Ben Benanke's Incompetent

[usaone]

If you look at Bonds, investor/consumer sentiment and the dollar it sure looks like we are at the bottom Flow.

[flow5]

community.nasdaq.com/News/2011-09/operation-twist-less-usd-bearish-than-qe3-bbh.aspx?storyid=94674

'Operation Twist' consists in a shift in the duration of the Fed's current holdings. "A duration shift is fundamentally less bearish for the dollar than large scale asset purchases (QE)

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www.fxstreet.com/fundamental/analysis-reports/fundamental-updates/2011/09/16/

...the ECB to offer 3–month US dollar loans to commercial banks, which have been facing funding pressures as US money markets have stopped lending to European banks. The move, with 5 central banks participating, will in essence try and backstop Europe’s banking system while ushering in a new era of global financial coordination. The idea is to make sure that companies have liquidity and access to dollars through the end of the year.

The ECB move to offer these loans will be done in coordination with the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank.

From Reuters: “The British and Swiss central banks said they would conduct three-month dollar lending operations simultaneously with the ECB on October 12, November 9 and December 7. The Bank of Japan, which already holds three-month dollar tenders, will add one on October 18.

The Fed, which in the past has faced criticism from lawmakers in Washington for its role in rescue efforts for European banks, will not itself offer three-month loans to banks in the United States. But it maintains dollar swap lines with the ECB and other central banks to ensure they can obtain additional supplies of dollars when needed.”

Why is the ECB lending Dollars and not Euros?

This step by the ECB is an attempt to get ahead of this funding issue – which is that European banks are struggling to access Dollars. US money market funds have been withdrawing from Europe, and two unidentified banks tapped the ECB’s 7-day dollar loans last week. The two unidentified banks borrowed a total of $575 million. Today’s action would give banks time to adjust their dollar businesses through the crucial end of year period and therefore help ease the pressure in the European banking system.

The ECB has helped three months dollar operations before, especially at the height of the global financial crisis in 2008-09. It also held a one-off three month dollar loan operations in May 2010 around the time of Greece’s first international bailout.

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Reuters) - Citigroup Inc (NYSE:C - News) said it will charge fees for deposit and checking accounts that are small or inactive, joining a growing list of U.S. banks altering their consumer banking operations as the industry adapts to new regulations.

Citigroup said on Friday it will charge a monthly service fee of $10 on basic checking accounts. The fee can be waived if a customer completes one direct deposit and one online bill payment per month, or maintains a combined balance of $1,500 in checking and savings accounts.

The change take effect in December.

Citigroup said it will not charge for debit card or online bill payment.

New York-based Citigroup is the latest bank to tinker with its account structures following changes in U.S. consumer banking regulations and laws over the last two years.

The new regulations -- part of a broad financial sector reform effort -- limit overdraft fees and other penalty fees banks can charge customers.

In response, to recoup lost revenues, many banks have begun introducing monthly service fees for accounts, debit card use and visits to branches.

Bank of America Corp (BAC - News), the largest U.S. bank by assets, introduced its own changes last year. The changes include an ebanking account, which allows customers to use ATMs and online banking for free but charges a $7 monthly fee for teller visits or receiving paper statements.

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By Warren Mosler

...Congress should not allow the Fed to lend unsecured to foreign central banks without specific Congressional approval. But the Fed does currently have that authority and they are again using it to keep $ LIBOR from rising. And that lending must be in unlimited quantities to insure $ LIBOR is capped at the Fed’s target rate.

The Fed doesn’t want $ LIBOR to go up because many US domestic loans are indexed to $ LIBOR, including adjustable rate mortgages. That’s why I’ve been proposing the Fed not let its member banks index loans to $ LIBOR, but instead let them index to the fed funds rate, or some other rate controlled by the Fed. That would return direct control of US $ interest to the Fed, obviating the need to use unsecured (and unlimited) $US lending to foreign central banks.

By the way, when testifying to Congress the Fed Chairman states the lending is secured, with the Fed getting euro deposits as collateral. And he believes that. However, the euro are on deposit at the European Central Bank, who is also the borrower of the $ from the Fed. So if he ECB defaults on the $ loans, the only way the Fed could use those euro is by instructing the ECB to transfer them to another’s account so the Fed can buy the dollars it wants.

