Ben Benanke's Incompetent

[flow5]

maseportfolio.blogspot.com/
JOHN MASON:

For your information, 0.4 percent of the banks in the United States, the largest 25 commercial banks, control 56 percent of the banking assets in the country.


The smallest banks, banks less than $100 million in total assets, which make up 35 percent of the banks in the country, control 1.0 percent of the banking assets in the country.


The next size category, commercial banks with more than $100 million in assets but less than $1.0 billion in assets, make up 57 percent of the number of banks in the country. These banks control another 9.0 percent of the banking assets in the country.


Consolidating these last two categories we find that 92 percent of the commercial banks in the country control only 10 percent of the banking assets of the country.


Just thought you might want to know these facts.


Over the past year, the total assets in the banking system in the United States grew by a little more than $630 billion.


Over the past year, the cash assets in the banking system in the United States grew by a little more than $650 billion!


Thank you, quantitative easing!


Of the $650 billion increase in cash assets, over 75 percent of the increase went into the cash assets of foreign-related banking institutions in the United States. And, over 85 percent of this increase went into the amount of liabilities due to the foreign offices of these foreign related banking institutions.


Three cheers for the “call” trade!


And, what about stimulating loan demand in the United States to get the economy going? The loans and leases at all commercial banks dropped by about $75 billion over the past year.


Business loans (commercial and industrial loans or C&I loans) did rise by a little more than $55 billion during this time period but the increase largely took place at the largest 25 banks; business loans at the remaining 6,400 banks in the country stayed relatively flat.


Over the latest 13-weeks business loans fell fairly dramatically at the smaller banks as the amount of assets in the smaller banks has actually declined.


But, it is still the real estate area that continues to suffer. Real estate loans on the books of commercial banks fell by about $175 billion over the past 12-month period. Dollar-wise, the drop was roughly the same between the largest 25 banks and the rest of the banking system.


The major part of the decline, however, came in the commercial real estate area, which declined by about $125 billion, again, with the largest banks and the smaller banks declining by about equal dollar amounts.


Over the last 13-week period, the decline in commercial real estate loans seemed to accelerate in the smaller banks relative to the larger banks. This points to the fundamental problem the smaller banks are having with their lending in the commercial real estate area. This in not supposed to get better in the near term.


The conclusions I draw from these data are: first, that the quantitative easing (QE2) of the Federal Reserve primarily went “off shore” and to this day remains “off shore.”


Second, many of the smaller commercial banks in this country are in very serious financial condition and many of the problems are located in the commercial real estate area. But, it seems as if there may be growing trouble located in their basic business loan portfolios.


Third, fundamental business lending seems to be picking up somewhat, but primarily at the largest 25 commercial banks in the country. Commercial real estate lending at these banks, however, has not picked up and is unlikely to do so in the near future.


These statistics do not point to a banking system that is ready to underwrite a strong economic expansion.

[decoy409]

"Just thought you might want to know these facts."

We must be on the same page this morning as that is what I have presented in both my Decoy Post today as well as the reflection on Gold & Silver in my gld and slv post today.

I presented it when I started writing back at the old MSN board as,'cookie jars' and indeed we are and have been playing with fire.

[flow5]

www.ifre.com/credit-taps-run-dry-for-european-banks/1518638.article

Credit taps run dry for European banks
12 August 2011 | By Gareth Gore

Options are rapidly running out for Europe’s ailing mid-tier banks as nervous creditors pull the plug on once-vital sources of funding in response to growing sovereign contagion worries, sowing the seeds of an imminent liquidity crisis at the heart of the eurozone.

With bond markets shut and investors unwilling to buy asset-backed securities, the repo market – for some banks the sole remaining source of private funding – has become the most recent tap to run dry, with some investment banks pulling credit lines worth tens of billions of euros in recent weeks.

Bankers who once ran the now-defunct repo facilities for medium-sized European banks say the credit lines were withdrawn after risk managers became concerned about their own exposure to the unfolding sovereign debt crisis, leaving some clients now solely reliant on central banks for cash.

“Given what’s going on in the markets, there are big question marks surrounding some of these clients,” said one banker who has closed such lines. “The appetite from investment banks is fading. There is a great deal of concern about financing wrong-way collateral.”

“Anything slightly peripheral-orientated is completely out of the question right now”
“Many of the wholesale banks are starting to rethink these credit lines,” added the global markets chief of one European investment bank heavily present in the repo markets. “Things can turn pretty nasty if you get these things wrong.”

The funding drought is all the more dramatic given that it’s only a few weeks since most European lenders were comfortably able to raise funds in markets. Covered bond issuance has been particularly popular, with Italian banks selling €11.9bn of the securities so far this year and Spanish banks €18.2bn.

Markets closed
However, there has not been a single publicly announced European covered bond deal since June, and other parts of the bond markets also remain closed to most. That could create a strain on the finances of banks that need to raise cash to pay maturing debts.

According to the European Banking Authority, the region’s banks have €4.8trn of wholesale and interbank funding expiring this year and next.

The closure of traditional credit lines is a clear sign that concern about European sovereign debt has infected the region’s banks. Many in the region are big holders of the debt of their respective governments. According to the EBA stress tests published in July, the 90 banks it surveyed held a total of €326bn in Italian government debt, €287bn of Spanish public debt, and €215bn of French debt.

“Everyone has been cutting their exposure,” said the head of another European investment bank. “It started with Greece, then Spain and now Italy. People don’t want to do business with these banks. Many of them have good underlying businesses, but they are stuffed.”

Before recent developments, repo markets were steadily gaining importance for banks. The facilities, financial market equivalents of pawn shops, which allow banks to borrow against collateral for specific periods, helped many firms to generate cash out of assets sitting on banks’ balance sheets.

Tri-party repo uptick
While large parts of the repo markets lend against safer collateral such as government bonds and other investment-grade securities, there had been a growing tendency by some investment banks to accept riskier assets, which clients had been pushing to use after running out of higher-grade assets.

“To begin with it was good collateral, things like good corporate bonds and securitised loans,” said the first banker. “But then some clients began to run out of that collateral.” The bank would force substantial haircuts and punitive interest rates on lesser collateral to protect itself, he added.

