rates on 1-year constant-maturity Treasury (CMT) securities".

The remuneration rate is a monetary policy "tool", it is the Central Bank's target rate's "floor" in an interest rate corridor where the FFR is the target rate & the discount rate is the penalty rate).

IOeRs are not just an asset swap. IOeRs are assets defined by economists to be outside-of-the properties normally assigned to the money aggregates. I.e., IOeRs are not a medium of exchange. They do not circulate. They do not require Basell II regulatory capital.

In their present state, IOeRs are a credit control device. IOeRs absorb bank deposits (which offset the expansion of the FED’s liquidity funding facilities on the asset side of its balance sheet, as well as QE1’s & QE2’s MBS, & Treasury purchases). Or in effect, IOeRs sterilize open market operations of the buying type.

(1) I.e., if the BOG raised the average reserve ratios on member bank deposits, the VOLUME of required, or legal reserves would increase (as RR were raised in 1936 by 50% & then again in 1937 by another 33%). SEE: www.econ.ucdavis.edu/working_papers/03-10.pdf

(2) If the BOG raised the remuneration rate on excess, & required reserves (vis a’ vis other competitive financial instruments, yields, & returns), the VOLUME of IBDDs would likewise increase.

The source of System Open Market Account (SOMA), holdings: agency debt, mortgage-backed securities, & Treasury’s ($1.7t - QE1), & Treasury securities ($.6t - QE2), were acquired thru open market operations of the buying type (via monetization between the Reserve Banks & the Commercial Banks, i.e., by simultaneously crediting member bank reserve account balances. The volume of FRB-IBDDs is almost exclusively related to the volume of Reserve Bank credit. I.e., Reserve Banks acquire earning assets (Treasury Bills, etc.), by creating IBDDs – the costless legal reserves of money creating deposit taking financial institutions.

By increasing the volume of un-used excess reserves outstanding (the ratio of reserves to deposits), the BOG absorbs, or reduces, the CB system’s lending capacity (either by siphoning the liquidity out of, or limiting the expansion of, the collective system of banks).. That's exactly like raising reserve ratios, or traditionally "tightening" monetary policy. Raising the volume of excess reserves held by the member banks is therefore contractionary, not inflationary.

If, on the other hand the FED lowered the remuneration rate on excess reserves (the FLOOR on interest rates, not the CEILING), the volume of excess reserves would fall (given the opportunity to make bankable loans & investments).

IOeRs are riskless, guaranteed, & are a hedge against higher interest rates (i.e., promise even higher, & safer returns as the economy expands). I.e., IOeRs are a defense against rising rates & falling prices, until the bank judges it is safe to capture higher yields).

I.e., IOeRs have made it unprofitable for the banks to lend within the short-end segment of the yield curve. The evidence is that: “Reserve velocity“ declined: from its peak in December 2007 of 353, to 2.4 as of December 2010. Reserve velocity is defined as the ratio of the average daily value of transactions on FEDWIRE, divided by the daily average value of IBDDs (reserves held at the Federal Reserve.

IOeRs are the bank’s primary liquidity reserves (clearing balance backstop), i.e., apart from the Central Bank's day-light credit backstop, & or System's Federal Funds Market, etc. I.e. as the volume of IOeRs grew -- FED-WIRE, Fed Funds, day-light credit, & contractual clearing balances have all declined conterminously

[flow5]

The FED is directly responsible for all FLASH CRASHES in the stock market. They are responsible for all the boom-busts in the economy. They contributed to most of the currency crises.

[lifewasgood]

Thank You Flow,

[flow5]

"Effect of Reg Q Repeal on MMFs Likely to Be Tempered Says ICI's Reid May 31 11

When we wrote last week "FDIC Says DDAs w/Interest Ineligible for Unlimited Deposit Insurance," we hadn't been aware of a May 13, 2011, letter written by the Investment Company Institute and its Chief Economist Brian Reid. The "ICI Comment Letter on Federal Reserve Board Proposal to Repeal Regulation Q," says, "The Investment Company Institute appreciates the opportunity to comment on the Federal Reserve Board's proposed rule that would repeal Regulation Q, which prohibits member banks of the Federal Reserve System from paying interest on demand deposits. The proposed rule, which implements Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), repeals Section 19(i) of the Federal Reserve Act, the statutory authority under which the Board established Regulation Q. In its rule proposal, the Board asked a series of questions about the repeal of Regulation Q, including whether it would have implications for money market funds."

Reid's letter comments, "It is unclear how significant the competitive effect of allowing banks to pay interest on demand deposits will be on investor DEMAND FOR MONEY MARKET FUNDS, in part because banks already pay implicit interest on certain business demand deposit accounts (DDAs) through 'earnings credits.' We have deep concerns, however, that the elimination of Regulation Q, coupled with the unlimited deposit insurance on noninterest-bearing transaction accounts as required under Section 343 of the Dodd-Frank Act,3 will effectively extend unlimited insurance to interest-bearing accounts.