So what are the odds of the ECB even taking the call from the Fed if they just defaulted on it’s dollar loans from the Fed? And what can the Fed do if the ECB doesn’t make payment and won’t let the Fed use its euro at the ECB to buy dollars?

[flow5]

www.reuters.com/article/2011/09/16/usa-economy-wealth-idUSS1E78F0XE20110916

Fri Sep 16, 2011 5:27pm EDT

* Ratio of household debt to disposable income falls in Q2

* Could lay groundwork for stronger consumer spending

* Despite progress on debt, household wealth falls

* Companies hoarding a record level of cash (Recasts first paragraph; adds economist's quote, byline)

By Jason Lange
WASHINGTON, Sept 16 (Reuters) - The level of U.S. household debt compared with after-tax income fell in the second quarter to the LOWEST LEVEL SINCE 2004, according to data on Friday, a trend that could lay the groundwork for greater consumer spending.

A Federal Reserve report showed that household mortgage debt fell while after-tax income rose in the second quarter. But CONSUMER CREDIT, which accounts for a smaller portion of household balance sheets, ROSE.

Household debt was 114.6 percent of disposable income during the April-June period, down from 116 percent in the previous quarter, according to Reuters' calculations based on the Fed's "Flow of Funds" report.

It was the lowest level for that ratio since the second quarter of 2004, and down from the RECORD HIGH of 130 percent hit in 2007, as America's housing bubble unraveled and the country sank into a deep recession.

"Basically households have gotten into a better position to sustain spending if there are job and income gains," said Joseph Carson, an economist at AllianceBernstein in New York.

While progress is being made bringing debt ratios down to more manageable levels, family debt burdens remain historically high. In data going back to just after World War Two, it is only since 2002 that household debt has exceeded after-tax income.

The decline in the debt ratio in the second quarter reflected a 1 percent rise in disposable income during the quarter and a drop in mortgage debt of 2.4 percent, the data showed. Consumer credit rose by 3.4 percent.

Household debts shrank at a 0.6 percent annual rate during the second quarter. That was the smallest decline since families started steadily shedding debt in the third quarter of 2008.

Still, total household wealth fell by $149 billion during the period. That could make consumers less willing to open their wallets as they fret about personal finances. The decline in total housing wealth dragged down household net worth to $58.5 trillion, well below its peak of $64.3 trillion at the end of 2006, the Fed figures show.

The report also showed nonfinancial corporate businesses held a record-high $2.05 trillion in liquid assets, such as cash, in the second quarter, up from $1.96 trillion in the previous quarter.

The hoarding of cash shows businesses remained leery about the future

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

So if credit card rates were capped - deleveraging would accelerate.

[flow5]

NASDAQ:INTC

(1) Researchers at Intel debuted an experimental processor at the company’s developer forum this week, which could lead to devices with significantly lower energy consumption.

The chip — codenamed “Claremont” — is known as a near-threshold voltage processor, which allows transistors to operate at super-low, near “threshold” voltages to increase efficiency and decrease energy consumption. This level is very near the voltage at which transistors switch on and start conducting current, which is referred to as the “threshold” voltage.

(2) Chip and system-level improvements that Intel is making with the Ivy Bridge microarchitecture will result in laptops out next year with longer battery life and better graphics, the company said this week.

Laptops with Ivy Bridge will be engineered for CPUs, graphics accelerators, memory and screens to consume less power, the chip maker said at the Intel Developer Forum (IDF) in San Francisco

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

Made a move on INTEL.

[flow5]

Currency-deposit ratio still deteriorating - but that may be masking a turn. Currency is finally moving after 2 months of sideways action.