The latest repo markets survey by the International Capital Market Association does show a marked pick-up in the use of riskier assets in European tri-party repo deals. Though small as a proportion of the region’s entire €5.91trn repo market, the use of assets with ratings below Triple B– accounted for 5.1% of all transactions in December, up from 1.2% a year earlier.

That has now largely stopped, say bankers once heavily involved in such deals. They had previously been able to hedge their exposures to such collateral, or to repackage the collateral on behalf of clients to sell off in chunks to fund managers. But growing investor concern, and a rush towards safer assets, has meant that neither investment banks nor investors now want to go near the stuff.

“We’ve attempted to do some trades with illiquid assets on behalf of peripheral banks, but we haven’t managed to syndicate deals,” said one senior banker that helped to repackage some deals in the past. “Anything slightly peripheral-orientated is completely out of the question right now.”

Financial detritus
For many, the European Central Bank is now the last remaining source of liquidity. Under its open market operations – brought in during the depths of the crisis to pump liquidity into the region’s banks – its member central banks provide unlimited repo financing against certain eligible assets.

Demand for that money has been picking up of late, as banks feel the squeeze of dry private credit lines. Earlier this week, the Italian central bank said lenders asked for €80.5bn of liquidity during July, almost double what it had provided only a month earlier, in a sign of banks’ deteriorating finances.

Total use of the ECB’s main refinancing and long-term refinancing facilities – both part of the open market operations – are now close to €500bn, up from about €400bn in the spring.

According to Goldman Sachs, although such levels are well short of the almost €900bn used in 2009, the uptick is worrying. “This is a substantial figure, reflective of the strains in the banking system,” analysts wrote.

But banks’ use of the ECB’s open market operations remains dependent on them having ample quality assets on their books. Under the terms of the operations, the central bank will only provide liquidity against certain assets – generally those rated Triple B– and above, with some exceptions.

If ECB eligible collateral runs out, banks will have little option but to sell off assets in a final fire sale, say bankers. That will depend on whether there are willing buyers for such assets, much of which were accumulated pre-2007 as retail, commercial and wholesale loans.

“The financial wreckage at many of these banks is along the lines of World War Two,” added the global markets chief. “There is so much detritus. But a lot of them don’t want to sell at these current prices: they know there will be a capital hit if things are properly priced.”

[flow5]

Aug 15 2011, 21:11 GMT
by Paul Kasriel - Northern Trust


It is not Enough to Tell the Fed to Target Nominal GDP – You Have to Tell it How

In the August 15 edition of the Financial Times, Clive Crook wrote an op-ed piece urging the Fed to target nominal GDP growth. This is not the worst Fed “mandate” that has been recommended. But it is not enough to recommend a mandate or a target to this Fed. You also have to explain to it how to maximize the probability of actually achieving its mandate. Targeting a fed funds rate won’t do the trick, especially under current circumstances. I would suggest that if the Fed were to accept Mr. Cook’s recommendation of it targeting nominal GDP growth, the Fed should choose as an intermediate target growth in the sum of Federal Reserve, commercial bank, S&L and credit union credit. Chart 1 shows that the correlation between the year-over-year percent change in this credit aggregate and the year-over-year percent change in nominal GDP is 0.61 from Q1:1954 through Q4:2007.

www.fxstreet.com/fundamental/analysis-reports/daily-global-commentary/2011/08/15/

In 2008, there was a significant divergence between the growth in this credit aggregate and the growth in nominal GDP. You may recall that in 2008, the over-the-counter money and capital markets froze up. Businesses, fearing the onset of another depression and with the commercial paper market shut down, tapped their back-up lines of credit at commercial banks quite heavily. The Fed through open the discount window and created new lending facilities to nondepository financial institutions that were desperate for liquidity with the interbank loan market frozen. Thus, this credit aggregate soared. But entities were borrowing not to spend, but rather to be as liquid as possible. Thus, although the sum of Fed, bank, S&L and credit union credit soared in 2008, growth in aggregate spending, as represented by nominal GDP, plunged. Even including this unusual 2008 episode, the correlation between growth in this credit aggregate and growth in nominal GDP remained relatively high at 0.56 (see Chart 2).

I would leave it to the Fed’s crack econometric staff to determine how fast the sum of Federal Reserve, commercial bank, S&L and credit union credit should grow in order to hit a nominal GDP growth target.

But this is how the Fed could do it. Scrap fed funds rate targeting. Rather, increase or decrease the Fed’s balance sheet such that the sum of Fed, commercial bank, S&L and credit union credit grows at the rate that the Fed’s econometricians believe is consistent with the Fed’s nominal GDP target growth rate.

===========

Note that Kasriel misses MSBs as DFIs (money creating depository institutions).

The deposit taking (money creating), financial institution's (DFIs) bank credit equals the sum of commercial bank, S&L, credit union, & MSB credit.

[flow5]

While the narrow measures of the money stock have run up, the ratios between deposit classifications have shifted. Also, the currency deposit ratio hasn't moved in line with this shift.

If the economy was actually expanding as fast as the run up in M1 indicates, currency would show a corresponding increase.

[smackdown]

Since there isn't any new money [being printed] and no currency courses through Main Street, every "up" day for the markets removes more capital out of the equation. Essentially, we have zero growth potential, only loss by osmosis. The ratio of "up" days to down ones is already disproportionate to the yield on last week's "up" days alone. Add the component going into gold and the math doesn't remotely add up.

[flow5]

Thursday, August 18, 2011
Fed Interested in "Cash" at Foreign-Related Financial Instituions
JOHN MASON

maseportfolio.blogspot.com/

Seems like the Fed is interested in something I have been writing on for at least four months: the cash assets that “foreign-related (financial) institutions have been accumulating during the period referred to as QE2. (See seekingalpha.com/article/287494-foreign-related-financial-institutions-continue-to-suck-up-u-s-excess-reserves.)

Reporting this morning in the Wall Street Journal, David Enrich and Carrick Mollenkamp claim that the“Fed Eyes European Banks,” (http://professional.wsj.com/article/SB10001424053111904070604576514431203667092.html?mod=ITP_pageone_0&mg=reno-secaucus-wsj). “Federal and state regulators, signaling their growing worry that Europe’s debt crisis could spill into the U. S. banking system, are intensifying their scrutiny f the U. S. arms of Europe’s biggest banks…”

“Officials at the New York Fed ‘are very concerned’ about European banks facing funding difficulties in the U. S…the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U. S. While signs of stress are bubbling up, the problems aren’t yet approaching the severity of past crisis.”