[Note: see Crane Data's prior New story "FDIC Says DDAs w/Interest Ineligible for Unlimited Deposit Insurance" for the latest.]

These changes could dramatically alter the competitive landscape BETWEEN BANKS & MONEY MARKET FUNDS and potentially create LARGE OUTFLOWS from money market funds and into banks either immediately or during a future financial crisis, putting severe pressure on the money markets.

Furthermore, the combination of these two changes will significantly increase moral hazard for the banking system, and potentially increase the costs of operating the deposit insurance program for the FDIC and ultimately the U.S. taxpayer. Indeed, the adoption of these two provisions likely will create systemic risks that did not previously exist. It is important, therefore, that the unlimited insurance, authorized for two years in Section 343, be allowed to expire as contemplated by the Dodd-Frank Act."

ICI explains, "Regulation Q was put in place by the Glass-Steagall Act of 1933 as part of a Congressional response to banking practices and problems encountered during the Depression. It authorized the Board to set the rates of interest that banks would be allowed to pay their customers, including a rate of zero on DDAs.

From the mid-1960s to the mid-1980s, yields on money market instruments generally were significantly higher than the imposed zero rate that banks were allowed to pay on DDAs and also were often higher than the ceiling imposed on passbook savings accounts.

Among other things, these developments discriminated against investors with modest balances. When market interest rates were above deposit ceiling rates, wealthy investors, including institutions, were able to shift from deposits to direct investments in money market securities such as repurchase agreements or commercial paper. Smaller investors were forced to continue to hold their liquid balances in deposit accounts paying submarket yields.

Money market funds provided a conduit through which smaller investors could, for the first time, gain access to the higher yields available on open market instruments. For institutional investors, through asset pooling, money market funds often provided more efficient cash management and better diversification than direct investments in money market instruments. These funds also provided investors with larger balances with a cash-management tool that reduced their exposure to a single bank."

They says, "With the notable exception of prohibiting the payment of interest on DDAs, Regulation Q restrictions on deposit rates were gradually phased out in the 1980s, allowing depositories to compete more effectively by creating new products. In the retail space, these products included negotiable order of withdrawal accounts and money market deposit accounts, which are not considered DDAs.

Banks have used sweep accounts to provide interest to business customers. Under such arrangements, banks allow customers to keep zero balances overnight in DDAs and sweep customer funds into repurchase agreements, money market funds, and offshore deposits daily.

Banks also have been able to compete for business deposits by providing 'earnings credits' on DDAs that can be used to offset service charges generated by the business account owner. These earnings credits amount to the implicit payment of interest on DDAs.

The earnings credit rate, however, is reportedly sometimes less than that offered by a 'hard' interest-earning account and any unused earnings credits typically do not carry forward from month to month.

The repeal of Regulation Q, therefore, may make DDAs a more appealing alternative for business cash management, thereby potentially reducing demand for money market funds, sweeps, or other arrangements."

Reid continues, "The effect of repealing Regulation Q on investor demand for money market funds, however, likely will be tempered by the tremendous benefits and protections money market funds provide to investors. Institutional investors historically have been attracted to money market funds not only for their market-based yields, but also for the unique protections offered by Rule 2a-7 under the Investment Company Act of 1940. Rule 2a-7, which was further strengthened in 2010, contains several conditions designed to limit a money market fund's exposure to certain market risks by specifying strict limits on portfolio credit quality and maturity of portfolio securities, and requiring readily available liquidity for redemptions. In addition, the rule requires that money market funds maintain a diversified portfolio designed to limit a fund's exposure to the credit risk of any single issuer. Indeed, money market funds often invest in hundreds of different underlying securities, providing investors with diversification across a large number of nonfinancial and financial institutions. In contrast, banks depositors are protected against losses by bank capital and through insurance by the FDIC up to $250,000 per account.

Institutional investors, however, often manage cash balances totaling millions to hundreds of millions of dollars or more. For such investors, the repeal of Regulation Q may be an insufficient incentive to offset the risks of an undiversified exposure of deposits in a single bank compared to the more diversified investment available through a money market fund."

He adds, "Thus, it is difficult to predict with any degree of precision what effect the repeal of Regulation Q, in and of itself, will have on investor demand for money market funds. As discussed below, however, the balance between the different approaches of money market funds and banks could be dramatically altered, as the risks associated with the lack of diversification in DDAs are mitigated by the availability of unlimited insurance on noninterest-bearing transaction accounts.

ICI's comment letter also says, "The economic role of a carefully designed deposit insurance program is to help promote stability across the entire economy. Deposit insurance reduces the probability of bank runs by guaranteeing that retail depositors are made whole when a bank defaults. Despite its demonstrated benefits, deposit insurance also carries risks for the financial system. For example, deposit insurance reduces the incentives for insured depositors to monitor the creditworthiness of banks, which in turn creates moral hazard that encourages banks to take additional risks, knowing that depositors will not withdraw their deposits if the bank's financial condition deteriorates. In addition, deposit insurance can cause other systemic risks for financial markets by increasing the propensity for investors to sell off assets -- such as stocks, bonds, mutual fund shares, and other securities -- and move the proceeds into insured deposits. As the FDIC itself has previously observed, this behavior can produce or exacerbate broader market dislocations during periods of financial stress."