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Percent change at seasonally adjusted annual rates:

..........................................................................M1.........M2

3 Months from May 2011 - Aug. 2011......36.7......23.3
6 Months from Feb. 2011 - Aug. 2011.......25.3......14.5
12 Months from Aug. 2010 - Aug. 2011.....20.7......10.3

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

zoom, zoom

[flow5]

Money supply factors and lags

Item Lag, operable time frame Notes

M1 4-10 months, averages 6-9
M2 9-20 months, averages 12-18
M3 9-20 months, averages 12-18

Monetary base 6-12 months, averages 8-16 High importance, controlled directly

Fiscal (government) stimulus 9-24 months, averages 12-18

Bank credit Two lags - one is 3-6 months, and the other is similar to

M3 High importance

Fed & comm'l repos Two lags - one is virtually immediate and is more important, and there is also a secondary lag of about 10 months High importance to stock market - the best single stat proxy for the Fed

Securities Lending Two lags - one is virtually immediate, and the other varies between 1-4 months High importance to bond interest rates

The changing velocity of money is the primary reason for the wide range in lags from the time money is created until it is reflected in inflation. With high inflation, money moves faster and there appears to be more in the system. Note that these numbers are only guidelines as of 2008.

Also note that the lags above only apply to the U.S. Federal Reserve. Other countries central banks may have different lags since money measure definitions differ.

"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.
The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation."
-- Milton Friedman, economist

www.nowandfutures.com/money_and_lags.html

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I.e., as the weighted arithmetic average of deposit classifications remains constant.

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www.bloomberg.com/news/2011-09-16/ubs-loss-may-prompt-global-regulators-to-limit-banks-trading.html

Gavin Finch, Elisa Martinuzzi and Ben Moshinsky - Sep 16, 2011

Less than two months after UBS AG (UBSN) Chief Executive Officer Oswald Gruebel said the bank had “one of the best” risk-management units in the industry, his firm posted a $2 billion loss from alleged “unauthorized trading.”

The disclosure exposed flaws in the bank’s risk controls that may prompt regulators to restrain lenders from making bets with their own capital, academics and analysts said. Britain’s Financial Services Authority and its Swiss counterpart yesterday said they would also investigate the UBS trading losses.

...The Swiss lender said yesterday that the loss at its investment bank was caused by a trader it didn’t identify. Police in London today charged Kweku Adoboli, a 31-year-old UBS employee, on suspicion of fraud by abuse of position. He worked on the Delta One desk, a team that handles trades for clients and took risks with the bank’s own money in arranging trades.

...Global regulators are pressing banks to CURB PROPRIETARY TRADING. The loss may revive calls for firms to increase controls on risk and separate their investment banking from retail businesses.

...“Whether it’s because of an irresponsible trader or failure in the prevention of risk taking, I’m convinced you can’t stop some investment banks taking on more risk than others,” said Martina Metzger, executive director of the Berlin Institute of Financial Market Research. “WHAT YOU CAN DO IS SEPARATE INVESTMENT BANKING FROM DEPOSITORS MONEY”

UBS’s loss is the largest of its type since former Societe Generale derivatives trader Jerome Kerviel caused a 4.9 billion- euro ($6.8 billion) loss in 2008...

--------

Glass-Steagall Act?

[flow5]

www.bloomberg.com/news/2011-09-16/ubs-loss-may-prompt-global-regulators-to-limit-banks-trading.html

Cheyenne Hopkins and Ian Katz - Sep 16, 2011

Volcker Rule May Extend to Overseas Banks Scott Eells/Bloomberg
Security guards stand in front of 200 West Street, which houses the headquarters of Goldman Sachs Group Inc., in New York.

A rule limiting proprietary trading by U.S. banks may be extended to overseas firms with operations in the country, according to four people familiar with the matter.

Regulators next month will issue a proposal to carry out provisions of the so-called Volcker Rule, part of the Dodd-Frank financial-regulation law, that will clarify the types of offshore trading allowed under the rule, the people said.

The Volcker Rule, designed to reduce the types of risky investments blamed for triggering the financial crisis, has prompted U.S. banks such as Goldman Sachs Group Inc. (GS) to close proprietary-trading operations. Overseas banks say that a strict interpretation of the rule may also force them to fire or relocate U.S. employees who are involved in proprietary trading, even if no American money is at risk.

...The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.

Subject to Interpretation
The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.

Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.

Five Agencies
The proposal may still change, the people said. Five regulators, including the Fed, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, must approve the proposal separately. The Treasury Department is responsible for coordinating the regulation. The proposed rule will be released for public comment and can be changed before it becomes final.