Up to now, borrowing dollars hasn’t been a problem. “Thanks partly to the Federal Reserve’s so-called quantitative easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets”

This is just what I have been reporting since early this year.

“Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U. S. arms.”

“Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing…”

In July, 2010, non-U. S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U. S. regulatory filings.”

Again, you could have read it here first.

“In recent weeks, though, the cash piles at foreign banks’ U. S. arms have diminished…foreign banks’ overall U. S. cash reserves fell to $758 billion as of Aug. 3, the latest data available.”

One note on this, the figures on cash assets at these foreign-related financial institutions can swing fairly dramatically from week-to-week and August, in banking non-seasonally adjusted statistical series, can be very interesting.

Also, the buildup in cash assets at these foreign-related institutions began early enough this year that they could have been used for the “carry trade.” Interest rates were so low in the United States that borrowing here and investing at the higher interest rates that could be found throughout the world was being done by most of the large financial institutions in the world.

On June 28 of this year I wrote, “In essence, it appears as if much of the monetary stimulus generated by the Federal Reserve System went into the Eurodollar market. This is all part of the “Carry Trade” as foreign branches of an American bank could borrow dollars from the “home” bank creating a Eurodollar deposit. This Eurodollar deposit could be lent to foreign banks or investors and this would not change the immediate dollar holdings of the American bank. This lending and borrowing in Eurodollar deposits could then multiply throughout the world. And, the American bank might be the ‘foreign-related” institution mentioned above and included in the statistical reports.

Note that the original dollar deposit created by the Fed is still recorded as a deposit at one Federal Reserve bank no matter how much shifting around the borrowing and lending in the Eurodollar market occurs.

Thus, it appears as if the Federal Reserve pumped one-half a trillion dollars off-shore since the end of 2010!” (See seekingalpha.com/article/276909-federal-reserve-money-continues-to-go-offshore.)

So, there may be more than one reason for the build up of cash assets at the foreign-related institutions. This is why we need to keep our eyes open and look at a wide-range of data.

It’s interesting to me that the Fed did not seem worried at all about this cash buildup earlier this year even though the foreign-related institutions seemed to be siphoning off a lot of the funds the Fed was supplying to the banking system that was supposed to go into bank lending to get the economy moving again.

[flow5]

Fed Eyes European Banks
Regulators Scrutinize Ability of Institutions' U.S. Units to Fund Themselves

By DAVID ENRICH And CARRICK MOLLENKAMP

Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.

The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.

Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks.

Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.

Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.

Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets.

Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, according to the people familiar with the matter. Officials also are in contact with regulators in the countries where the European banks are headquartered.

The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter. The state regulator supervises the New York outposts of many major European banks, and it has the power to force them to keep more money on hand in the U.S. Mr. Lawsky's office has been getting near-daily updates from examiners embedded in European banks' New York offices about their funding positions.

Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U.S. arms, these people said. Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed organizations that are better insulated from problems with their parent companies, a senior bank executive said.

In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.

Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector. While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.

Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.

In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.

On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.

Spokesmen for Société Générale and Deutsche Bank declined to comment on the reasons for the funding buildup or whether there has been a pullback.

In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year.

The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities

online.wsj.com/article/SB10001424053111904070604576514431203667092.html

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

watch swap lines

[flow5]

The FED just now responded:

Aug 18 (Reuters) - The Federal Reserve provided $200 million of liquidity to the Swiss National Bank in the latest week via its swap lines for foreign central banks, the New York Fed said on Thursday.

The SNB was the sole institution to tap the swap lines in the week ended Aug. 17, swapping the full amount.

The terms for the SNB swap were seven days at 1.08 percent.

It was the first time the SNB has tapped the swap lines since they were reopened in May, 2010, and the first time since early March that the Fed has provided liquidity to a foreign central bank. Then, the European Central Bank swapped $70 million.

The SNB has faced mounting pressure in recent weeks to rein in the rapid ascent of the Swiss franc as investors have run for safety on concerns about the global economy and Europe's debt crisis.

"The very high price of the Swiss franc is putting an enormous amount of stress on them," said Boris Schlossberg, director of currency research at GFT in New York. "They are using swap lines to obtain more dollars basically to go into the market."

The SNB has been pumping liquidity into the Swiss franc money market in a bid to reduce the appeal of franc-denominated assets and weaken the currency. The bank on Wednesday said it would boost liquidity further via foreign exchange swaps and by buying back its own debt, called SNB Bills.

The Federal Reserve has established swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan in an effort to respond to the re-emergence of strains in short-term funding markets in Europe. (For the full Fed report, double-click on: here) (Editing by Dan Grebler)

[flow5]

Reuters) - The Federal Reserve Bank is treating foreign banks the same as their U.S. peers, a top policymaker said on Thursday, contrary to a published report that said the U.S. central bank was keeping a closer eye on European banks struggling with the continent's debt crisis.

Fears about bank funding contributed to another dismal trading day for bank stocks in Europe after heavy losses in the last two weeks, with the main bank stocks index falling 6.7 percent.

The Wall Street Journal said earlier that the Federal Reserve was asking for more information about whether European banks with U.S. units had reliable access to the funds needed to operate in the United States.

William Dudley, the president of the Fed's New York regional bank, in response to the story in the Journal, said the U.S. central bank was "always scrutinizing banks" and that it treated U.S. and European banks "exactly the same."

"This is standard operating procedure, this is something that we do as a matter of course," Dudley told New Jersey business leaders Thursday.

"It's really important to stress that we're not focusing on foreign banks any more than we're focusing on U.S. banks. We treat foreign banks and U.S. banks exactly the same."

The $2.5 trillion U.S. MONEY MARKET FUNDS INDUSTRY -- which supplies short-term dollar funding to banks -- HAS RETREATED FROM THE EURO ZONE in recent months, concerned that the continent's debt crisis is spiraling out of control.

That and the drying up of interbank lending has led to a trebling of dollar funding costs for euro zone banks in the last month. One bank was forced to borrow dollars at the European Central Bank Wednesday.

A source familiar with the matter said the New York state Department of Financial Services, which is led by Benjamin Lawsky, is getting near daily updates from its examiners at U.S. operations of foreign banks.