Finally, Reid writes, "Historically, the risks posed by deposit insurance programs have been mitigated by capping the amount of a depositor's account that is insured (currently $250,000). In the case of the temporary unlimited insurance authorized by Section 343 of the Dodd-Frank Act, even with the statutory limits on the types of accounts covered (noninterest bearing), the moral hazard and systemic risks created by the banking system have increased, particularly with the removal of Regulation Q.

For example, we are not aware of any limitation placed on interest-bearing DDA holders that would prohibit them from moving their cash balances to a noninterest-bearing, fully insured transaction account during a period of financial stress at an individual bank or in the financial markets in general. Nor are we aware of any prohibition on banks creating such a linkage that could be executed automatically.

Taken together, the removal of Regulation Q and the unlimited insurance on noninterest-bearing transaction accounts required under Section 343 of the Dodd-Frank Act will effectively allow the FDIC to provide unlimited insurance on interest-bearing accounts and will no doubt draw money away from money market funds, other cash pools, and direct investments in the money market, perhaps even to a degree that could raise systemic concerns. It is critical, therefore, that the unlimited insurance on noninterest-bearing transaction accounts, authorized for two years in Section 343, be allowed to expire as contemplated by the Dodd-Frank Act. Indeed, this point is sufficiently important that we recommend the Board express this view to Congress and the FDIC to ensure that the unlimited insurance is not extended by statute or regulation." [Note: This letter was posted before last Thursday's Crane Data News story, "FDIC Says DDAs w/Interest Ineligible for Unlimited Deposit Insurance".)"

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

Once again, our legislators & their advisors have failed to understand the differences between money creating depository institutions and the non-banks (financial intermediaries - where savings equal investment). Payment of interest on demand deposits will weaken the competitiveness of the MMMFs. The CBs will again be the dominate predators.

[flow5]

What’s confusing is that real-growth is sea-sawing opposite of inflation which is also sea-sawing. The next bottom in inflation is July. And we just completed a top in real-growth - 3rd qtr flat.

[Virgil Showlion]

So in essence you're arguing that Ben is incompetent because he's trying to control something that fundamentally can't be controlled.

I can live with that assessment.

[flow5]

Yes, Keynes's liquidity preference curve is a false doctrine.

[flow5]

This is the first time (beginning late March), that velocity has fallen since early 2009.

[flow5]

Bernanke's & Greenspan's incompetence:

MONETARISM HAS NEVER BEEN TRIED:

To counter what Greenspan described as “irrational exuberance (at the height of the Doc.com stock market bubble), Greenspan initiated a "tight" monetary policy (for 31 out of 34 months).

A “tight” money policy is one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate of turnover) is no greater than 2-3% above the rate-of-change in the real output of goods & services.

Greenspan then wildly reversed his “tight” money policy (at that point Greenspan was well behind the employment curve), and reverted to a very "easy" monetary policy -- for 41 consecutive months (despite 17 raises in the FFR, -every single rate increase was “behind the curve”). I.e., Greenspan NEVER tightened monetary policy.

Then, as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated a "tight" money policy (ending the housing bubble in 2006), for 29 consecutive months (out of a possible 29, or at first, sufficient to wring inflation out of the economy, but persisting until the economy collapsed).

I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market).

The FOMC continued to drain liquidity - despite 7 reductions in the FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed, the FED maintained its “tight” money policy (i.e., credit easing, not quantitative easing).

I.e., Greenspan didn't start "easing" on January 3, 2000, when the FFR was first lowered by 1/2, to 6%. Greenspan didn't change from a "tight" monetary policy, to an "easier" monetary policy, until after 11 reductions in the FFR, ending just before the reduction on November 6, 2002 @ 1 & 1/4%.

I.e., Greenspan was responsible for both higher employment (June 2003, @ 6.3%), and higher inflation (rampant real-estate speculation, followed by widespread commodity speculation – peaking in July 2008 – Greenspan’s inflection point).

Bernanke then relentlessly drove the economy into the ground, creating an un-employment, & under-employment rate, nightmare.

The problem is that the Federal Reserve doesn’t gauge the volume and timing of its open market operations in terms of the amount and desired rate of increase of member commercial bank’s COSTLESS legal reserves, but rather in terms of the levels of the federal funds rates (the interest rates banks charge other banks on excess balances with the Federal Reserve).

By using the wrong criteria (INTEREST RATES, rather than member bank LEGAL RESERVES), in formulating and executing monetary policy, the Federal Reserve became an engine of inflation and a doomsday machine.