...The Institute of International Bankers, which represents firms such as London-based HSBC Holdings Plc (HSBA) and Paris-based Societe Generale SA, is arguing that the Volcker rule shouldn’t apply if trading takes place offshore and doesn’t put U.S. investors or the financial system at risk.

The rule “should focus on where the risk of the activity is held,” Sally Miller, the institute’s chief executive officer, wrote in a May 10 letter to the regulators. “The statutory text focuses on the location of the activities a bank engages in.”...

[flow5]

Need to break AUG 31 DOW @ 11,613.53 to resume uptrend?

Bottomed @10,719.94 on AUG 10. Re-tested on SEPT 9 @ 10,992.13.

Oil prices showing Bernanke has room to move. Higher nominal gDp on the way?

CRUDE OIL Oct 2011 (NYMEX:CL.V11)

87.96 -1.44 (-1.64%)

[flow5]

July 21 DOW peaked @12,724.41. -- 30 day wash sale rule now over.

[jarhead1976]

With the Treasury so closely connected to the Federal Reserve, its no wonder we are so screwed. Timmy Goes to Europe and tells them to get their house in order! Its like a hoarder saying you need to clean the Hearst castle.

[flow5]

For sure. The General Fund Account. TT&L Accounts. The U.S. Treasury, supplementary financing account. Support of the Treasury market (new issues & refinancing).

[flow5]

Goldman Sachs expects the Federal Reserve cut interest rates on excess reserves over 50% probability

Published On Saturday, September 17, 2011

...Fed’s excess banking reserves totaled 1.7 trillion. Goldman Sachs analysts expect the Federal Open Market Committee WILL CUT THE EXCESS RESERVE RATE TO 0.10%.

...Goldman Sachs said the Fed cut the excess reserve rate IOER benefits include the following three points: it might be slightly lower short-term interest rates; & the commitment and the change in balance sheet composition;

At the same time, Goldman Sachs also lists the excess reserve rate cut drawbacks and risks: the excess reserve rate cut may damage the normal operation of the federal funds market; may lead to increased bank deposit insurance fees, effectiveness of policies to offset. Although the Fed cut the excess reserve rate IOER, but banks may charge more to customers to compensate for the loss of interest income; cut the excess reserve rate IOER hedge funds, money market can also make it difficult to cover its operating costs.

Goldman Sachs said that because the Fed to build zero-interest rate environment, the overall size of up to $ 2.6 trillion in U.S. money market hedge fund industry profits damaged, if the excess reserve rate cut, the industry will be more or difficult to recover operating costs.

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

unknown impact -- must be accompanied by reserve draining operations.

[flow5]

Suddenly, Over There Is Over HereBy GRETCHEN MORGENSON
Published: September 17, 2011

THE debt crisis in Europe has finally, and officially, washed up on American shores. Last week, the mighty Federal Reserve moved to help European banks that have been having trouble finding people who are willing to lend them money.

Some of THESE BANKS ARE GROWING DESPERATE FOR DOLLARS. Fearing the worst, investors are pulling back, REFUSING TO ROLL OVER THE BANK'S COMMERCIAL PAPER, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.

...Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., outlined what he sees as the major risks — and they fall into two categories. One is the potential for losses incurred by financial institutions that wrote credit insurance on European government debt and the European banks that own so much of that paper. The other is the likely economic hit as banks in the euro zone curb lending significantly.

A crucial mechanism linking financial players in the United States to the problems in Europe involves CREDIT DEFAULT SWAPS, those insurance-like products that did so much damage during the 2008 financial crisis. (Think American International Group.)

Billions of dollars in swaps have been WRITTEN ON SOVEREIGN DEBT, guaranteeing that those who bought the insurance will be paid if Greece or other countries default. As of Sept. 9, some $32 billion in net credit insurance exposure was outstanding on debt of Greece, Portugal, Ireland and Spain, according to Markit, a financial data provider. An additional $23.6 billion has been written on Italy’s debt. Billions more in credit insurance have also been written on European banks, many of which hold huge positions in troubled sovereign obligations.

But since these instruments trade in secret, investors don’t know who would be on the hook — as A.I.G. was in its ill-fated mortgage insurance — should a government default or a bank fail.