The New York State Department of Financial Services declined comment.

In a dramatic shift, the U.S. branches of foreign banks became net borrowers of dollars from their overseas affiliates for the first time in a decade, Federal Reserve data released last week showed.

One person at a European bank said the crisis had heightened scrutiny on the U.S. operations of Europe's banks, although this was a typical response by local regulators.

U.S. regulators were concerned about over-reliance on short-term wholesale funding given how quickly that can dry up, the person said, and worried that funds could flow back to the parent group from overseas branches quickly in a crisis.

Wednesday, ONE EURO ZONE BANK BORROWED $500 million from the EUROPEAN CENTRAL BANK at a rate much above those at which banks can get dollars in the open market. It was the first time since February 23 a bank used the central bank's facility.

French banks are most exposed to U.S. short-term funding, and it is access to U.S. dollar liquidity that is of particular concern. BNP's short-term borrowings were $94 billion and SocGen's were $56 billion, according to Citi estimates.

European shares dropped sharply trade on Thursday after gloomy data on the U.S. economy, with bank shares among the top losers.

Among European banks, Franco-Belgian Dexia was the hardest-hit, losing just under 14 percent. Dexia was the biggest borrower of the Federal Reserve's so-called discount window -- an emergency facility -- during the financial crisis.

"The French banks have been hit much more than other European banks. ... They are more reliant on U.S. money-market funds," said Christophe Nijdam, analyst at Alphavalue.

Societe Generale's shares fell more than 12 percent. Its dollar exposure was around 23 per cent of its balance sheet, Nijdam added, and Dexia's around 14 per cent.

[flow5]

Once again in this Great Recession the FED is a day late & a dollar short.

[flow5]

M2 Surge Moderates, "Only" Increases By $42.2 Billion In Past Week
Submitted by Tyler Durden on 08/18/2011 22:55 -0400

Federal Deposit Insurance Corporation M2


Following last week's near record surge in M2, which was merely the result of a complete panic in markets resulting in a scramble for deposit accounts OUT OF MONEY MARKETS (these tumbled by $82.5 billion in the week to $1688.5 billion, the lowest since September 2007) and other "unsafe" venues, amounting to $159.1 billion, this week M2 has risen by a far more modest (though still abnormally high by historic standards) $42.2 billion.

What is disturbing is that unlike in the past when record surges in commercial bank savings deposits have seen a prompt unwind in the following week, this time around last week's $58.4 billion spike in such money was followed by another massive $51.7 billion, as cash ran to the "SAFETY" of FDIC INSURANCE.

And just as disturbing, the huge $99.3 billion in additions to plain vanilla demand deposits did not see any unwind, with just $8.3 billion leaving bank teller windows in the past week.

End result: M2 has just hit another new all time high of just over $9.5 trillion (which helped today's LEI number beat expectations). And if QE3 proceeds as planned, and it US consumers actually start borrowing, this number is going much, much higher. Which will be bullish, for makers of wheelbarrows.

[lifewasgood]

Totally agree with your last post Flow except the "if QE3 proceeds" I would change to WHEN QE3 proceeds.

[flow5]

August 16, 2011
It’s the Aggregate Demand, Stupid
By BRUCE BARTLETT

...Aggregate demand simply means spending — spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment. At the moment, businesses don’t need to invest because their biggest problem is a lack of consumer demand, as a July 21 study by the Federal Reserve Bank of New York documented.

...the personal saving rate fell from 3.5 percent in the early 2000s to just 1.4 percent in 2005 at the peak of the housing bubble.

...Home prices roughly doubled between 2000 and 2006, according to the Case-Shiller index, and many homeowners talked themselves into believing they would continue rising indefinitely. Thus they increased their spending and reduced their saving based not only on actual price increases, but also on expectations of future increases.

...One way that the rise and fall of spending can be visualized is by looking at the VELOCITY OF MONEY. This is the speed at which money turns over in the economy. When velocity rises, more G.D.P. is produced per dollar of the money supply. When velocity falls, the economic impact is exactly the same as if the money supply shrank by the same percentage.

The chart below comes from the Federal Reserve Bank of St. Louis and shows velocity as the ratio of the money supply (M2) to nominal G.D.P. It rose from 1.85 in 2003 to 1.96 in 2006. It has since fallen to a current level of 1.66. Thus one can say that each $1 increase in the money supply produced almost $2 of G.D.P. in 2006 and only $1.66 today.

Velocity of M2 money supply, expressed as the ratio of quarterly nominal G.D.P. to the quarterly average of M2 money stock. This suggests that the Federal Reserve could have offset the decline in spending and velocity resulting from the fall in home prices with a sufficient increase in the money supply. And it tried. Since 2006, money supply has increased by about $2 trillion. But VELOCITY FELL FASTER THAN THE MONEY SUPPLY INCREASED as households REDUCED SPENDING & INCREASED SAVINGS — the saving rate is now over 5 percent — and banks and businesses hoarded cash.

Nonfinancial businesses are now sitting on close to $2 trillion in liquid assets that could be invested immediately if there was an increase in sales, and banks have $1.5 trillion of excess reserves that could be lent as well.

Fiscal policy could raise velocity and growth by getting money moving throughout the economy. But since that is not feasible, the Fed is the only game in town. Joseph Gagnon, a former Fed economist, says that it should immediately increase the money supply by $2 trillion and promise to keep increasing it until the economy has turned around.

But the Fed is already under pressure to tighten monetary policy from its regional bank presidents, three of whom dissented from last week’s Fed decision to keep policy steady. They fear that inflation is right around the corner. But as the Harvard economist Kenneth Rogoff has argued, a short burst of inflation would do more to fix the economy’s problems than any other thing. One reason is that inflation raises spending by encouraging consumers and businesses to buy things they need immediately because prices will be higher in the future.

The right policy can be debated, but the important thing is for policy makers to stop obsessing about debt and focus instead on raising aggregate demand. As Bill Gross of the investment firm Pimco put it recently: “While our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.”

[usaone]

Aug 19, 2011 8:25:53 GMT -5 flow5 said:

August 16, 2011
It’s the Aggregate Demand, Stupid
By BRUCE BARTLETT

...Aggregate demand simply means spending — spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment. At the moment, businesses don’t need to invest because their biggest problem is a lack of consumer demand, as a July 21 study by the Federal Reserve Bank of New York documented.