[flow5]

"In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and THERE ARE NO BINDING RESERVE REQUIREMENTS"

"A Note on Bank Lending in Times of Large Bank Reserves" - frbNY

This was a preparatory announcement, i.e. prior to eliminating all reserve requirements:

"The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve banks gave the Board of Governors authority to lower reserve requirements on all transaction deposits (applied to deposits above a certain threshold level) to as low as ZERO PERCENT, from their previous minimum top marginal requirement ratio of eight percent. These changes are not effective until October 2011"

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

The bankers get almost anything they ask for - to the detriment of the public's pocketbook.

[decoy409]

flow5, say,forget about 'Keynes's' , school me up some more with this pattern I spoke of long back at old MSN. I am using the following to cite my laid out example,

April 2010 - The Long Wave (aka The K Wave) “Jubilee” Cycle

Quote: At its deepest level, the long wave is a cycle of the ebb and flow of global corporate efficiency. Trends that go too far and then reverse in innovation, scarcity, overcapacity and debt produce the ebb and flow of inflation and deflation in producer and consumer prices that drive the cycle. The study of cycles is the study of trends. The global stock market trends on top of these deeper economic trends are simply market manifestations of the underlying economic reality of the long wave.

When you strip out the noise, and look at a real data chart that presents the ebb and flow of corporate efficiency on a major equity index chart, adjusted for inflation, with the long wave start date labeled correctly, your jaw drops. You suddenly see the Kondratieff long wave in stunning and sometimes terrifying detail, with all its implications.

marketoracle.cn/Article18343.html

The unknown and how this wave rides darn near exact as the rest year in and year out,but you trick it here and there,and look out,as it is the 'unexpected',but not to 'all.'

Thoughts please.

[bimetalaupt]

Jun 1, 2011 19:28:55 GMT -5 flow5 said:

This is the first time (beginning late March), that velocity has fallen since early 2009.

Flow5,
It looks like the means to purchase is not growing as fast as M1..M2 growth was about the same as the growth of saving (4.9%) . What little data around looks like savings is again on the rise to maybe 8% by the end of the summer.. every dollar of saving is one dollar less GDP..

The economy is again on the savings march..Driven by fear!! esp the Baby Boomers!!

Bi Metal Au Pt

Attachments:

[usaone]

Savings rate at 6% to 8% is great for the future!

[flow5]

decoy409:

April 2010 - The Long Wave (aka The K Wave) “Jubilee” Cycle

Kondratieff identified a systematic, recurring, long wave, economic cycle. But for what it's worth, I think its theoretical base is questionable. That doesn't mean that there's not one, or that the U.S. isn't about to enter a down phase corresponding to Kondratieff's theory. But his basis views escape me.

[flow5]

Bi Metal Au Pt:

Velocity has to have declined significantly. We haven't had a deviation like this from my numbers in the last 10 years. I'll have to look a little harder at the numbers.

[decoy409]

Flow,why do you think the guy was locked up? Because of the danger of such and it being perfectly feasable to make work.

[flow5]

www.frbsf.org/news/speeches/2011/john-williams-0601.html?utm_source=home


...The first major difference between monetary policy today and policy of a generation or so ago is that our decisions have had less and less to do with monetary aggregates, such as M1. This reflects the fact that PAYMENTS TECHNOLOGY has changed so dramatically over the past 50 years. In the 1950s, when June Cleaver went to buy groceries, she probably paid with cash or perhaps a check. If her purse was empty, she had to get to the bank before it closed at three o'clock, wait in line for the next available teller, and then withdraw enough cash to last until her next bank visit. These simple facts of life determined the monetary theories of that day. They even shaped the definition of M1, which has a nostalgic 1950s simplicity about it.

For example, M1, the most liquid measure of money, is defined as cash and coin, traveler's checks, demand deposits, and similar bank balances. These include the measures of money that June Cleaver used for her transactions every day. In terms of understanding how much cash June wanted to hold, the Baumol-Tobin theory of money demand might apply. In that theory, households calculate how many times to go to the bank to withdraw cash and how much cash to take out based on two things: the inconvenience cost of each trip to the bank and the household's typical monthly shopping needs.

Let's now fast-forward 50 years. Instead of driving to the bank and waiting in line, many of us do most of our banking online or at ATMs. And purchases today can be made using a dizzying array of payment options, including credit cards, debit cards, gift cards, and PayPal, to name just a few. Debit cards and PayPal have many similarities to traditional checking accounts and can be fitted into traditional monetary theories. But credit cards present a much greater challenge. CREDIT CARD BALANCES ARE NOWHERE TO BE FOUND IN THE MONETARY AGGREGATES, even though they make up a large fraction of total U.S. transactions. If you or I drained our bank accounts, we could still shop until we dropped by running up our credit card balances.

How do 1950s theories of cash and checks apply in a world in which you and I can instantly take out a loan of several thousand dollars with the swipe of a card at the cash register? When Milton Friedman first advocated slow and stable growth of the money supply, he didn't write a word about credit cards, checkable brokerage accounts, or checkable home-equity loan accounts. In the 1950s, these innovations hadn't been invented or existed only in the most rudimentary form.