...the personal saving rate fell from 3.5 percent in the early 2000s to just 1.4 percent in 2005 at the peak of the housing bubble.

...Home prices roughly doubled between 2000 and 2006, according to the Case-Shiller index, and many homeowners talked themselves into believing they would continue rising indefinitely. Thus they increased their spending and reduced their saving based not only on actual price increases, but also on expectations of future increases.

...One way that the rise and fall of spending can be visualized is by looking at the VELOCITY OF MONEY. This is the speed at which money turns over in the economy. When velocity rises, more G.D.P. is produced per dollar of the money supply. When velocity falls, the economic impact is exactly the same as if the money supply shrank by the same percentage.

The chart below comes from the Federal Reserve Bank of St. Louis and shows velocity as the ratio of the money supply (M2) to nominal G.D.P. It rose from 1.85 in 2003 to 1.96 in 2006. It has since fallen to a current level of 1.66. Thus one can say that each $1 increase in the money supply produced almost $2 of G.D.P. in 2006 and only $1.66 today.

Velocity of M2 money supply, expressed as the ratio of quarterly nominal G.D.P. to the quarterly average of M2 money stock. This suggests that the Federal Reserve could have offset the decline in spending and velocity resulting from the fall in home prices with a sufficient increase in the money supply. And it tried. Since 2006, money supply has increased by about $2 trillion. But VELOCITY FELL FASTER THAN THE MONEY SUPPLY INCREASED as households REDUCED SPENDING & INCREASED SAVINGS — the saving rate is now over 5 percent — and banks and businesses hoarded cash.

Nonfinancial businesses are now sitting on close to $2 trillion in liquid assets that could be invested immediately if there was an increase in sales, and banks have $1.5 trillion of excess reserves that could be lent as well.

Fiscal policy could raise velocity and growth by getting money moving throughout the economy. But since that is not feasible, the Fed is the only game in town. Joseph Gagnon, a former Fed economist, says that it should immediately increase the money supply by $2 trillion and promise to keep increasing it until the economy has turned around.

But the Fed is already under pressure to tighten monetary policy from its regional bank presidents, three of whom dissented from last week’s Fed decision to keep policy steady. They fear that inflation is right around the corner. But as the Harvard economist Kenneth Rogoff has argued, a short burst of inflation would do more to fix the economy’s problems than any other thing. One reason is that inflation raises spending by encouraging consumers and businesses to buy things they need immediately because prices will be higher in the future.

The right policy can be debated, but the important thing is for policy makers to stop obsessing about debt and focus instead on raising aggregate demand. As Bill Gross of the investment firm Pimco put it recently: “While our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.”

Great article. Can someone please inform the Tea Party Please!

[flow5]

Loose Money Will Keep Economy From Sliding Away: Ramesh Ponnuru
By Ramesh Ponnuru

Aug. 15 (Bloomberg) --

...A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate.

That view sounds crazy to a lot of people. They look at low interest rates, soaring commodities prices and an expanded money supply, and assume that these are clear indications of easy money. And sometimes these conditions do reflect monetary ease.

But not always. The late great Milton Friedman looked at Japan’s lost decade and grasped that its low interest rates were, counterintuitively, a sign of tight money: The Bank of Japan had choked the life out of the economy by keeping the money supply too low, and that’s what kept interest rates down.

Short-term moves in commodity prices are not reliable evidence of inflation, either. Otherwise we would have to conclude that we have loose money any time Asian consumption of precious metals increases, or there’s a disruption of the oil markets.

As for the money supply, its increase signifies looseness only if the demand for money balances stays constant. If the supply rises but demand rises even faster, then the central bank has, perhaps inadvertently, allowed money to tighten.

These are not just theoretical possibilities. The Fed of the early 1930s offers us history’s most disastrous example of extremely tight money, but at the time low interest rates and an expanded monetary base misled central bankers into thinking their policies were loose. By not sufficiently accommodating increased demand for money balances, the Fed allowed nominal spending to collapse.

You can’t figure out whether monetary policy is loose or tight, in short, without picking the right baseline against which to judge it. The baseline that makes the most sense at the moment can be found in the record of the so-called Great Moderation, from 1987 to 2007. During that time, Fed policies kept the size of the economy growing at a fairly stable 5 percent a year in current dollars. (Inflation averaged 2 percent, real growth 3 percent.) That stability, in turn, anchored expectations about how easy it would be to repay nominal debts.

By this measure, money was loose during the closing period of the Great Moderation, also known as the housing bubble: Nominal growth in gross domestic product was above trend. Since then, though, money has been tight. In 2008, the recession and the financial panic sent the demand for money balances sharply upward. (In other words, the “velocity” of money -- the rate at which it changes hands -- dropped.)

The Fed, partly because it was worried that a surge in commodity prices presaged future inflation, didn’t increase the money supply enough to accommodate that demand. Making matters worse, it instituted a policy of paying banks interest on reserves, which discourages lending and money creation.

The results are all around us. Instead of rising, inflation fell, and has stayed low. Nominal GDP fell faster than at any other point in the last six decades. To return to the pre-crisis trendline, nominal GDP would have to grow by more than 5 percent annually for a few years. Neither round of the Fed’s quantitative easing brought us close to that level. In per- capita terms, nominal GDP is actually below where it was at the start of the crisis.

When nominal GDP falls below expectations, people find the burden of their nominal debts -- such as mortgages -- unexpectedly rising. Uncertainty about the economic outlook increases, and makes consumers and businesses more skittish than they otherwise would be.

Economics professor and blogger David Beckworth suggests that the Fed should abandon interest-rate targeting and instead announce that it will do whatever it takes -- from further quantitative easing to throwing money out of a helicopter -- to restore nominal GDP to trend.

www.bloomberg.com/news/2011-08-16/loose-money-will-keep-economy-from-sliding-away-ramesh-ponnuru.html

[usaone]

Excellent article again.

BTI has a few charts in his threads supporting this point.

K for Flow.

[flow5]

www.istockanalyst.com/finance/story/5362838/is-obama-the-new-hoover

In the early days after Obama's inauguration, there were many who saw the president as the new FDR. But is the Hoover reference an easier sell in the current climate? It is if you look through the prism of monetary affairs, according to one dismal scientist.

"Hoover wasn't able to print gold, but can be blamed for supporting the Fed's tight money policies," writes Scott Sumner. "Obama can't print dollars, but can be blamed for not moving aggressively to put people at the Fed who understand the need for more dollars."

Alas, the clock is ticking. Bruce Bartlett reminds that the velocity of money supply (the ratio of quarterly nominal G.D.P. to the quarterly average of M2 money stock) is moving in the wrong direction again. The implications?

This suggests that the Federal Reserve could have offset the decline in spending and velocity resulting from the fall in home prices with a sufficient increase in the money supply. And it tried. Since 2006, money supply has increased by about $2 trillion. But velocity fell faster than the money supply increased as households reduced spending and increased saving — the saving rate is now over 5 percent — and banks and businesses hoarded cash.
And then Christina Romer, the former chairwoman of President Obama's Council of Economic Advisers, gives us this bit of history:

As I showed in an academic paper years ago, [World War Two] first affected the economy through monetary developments. Starting in the mid-1930s, Hitler's aggression caused capital flight from Europe. People wanted to invest somewhere safer — particularly in the United States. Under the gold standard of that time, the flight to safety caused large gold flows to America. The Treasury Department under President Franklin D. Roosevelt used that inflow to increase the money supply.

The result was an aggressive monetary expansion that effectively ended deflation. Real borrowing costs decreased and interest-sensitive spending rose rapidly. The economy responded strongly. From 1933 to 1937, real gross domestic product grew at an annual rate of almost 10 percent, and unemployment fell from 25 percent to 14. To put that in perspective, G.D.P. growth has averaged just 2.5 percent in the current recovery, and unemployment has barely budged.

There is clearly a lesson for modern policy makers. Monetary expansion was very effective in the mid-1930s, even though nominal interest rates were near zero, as they are today. The Federal Reserve's policy statement last week provided tantalizing hints that it may be taking this lesson to heart and using its available tools more aggressively in coming months.

History doesn't repeat, but does it rhyme? If so, which history? Romer continues:

One reason the Depression dragged on so long was that the rapid recovery of the mid-1930s was interrupted by a second severe recession in late 1937. Though many factors had a role in the "recession within a recession," monetary and fiscal policy retrenchment were central. In monetary policy, the Fed doubled bank reserve requirements and the Treasury stopped monetizing the gold inflow. In fiscal policy, the federal budget swung sharply, from a stimulative deficit of 3.8 percent of G.D.P. in 1936 to a small surplus in 1937.

[flow5]

online.wsj.com/article/SB10001424053111904070604576514431203667092.html?mod=WSJ_WSJ_News_BlogsModule

By DAVID ENRICH And CARRICK MOLLENKAMP

Federal and state regulators, signaling their growing worry that Europe's debt crisis COULD SPILL INTO THE U.S. BANKING SYSTEM, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.

The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.

Officials at the New York Fed "are very concerned" about European banks FACING FUNDING DIFFICULTIES in the U.S., said a senior executive at a major European bank who has participated in the talks.

Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and MEET OTHER FINANCIAL OBLIGATIONS in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.

Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from MONEY-MARKET FUNDS, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those OPTIONS CAN VANISH IN A CRISIS.

Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has LANDED AT INTERNATIONAL BANKS, according to weekly Fed reports on bank balance sheets.

The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter. The state regulator supervises the New York outposts of many major European banks, and it has the power to force them to keep more money on hand in the U.S. Mr. Lawsky's office has been getting near-daily updates from examiners embedded in European banks' New York offices about their funding positions.

Regulators are trying to guard against the possibility European banks that encounter trouble COULD SIPHON FUNDS OUT OF THEIR U.S. arms, these people said. Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed organizations that are better insulated from problems with their parent companies, a senior bank executive said.

In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.

Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector. While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.

Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.

In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.

On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.

Spokesmen for Société Générale and Deutsche Bank declined to comment on the reasons for the funding buildup or whether there has been a pullback.

In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year.

The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities.

[lifewasgood]

QE3

[bimetalaupt]

Aug 20, 2011 10:46:26 GMT -5 @lifewasgood said:

QE3

Life ,
But at the growth rate of M1 of 18.4%.. Most forget the Federal Reserve is the worlds largest bank and makes the most money/.... 2010 saw check to the Treasury of over $50 billion to rent the $$$ bill in your wallet!!!!

Just a thought,
Bi Metal Au Pt

--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent change at seasonally adjusted annual rates M1....... M2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Thirteen weeks ending August 8, 2011
from thirteen weeks ending:
May 9, 2011 (13 weeks previous) 18.4 . ...... 11.4
Feb. 7, 2011 (26 weeks previous) 15.6 ........ 8.5
Aug. 9, 2010 (52 weeks previous) 15.0 ........ 7.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Special caution should be taken in interpreting week-to-week changes in money supply data, which are highly volatile and subject to revision.

p preliminary
Components may not add to totals due to round

[flow5]

ftalphaville.ft.com/blog/2011/08/19/658171/more-on-that-us-dollar-funding-problem/

More on that US dollar funding problem [updated]
Posted by John McDermott on Aug 19
Not for the first time, we may have spoke too soon.

Nomura’s fixed income research strategists are out with a Friday note on foreign banks’ funding woes, and they argue that the situation is likely to get a fair bit worse before it gets better.

The strategists start by recognising that because of QE2 cash buffers are stronger than they were in 2008. The aggregate cash position of foreign banks was only around $50bn in the first half of 2008, compared with $750bn and change as of August 3.

However, as the WSJ noted in its front page article on Thursday, this is down a non-seasonally adjusted $131bn in the two weeks to August 3. We’re still waiting for the updated Fed data — out 4:15pm New York time — but Nomura forecasts that the cash buffer will have declined further, to $580bn – $630bn as of August 10.

Here’s why (we’ve added links to relevant FT Alphaville posts):

1. Volatility of bank stocks has increased dramatically. On August 3, the VIX was at 23%; it is now at 43%. In European equities, implied vol has climbed from 30 on August 3 to over 46 currently. And vol in the banking sector has increased disproportionately.