Let's take a closer look at the classic quantity theory of money: MV = PY. It becomes very tenuous when traditional measures of M make up a smaller and smaller fraction of the value of transactions. For example, the velocity of M1 was around three or four in the 1950s. Now it is about eight—and that's down from a peak of about 10½ a few years ago. Today's economy uses cash and checking accounts much more efficiently.

There have been a number of attempts to find a broader measure of "money" that has a stable relationship with nominal spending—that is, a constant velocity. These include M2 and variants of M2 that incorporate the latest financial innovations.4 But, despite repeated efforts, like the mythical city of El Dorado, this ideal measure of money has proven elusive. IT IS PRECISELY BECAUSE OF THE VOLATILITY OF VELOCITY (V) that the Fed has MOVED AWAY FROM TARGETING THE MONETARY AGGREGATES in conducting monetary policy. Instead, for the past few decades, the Fed has TARGETED SHORT-TERM INTEREST RATES, in particular the federal funds rate and the interest rate on bank reserves. By targeting these rates directly, the Fed bypasses the uncertain and unpredictable link between money and the economy. Other major central banks target short-term interest rates as well.

...The BREAKDOWN OF THE STANDARD MONY MULTIPLIER has been especially pronounced during the crisis and recession. Banks typically have a very large incentive to put excess reserves to work by lending them out. Thus, our traditional textbook theories predict that banks will hold reserves only to the extent that they have to do so to satisfy regulatory requirements and transactions needs. If a bank were suddenly to find itself with a million dollars in excess reserves in its account, it would quickly try to find a creditworthy borrower and earn a return on that one million dollars. If the banking system as a whole found itself with excess reserves, then it would try to lend the money out. That would increase the availability of credit in the economy, drive private-sector borrowing rates lower, and spur economic activity. Precisely this reasoning lies behind the classical monetary theories of multiple deposit creation and the money multiplier.

But, this hasn't happened—not at all. The Federal Reserve has added $1.5 trillion to the quantity of reserves in the banking system since December 2007. Despite a 200 percent increase in the monetary base—that is, reserves plus currency—measures of the money supply have grown only moderately. Over this period, M1 increased 38 percent, while M2 increased merely 19 percent. In other words, the money multiplier has declined dramatically. Indeed, despite all the headlines proclaiming that the Fed is printing huge amounts of money, since the end of 2007 M2 has grown at a 5½ percent annual rate on average. That's only slightly above the 5 percent growth rate of the preceding 20 years.

Why has the money multiplier broken down? Well, one reason is that banks would rather hold reserves safely at the Fed instead of lending them out in the still struggling and risky economy. But, once the economy improves sufficiently, won't banks start lending more actively in order to earn greater profits on their funds? And won't that get the money multiplier going again? And can't the resulting huge increase in the money supply overheat the economy, leading to higher inflation? The answer is no, and the reason for this is a profound, but largely unappreciated change in the inner workings of monetary policy.

...I'm referring to the 2008 legislation that allowed the Fed to pay interest on bank reserves. These reserves consist almost entirely of bank balances held electronically at the Fed. Until just a few years ago, bank reserves and cash were the same in many respects. Both were part of the monetary base. Both earned no interest. And both could be used to satisfy reserve requirements and settle payments between banks.

But now banks earn interest on their reserves at the Fed and the Fed can periodically change that interest rate. This FUNDAMENTAL CHANGE in the nature of reserves is not yet addressed in our textbook models of money supply and the money multiplier. Let's think this through. At zero interest, bankers feel considerable pressure to lend out excess reserves. But, if the interest rate paid on bank reserves is high enough, then banks no longer feel such a pressing need to "put those reserves to work." In fact, banks could be happy to hold those reserves as a risk-free interest-bearing asset, essentially a perfect substitute for holding a Treasury security. If banks are happy to hold excess reserves as an interest-bearing asset, then the marginal money multiplier on those reserves can be close to zero.

In other words, in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and ultimately inflation no longer hold. In particular, the world changes if the Fed is willing to pay a high enough interest rate on reserves. In that case, the quantity of reserves held by U.S. banks could be extremely large and have only small effects on, say, M1, M2, or bank lending. So what about excess reserves and inflation? Classical monetary theory would take it as given that the enormous growth of excess reserves of the past few years would spur inflation. But if all those reserves aren't lent out, and all they do is sit at the Fed gathering interest, then the classical conclusion no longer holds water.

Understanding the Federal Reserve's asset purchase programs

This raises another question: If those reserves aren't circulating, why has the Fed boosted them so dramatically in the first place? The most important reason has been a deliberate move to support financial markets and stimulate the economy. By mid-December 2008, the Fed had lowered the federal funds rate essentially to zero. Yet the economy was still contracting very rapidly. Standard rules of thumb and a range of model simulations recommended setting the fed funds rate below zero starting in late 2008 or early 2009, an obvious impossibility.6

Instead, the Fed provided additional stimulus by purchasing longer-term securities, another policy tool absent from standard textbooks. From late 2008 through March 2010, the Fed bought $1.7 trillion in such instruments. Then, in November 2010, we announced we would purchase an additional $600 billion in longer-term Treasury securities by the end of June 2011. We created bank reserves to pay for the securities. These purchases increased the demand for longer-term Treasuries and similar securities, which pushed up the prices of these assets, and thereby reduced longer-term interest rates. Lower interest rates, in turn, have improved financial conditions and helped stimulate real economic activity. Based on econometric analysis and model simulations, I estimate that these longer-term securities purchase programs will raise the level of GDP by about 3 percent and add about 3 million jobs by the second half of 2012. This stimulus also probably prevented the U.S. economy from falling into deflation.7

The important point is that the additional stimulus to the economy from our asset purchases is primarily a result of lower interest rates, rather than through a textbook process of reserve creation leading to an increased money supply. It is through its effects on interest rates and other financial conditions that monetary policy affects the economy. Of course, once the economy improves sufficiently, the Fed will need to raise interest rates to keep the economy from overheating and excessive inflation from emerging. It can do this in two ways: by raising the interest rate paid on reserves along with the target federal funds rate; and by reducing its holdings of these securities, which will reverse the effects of the asset purchase programs on interest rates.

Lender of last resort

Finally, the Fed is not only the nation's monetary authority. It is also the lender of last resort. This too is a function that has undergone momentous changes in recent decades. Traditionally, during bank panics or times of financial distress, the Fed would use the discount window to lend cash to banks against illiquid collateral. These emergency loans kept sound banks from falling victim to a lack of liquidity during bank runs.

In the most recent financial crisis, liquidity all but vanished across an unprecedented spectrum of assets and markets. In response, the Fed carried out a slew of unconventional measures to try to prevent fundamentally sound institutions from failing and economically important asset classes from disappearing. To accomplish this, the Fed extended the discount window to nonbank institutions. And it lent cash against an extremely wide variety of fundamentally sound but illiquid assets.

The novelty here is not so much in the loans that the Fed made, but rather in the UNIVERSE OF BORROWERS. The extension of discount window-type loans to INVESTMENT BANKS and even an INSURANCE COMPANY was a major departure from past practices and it wasn't always popular. Here again though is a case of perception not catching up with the reality of the new financial order. When the Fed was assigned the role of lender of last resort, the financial system was far simpler. Securitized mortgages didn't exist. Commercial paper was a tiny fraction of corporate finance, while today it is one of the most important ways corporations finance their short-term needs for cash. In addition, the walls between traditional banking and other financial market activities have crumbled. More of what we traditionally regarded as commercial banking activity is now carried out in the SHADOW BANKING SYSTEM than in the world of regulated banks and thrifts. The explosive growth of the shadow banking system has meant that we have had to think about the lender-of-last-resort function in new ways.

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

Very unsound. All the demand drafts drawn on DFIs cleared through DDs – except those drawn on MSBs, interbank and the U.S. government. But who cares. You can do anything with code (software), & the hardware it's run on.

[flow5]

“based on our concept of MFI credit”

“The genesis of MFI credit is the Austrian school of economic thought’s concept of created credit”

No, as Written June 1980 – Dr. Leland James Pritchard: BA, Political Science, MS, Statistics -Syracuse, Ph.D. Economics -Chicago, 1933:

The DIDMCA became law on March 31st, 1980. The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation's savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks have been commercial banks for many years…

MFI’s are money creating depository financial institutions (or called DFIs by the frbST’s research staff).

Just like the TMS money supply concepts, the Austrians are always copying the Chicago School & claiming it as their own.

===============
Paul Kasriel:

"We believe that the FOMC should look to the behavior of a credit aggregate we have called Monetary Financial Institution (MFI) credit for guidance with regard to its quantitative-easing decisions. To refresh your memory, MFI credit is the sum of the credit created by the Federal Reserve, the commercial banking system, the savings and loan system and the credit union system. All of these entities have the ability to create credit figuratively "out of thin air." The Federal Reserve can theoretically create an unlimited amount of credit out of thin air. The commercial banking, savings and loan and credit union system's ability to create credit out of thin air is limited by the amount of "seed" money provided them by the Federal Reserve. A unique characteristic of an increase in MFI credit is that no entity in the economy needs to cut back on its current spending when the recipients of MFI credit increase their current spending. This categorically cannot be said of increases in non-MFI credit. The genesis of MFI credit is the Austrian school of economic thought's concept of created credit. A theoretical implication of the unique characteristic of MFI credit - recipients of MFI credit increase their current spending while no other entity need cut back on its current spending - is that changes in MFI credit would be positively correlated with changes in nominal GDP, the value of goods and services produced in the economy".