2. Bank CDS have been on a rising trend—especially in the eurozone, partly driven by a widening of French sovereign CDS.

3. The basis in the EUR/USD FX swap market has also been on a widening trend over the past two weeks, with the pace of deterioration increasing lately.

4. Access to USD CP funding for international banks continues to deteriorate. Thursday‟s Fed data on outstanding commercial paper showed a further decline, indicating that some European banks are having difficulty rolling paper.

5. Wednesday, August 17, one eurozone bank tapped the ECB’s dollar funding offering. The amount was small ($500mn), but this was the first time in six months that any European institution has used the facility and is a signal of increasing stress.

Nomura points out that “the evidence points to a clear deterioration in the outlook for future funding, but there is little evidence of immediate acute stresses for major institutions.” This remains one of the key known unknowns: WHICH BANKS(s) is(are) HAVING TROUBLES and HOW THE CASH IS DISTRIBUTED AMONG THEM.

The strategists say they’re going to take a closer look at these questions next week — we look forward to reading more. Until then, we’ll see what the Fed’s H8 data show later this afternoon.

Updated (4:33pm, New York time): The latest H8 data were released at 4:15pm on Friday and… perhaps we were right to be sceptical of the WSJ story all along. (Not its hypothesis so much as the evidence for that evidence.) CASH ASSETS OF FOREIGN BANKS INCREASED TO $813.1bn at the end of August 10 from $757.7bn at the end of August 3. Now, this *may* reflect regulators’ wish to see more guns on the table, so to speak, but may well also suggest that in the aggregate foreign banks are okay for US dollars. In any case, Nomura’s pessimism was not proved correct

[flow5]

washingtonoutside.blogspot.com/2011/08/why-does-federal-reserve-pay-interest.html

Friday, August 19, 2011
Why Does the Federal Reserve Pay Interest on Required and Excess Reserves?

When the Federal Reserve announced earlier this month that it would in all likelihood keep it fed funds rate target between 0 and 0.25% for the next two years, there was some comment that the Fed might not have any more very powerful tools left with which to jumpstart the current sluggish economy, which may be headed for another recession. One tool that is mentioned (for example, here by Alan Blinder) is for the Fed to lower the interest it pays banks on excess reserves. The mention of this possibility, though, raises the question of why the Fed is currently paying interest on both required and excess reserves on deposit at the Fed.

Prior to October 2008, the Fed did not pay interest on reserve balances. Prior to this, the Fed did not have the authority to pay interest on reserves. The Fed explains: "The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008."

The topic of paying interest on reserves came up from time to time when I was at Treasury. I and others at Treasury expressed some skepticism about this. Looking out for the Treasury (and, of course, the taxpayer), we pointed out that any interest the Fed paid would reduce its earnings and hence the amount of money the Fed pays to the Treasury. As far as the monetary policy arguments were concerned, they were never convincing. Looking at more recent Fed explanations, they still aren't.

In a Fed October 6 press release announcing that it would use its authority to pay interest on reserves, it justified paying interest on required reserves by stating: "Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector." This more or less says giving money to banks that we were not able to in the past is a good thing. You could argue that not paying interest on reserves was a tax, though banks got a lot of privileges for paying that tax. The Fed statement hardly justifies repealing this tax, and it certainly does not justify paying them an above market rate, as the Fed is arguably currently doing.

Part of the Fed's case for excess reserves is somewhat more credible: "Paying interest on excess balances should help to establish a lower bound on the federal funds rate." Currently, though, it is not doing that since the fed funds rate is currently below the interest the Fed is paying on both required and excess reserves – 0.25%. It is not clear why any banks are lending at rates below the 25 basis points they can receive from the Fed, but that is what the Fed is reporting.

The second part of the Fed's case makes little sense: "The payment of interest on excess reserves WILL PERMIT THE FEDERAL RESERVE TO EXPAND ITS BALANCE SHEET AS NECESSARY TO PROVIDE THE LQUIDITY NECESSARY TO SUPPORT FINANCIAL STABILITY while implementing the monetary policy that is appropriate in light of the System's macroeconomic objectives of maximum employment and price stability." No more explanation is given.

The President's Working Group on Financial Markets ("PWG") issued a statement on October 6 about the passage of the Economic Emergency Stabilization Act ("ESSA") which included a sentence reiterating the Fed's justification for paying interest on reserves: "… the authority to pay interest on reserves that was provided by EESA is essential, because it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting a monetary policy that promotes the Federal Reserve's macroeconomic objectives of maximum employment and stable prices." On October 8, Treasury Secretary Henry Paulson issued statement on financial markets which included this on interest on reserves: "The EESA granted the Fed permanent authority to pay interest on depository institutions' required and excess reserve balances held at the Federal Reserve. THIS WILL ALLOW THE FED TO EXPAND ITS BALANCE SHEET to support financial stability while maintaining its monetary policy priorities."

Since the Federal Reserve can expand its balance sheet at will by either buying securities or making loans, why paying interest on reserves is a necessary tool for expansion of its balance sheet is unexplained. Paying interest on excess reserves does save the Fed from criticism from the banks of having imposed a burden on the banks. Also, it might encourage banks from holding reserves in the form of vault cash beyond their needs, but that would seem to be a minor factor. The PWG and Paulson statements indicate an unquestioning deference to the Fed, particularly by Treasury, which is troubling. While some have argued that the Treasury has too much influence over the Fed, I would argue that, based on my experience and current observations, it has in recent times been the other way round.

It is hard to know how much of a factor interest on reserves has been in encouraging banks to sit on them. In a poor economy, there may not be that much of a demand for loans from creditworthy borrowers. But given that banks are earning more on their reserves than they could by, for example, buying three-month Treasury bills, it is hard to justify this payment to the banks. After one clears the smoke about the Federal Reserve Banks being private institutions in a legal sense, this is essentially taxpayer money. Given the current level of reserve balances held at the Federal Reserve Banks of more than $1.6 trillion dollars, an annual interest rate of 25 basis points amounts to more than $4 billion a year.

Finally, here is a picture that shows what has been happening to required and excess reserves since 2008:

[Aman A.K.A. Ahamburger]

One tool that is mentioned (for example, here by Alan Blinder) is for the Fed to lower the interest it pays banks on excess reserves. The mention of this possibility, though, raises the question of why the Fed is currently paying interest on both required and excess reserves on deposit at the Fed.