Northern Trust
www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283684288_6.xml&TYPE=interior&er=useoDetail&c=primary/resource/1103/1301064343800_12.xml
===================

This is why the metric published by the frbST for "commercial bank credit" is incomplete - it omits the volume of new money & credit created by the S&Ls, MSBs, & CUs. Note also that Kasriel missed MSBs.

[flow5]

Theoretically (I haven't constructed a time series): Not seasonally mal-adjusted currency in circulation (outside the CBs), fell in the middle of March right before the April peak in commodity prices. The volume of currency in circulation might be indicative of higher economic activity (transactions velocity), in the Underground Economy (estimated c. 9% of gDp), or too, illegal activity in the Black Market (where record-keeping & taxes are deliberately avoided).

Also, unlike IOeR's (which banks hold for remuneration - i.e., Federal Funds aren't being lent and redistributed in the overnight inter-bank market), a substantive proportion of currency is constantly re-circulated thru the banking system (e.g., cash is withdrawn by consumers for the payment of goods & services from their banks/ATM networks & is returned to the banks by businesses, etc.) - implying that the volume held by the non-bank public has (relative to some deposit classifications), - a higher turnover ratio.

watch when the ratio reverses

[flow5]

Plosser said as the Fed normalizes policy, it should return to an operating framework in which the benchmark federal funds rate is the primary instrument of monetary policy. In this framework, the Fed's balance sheet should shrink to "probably less than $1 trillion" so that the fed funds rate trades above the interest on excess reserves.

The interest on excess reserves is a new tool that Congress gave the Federal Reserve's Washington-based Board of Governors -- not the Fed's policy-setting committee -- during the financial crisis.

Plosser said he would find a "floor system" framework in which the interest on excess reserves rate is the de facto policy rate "troubling" as it PUTS NO LIMIT ON THE SIZE OF THE BALANCE SHEET.

"If our operating framework divorces our balance-sheet decisions from monetary policy, it becomes a TEMPTING instrument for future policymakers inside or outside the central bank to USE IT FOR NON-MONETARY PURPOSES," Plosser said.

"This could JEOPARDIZE THE INDEPENDENCE OF THE CENTRAL BANK and, if abused, would be a SOURCE OF MANY UNFORSEEN PROBLEMS."

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

So I believe the corridor system, with its constraints on the balance sheet, is more likely to preserve central bank independence and limit the temptation to use the Fed's balance sheet as an instrument of FISCAL POLICY."

[flow5]

John Mason

The Federal Reserve continues to pump reserves into the commercial banking system and the MAJORITY OF THESE RESERVES ARE GETTING INTO THE HANDS OF FOREIGN-RELATED FINANCIAL INSTITUTIONS and then HEADING OFFSHORE.

On May 25, 2011, CASH ASSETS on the books of foreign-related financial institutions was just under $950 BILLION, up about $200 billion from April 27, 2011. On May 4 cash asset at foreign-related financial institutions were 50 percent of all the cash assets held by commercial banks in the United States.

Now, on May 25, 55 percent of all the cash assets held by commercial banks in the United States were held by foreign-related financial institutions.

Please note, that on December 29, 2010, before QE2 really swung into action, these foreign-related institutions held only about one-third of all the cash assets on the balance sheets of commercial banks in the United States.

The increase from December 29 to the present has been roughly $590 billion.

During this same period cash assets at all commercial banks rose by just under $660 billion, so that almost 90 PERCENT of the cash assets pushed into the banking system by the Federal Reserve has gone into the coffers of foreign-related financial institutions!

From the Fed’s own balance sheet we see that Reserve Balances with Federal Reserve Banks, which closely tracks the excess reserves in the banking system, rose by $572 billion. Almost all of this increase in excess reserves in the banking system has come about through the Fed’s acquisition of over $500 billion worth of U. S. Treasury securities.

And, what have these foreign-related financial institutions done with the funds?

There is an account called “Net (Deposits) Due to Related Foreign Offices.” On December 29, 2010 this account, on the reported statistics was a negative $420 billion. That is, this was not money due to “related foreign offices” it was the money that “related foreign offices” had allocated to the United States office. That is, it was an asset of the bank and not a deposit liability.

On May 25, 2011, this negative number had turned into a positive number, it became a liability of the United States branches to “related foreign offices”, and this number was slightly over $86 billion. This represented a swing of $506 billion!

In essence, cash assets at these foreign-related institutions rose by about $590 billion since December 29 and $506 billion of this increase went to “related foreign offices.”

This looks a lot like the “pump” for the “CARRY TRADE”.
And, where do we pick up some of the results of this “carry trade” action?

Check out the Wall Street Journal last week, “Big Banks Cash In On Commodities,” “Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost bank profits.”

“A group of 10 large banks saw their COMMODITIES REVENUES increase by 55% in the first quarter. “

And, who says that the Federal Reserve is not underwriting world commodity inflation? And, who says that the Federal Reserve is not underwriting the profitability of the big banks and producing even bigger banks that are too big to fail?