Ah HA! There it is! This has been floated around a bit now. One thing that some of us have been talking about, and the article points out, the banks have had more incentive to save their money. By removing this you give the banks extra incentive to lend, even with the low interest rates because they are making 0 interest on monies they will be sitting on.

[flow5]

AssetInflation.com

In 2008 our financial system was on the precipice because the large financials were not prepared for how quickly the situation could unwind. They were dangerously leveraged, under-reserved, poorly scrutinized, and capital deficient. The whole global system was in turmoil and extraordinary measures were needed, and in fact delivered.

Fast forward to 2011. Leverage has been reduced meaningfully, reserves are at records, every politician, analyst, and lawyer has scoured through every speck of data for problems, and finally capital has been injected through government bailouts, equity capital raises, and asset sales. In addition, the problems that the system experienced is due to activities prior to 2008. Since 2008, banks have tightened lending standards and been reluctant to take new risk. Today's perception of preparedness is the same as in 2008, but the facts are 180-degrees different. The system might need to recalibrate, but a major overall is not going to happen.

Lets look at five major systemic financials:

Bank of America (BAC)

Price: $6.97
Now tangible common equity $128B from $62B 2008
After writing off $95B in loan losses since 2008
Still have loss reserves of $37B.

Citigroup (C)

Price: $26.77
Now tangible common equity $142B from $30B 2008
After writing off $90B in loan losses since 2008
Still have loss reserves of $34B.

Goldman Sachs (GS)

Price: $111.76
Now tangible common equity $64B from $37B 2008.

JPMorgan (JPM)

Price: $34.35
Now tangible common equity $127B from $94B 2008
After writing off $74B in loan losses since 2008
Still have loss reserves of $29B

Wells Fargo (WFC)

Price: $23.36
Now tangible common equity $92B from $65B in 2008
After writing off $56B in loan losses since 2008
Still have loss reserves of $21B.
As you can see above, the effort has been diligent. Our top 4 banks have taken charge-offs in excess of $300B, raised tangible common equity over $200B, and still have total loan loss reserves of $120B. While this is a small sampling, the same degree of diligence has been happening across the globe. From AIG's (AIG) shedding of major units, re-capitalizing, and winding down their CDS business; to General Electric's (GE) controlled balance sheet shrink, large financial institutions have indeed focused on the issues.

[jarhead1976]

BAC is done. There will soon be more people taking money out than putting in. Have followed your thread for some time . The only real solution is to END "THE FEDERAL RESERVE". It is an Unconstitutional entity that exist for greed only.

[flow5]

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
08/01/11 0.13 0.10 0.16 0.22 0.38 0.55 1.32 2.05 2.77 3.72 4.07
08/02/11 0.05 0.06 0.13 0.17 0.33 0.50 1.23 1.94 2.66 3.59 3.93
08/03/11 0.01 0.02 0.08 0.16 0.33 0.52 1.25 1.94 2.64 3.55 3.89
08/04/11 0.01 0.02 0.05 0.12 0.27 0.44 1.12 1.78 2.47 3.37 3.70
08/05/11 0.01 0.01 0.05 0.11 0.28 0.49 1.23 1.91 2.58 3.49 3.82
08/08/11 0.02 0.05 0.07 0.12 0.27 0.45 1.11 1.75 2.40 3.31 3.68
08/09/11 0.02 0.03 0.06 0.11 0.19 0.33 0.91 1.53 2.20 3.17 3.56
08/10/11 0.02 0.02 0.06 0.09 0.19 0.33 0.93 1.52 2.17 3.08 3.54
08/11/11 0.01 0.03 0.08 0.10 0.19 0.34 1.02 1.65 2.34 3.34 3.82
08/12/11 0.01 0.02 0.07 0.11 0.20 0.32 0.96 1.56 2.24 3.24 3.72
08/15/11 0.00 0.02 0.08 0.12 0.19 0.34 0.99 1.60 2.29 3.29 3.75
08/16/11 0.02 0.03 0.07 0.12 0.20 0.33 0.95 1.54 2.23 3.23 3.67
08/17/11 0.01 0.01 0.06 0.12 0.19 0.33 0.92 1.48 2.17 3.14 3.57
08/18/11 0.01 0.01 0.05 0.10 0.20 0.33 0.90 1.43 2.08 3.02 3.45
08/19/11 0.00 0.02 0.04 0.10 0.20 0.34 0.90 1.43 2.07 2.97 3.39
08/22/11 0.01 0.01 0.04 0.09 0.22 0.37 0.94 1.47 2.10 3.00 3.42
===================

Did rates just bottom?

[usaone]

Looks like they did.

[flow5]

MMMFs end exposure to Italian and Spanish banks
Posted by John McDermott on Aug 22
Worries about European banks’ US dollar funding have been growing lately, even though the latest Fed data show foreign banks still have huge piles of cash on an aggregate basis.

But that’s just one part of the funding story. Another concerns our old friends, the money market funds. FITCH RATINGS on Monday published its latest monthly report on US MMF exposure to European banks.

It’s not a cause for panic but it does show how MMFs have reduced their overall exposure and, more interestingly, SHIFTED TO SHORTER-TERM LENDING. There were reports a few weeks back of MMFs being reluctant to provide longer-term funding so it’s nice to have some corresponding data. Here’s the relevant chart from the report:

ftalphaville.ft.com/blog/2011/08/22/659211/mmfs-end-exposure-to-italian-and-spanish-banks/

Overall, the MMFs sampled by Fitch (it uses data from the 10 biggest MMFs, representing 43 per cent of total prime MMF assets) REDUCED THEIR EXPOSURE to European banks last month by 9 per cent on a dollar basis.

What of French banks, we hear you ask. Fitch notes that by the end of the month over 20 per cent of MMF exposure was in maturities less than a week long, a three-fold increase since the end of June.

A little worrying but that caution is nothing compared to MMFs’ view of Italian and Spanish banks. From the report:

Finally, exposures to Italian and Spanish banks, which in aggregate were 0.8% in month-end June, currently round to 0% (see the “Diverging Exposures Across Countries” chart).

Not exactly a vote of confidence.

[Aman A.K.A. Ahamburger]

I agree 110% wxyz.. How about "THE US ECONOMY WILL HEAL ITSELF!!!"