This is my July edition of the QE2 Watch, following up my June edition. The Fed continues to do what it said it was going to do, purchase about $600 billion in U. S. Treasury securities by June 30, 2011.

From December 29 through June 1, the Fed has purchased $516 billion U. S. Treasury securities. Roughly $105 billion of these have gone to offset the decline in the Fed’s portfolio of Federal Agency Issues and Mortgage-backed securities. Thus, the net increase in the Fed’s portfolio of securities has only been about $415 billion.

But, the United States Treasury has drawn down $195 billion from its deposit account at the Fed related to “Supplemental Financing Account and this has put $195 billion of reserves into the banking system over the last five months.

The combination of the two, $415 billion and $195 billion, comes to $610 billion and accounts for all of the increase in reserve balances at Federal Reserve banks, the proxy for excess reserves, of $570 billion.

The bottom line on this is that the Federal Reserve and the Treasury Department are seeing to it that the financial system is awash with liquidity…even though the largest amount of the funds are going offshore.

----------------------------

[bimetalaupt]

Jun 1, 2011 12:30:52 GMT -5 @maui1 said:

i am not sure it is the men (greenspand/volker as well) as fed chairman, that makes them seem stupid, but the position itself that is stupid.

as i see it.........the baseless need for the fed, is the only need i see for the fed.

It was designed by Paul Warburg.. You know Warburg was part of the Rothschild family and he gave up a huge banking salary to take the job.. We just need to have the Fed Pay more for the office of Chairperson.. Just think what Dimon would lose if he took the job? Just think what Wm Dudley would lose ( 200,000- 100,000) to take the chairman's jobs..

It is all about money,
Bi Metal Au Pt

[flow5]

As the FX traders & currency arbitrageurs unwind their forward derivative positions (c. ¾ of QE2 was credited to foreign-related CBs [out of $1,548,638T excess reserves outstanding]), & hot money is repatriated from the carry trade (bringing spot prices into alignment), the dollar's conversion ratio will rise (confirming that the CPI's & CCI’s recent increases are indeed "transitory" as Bernanke foretold). Note: “About 70% to 90% of the foreign exchange transactions are speculative” (where delivery is not ultimately intended).

Since the FED has been the largest supplier of credit during QE2 (after POMOs end on June 30), the demand for loan funds will increase (other things being equal), forcing all interest rates higher (followed by those overseas: -- with wider swap spreads & higher benchmark LIBOR indexes).

In the adjustment process, treasury bill and bond prices will revert to mean; & interest rate differentials will gradually increase; investment funds will then flow to the higher yields (acting as a bond market stabilizer).

An additional market buffer notes JPMorgan (after the FED ends POMO purchases), is that Central banks have been accumulating foreign exchange reserves at a rapid pace (with emerging markets accumulating 80% of 2010’s $885b total). Consequently, conservative Central bankers are likely to increase their purchases and support of U.S. Treasury’s.

And hopefully, as bankers are confronted with a remuneration rate that is less attractive vis a’ vis other competitive instruments and yields, bank lending will expand (pushing the economy along). Bankers may not find eligible borrowers but they can always buy investment-grade assets (this is IOeR's exit path). The open question becomes how long will this adjustment process take?
Or maybe, how will the savings rate respond to higher yields?

[flow5]

Put into perspective:

QE2 greased the wheels (velocity). It accelerated decision making (financial transactions). It redistributed financial investment (not real investment). It supported the Treasury Market (the FED's informal mandate). Once you change the risk value (swap or convert assets), you make the markets rebalance. Rebalancing alters the asset mix. It makes the market re-examine, and revalue, the linkages between financial and real assets. It changes support & resistance lines. It increases the demand for speculative loan-funds.

The Central Bank’s distribution channel (a.k.a. monetary transmission mechanism) is comprised of the primary dealers (19 banks and securities brokerages that trade in U.S. Government securities), and their CUSTOMERS (the investment banks and their mutual fund, hedge fund, pension fund, insurance company, sovereign wealth fund, corporate treasury, & wealthy investor, CLIENTS).

Note that the PDs “purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and RE-SELL them (an established distribution channel), to the public" (or to the FED). – Wikipedia.

These asset speculators (& their proprietary trading operations) are now horizontally integrated (vastly accelerating the transfer of ownership), under the Gramm-Leach-Bliley Act passed in 1999 (rather than segregated - under the Glass-Steagall Act of 1932 – an act put in place to curb the type of stock market speculation that characterized the late 1920’s).

Indeed, the distribution channel is international: “according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume” – Wikipedia.

Note also that: commercial bank trading revenues, can be divided into (1) fixed-income, (2) currency, (3) equity, & (4) commodity classifications. I.e., it is obvious, that if the NY FED trading desk buys securities, then their owners (or their trading partners & clients), will “buy riskier assets”.

[flow5]

Everyone has been too kind to the architects of QE2.