“If Greece folds its tent and that takes out a big institution, we don’t know who wrote the swaps,” Mr. Weinberg said. “Can they raise the cash to perform on their obligations? Can they take the balance-sheet hits? We have a lot of unknown unknowns.”

Even after what we went through with A.I.G., the huge market in credit default swaps remains unregulated and still operates in the shadows. You can thank big banks that trade these instruments — and their LOBBYISTS — for that.

...ONE troubling aspect of the euro zone crisis is just how large the European banks’ sovereign debt holdings are. At many institutions, the positions dwarf what American institutions held in mortgage-related securities, for example, when compared to book values.

Why? Regulators encouraged European banks to hold huge amounts of European government debt by letting them account for these investments AS IF THEY POSED ZERO RISK. That meant the banks DIDN'T NEED TO SET ASIDE A SINGLE EURO IN CAPITAL AGAINST THOSE HOLDINGS.

Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values.

Adding to the peril is that these banks are FUNDED PRIMARILY BY SHORT-TERM INVESTORS, LIKE BUYERS OF COMMERCIAL PAPER, rather than by depositors, as is more often the case with American banks. This was the same problem faced by Bear Stearns and Lehman Brothers, which collapsed after short-term lenders fled in panic.

Measuring the loans made to European banks against their deposits tells the story. Across Europe, according to Autonomous Research, loans to banks exceed their deposits by 6 percent. Among French banks, loans exceed deposits by 19 percent. In Greece, they swamp deposits by 32 percent.

In the United States, by contrast, banks are borrowing less than 90 percent of their deposits, on average.

This is why it is becoming such a problem for European banks that so many short-term lenders are declining to renew when loans come due. MONEY MARKET FUNDS, traditionally big investors in short-term paper issued by European banks, have been reducing exposures. A recent Fitch Ratings report shows that for the two months ended July 31, the 10 largest United States prime money market funds pared their holdings in European banks by 20.4 percent, in dollar terms. In the same period, the funds cut their exposure to Italian and Spanish banks by 97 percent.

But these money funds, with total assets of $658 billion, held $309 billion in debt obligations issued by European banks. That’s equivalent to 47 percent of these funds’ total assets...

www.nytimes.com/2011/09/18/business/economy/as-europes-crisis-grows-over-there-is-over-here.html?_r=1

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By E. Scott Reckard, Los Angeles Times

September 17, 2011,
Americans are pumping money into bank accounts at a blistering pace this year, sending deposits to record levels near $10 trillion on escalating fears that the U.S. economy is on the verge of another implosion.

There's no sign that the flood into checking, savings and money market accounts is slowing down. In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year.

There's one big problem: Banks don't want your money.

"BANKS & CREDIT UNIONS ARE DOING EVERYTHING THEY CAN TO GET RID OF THE CASH EXCEPT MAKE LOANS," said Mike Moebs, a Lake Bluff, Ill., banking consultant.

He said banks are driving away deposits by REFUSING TO RENEW CDs at higher rates and by IMPOSING FEES ON CHECKING ACCOUNTS for depositors who don't use other, profitable financial services as well.

During the housing boom, banks gobbled up deposits — including plenty of "hot money" provided by brokers chasing high interest rates for their clients — to fuel binges of mortgage and construction lending. The collapse of home prices and the ensuing financial crisis caused nearly 400 banks to fail, more than at any time since the savings and loan meltdown in the 1980s.

The latest flood of deposits has occurred in spite of banks PAYING THE LOWEST INTEREST RATES ON RECORD for money they know could flow back out if the economy improves. Similar "flights to safety" with huge deposit inflows occurred in late 2008, when the financial crisis struck, and in 1999, when fears of massive defaults on Russian debt panicked investors.

The large amount of cash only ADDS TO EXPENSES SUCH AS PAYING FOR DEPOSIT INSURANCE PREMIUMS. With lending standards tight as a drum after the financial fiasco, and demand for loans growing only slightly, banks have been doing everything they can to demonstrate how little they need new cash.

In the most obvious sign, they have SLASHED INTEREST PAYMENTS TO DISCOURAGE CUSTOMERS. Wells Fargo & Co., which has the most branches in California, halved its payments on one-year certificates of deposits to 0.1%; Citigroup, which paid 2% in 2009, dropped its payment to a paltry 0.3%.

And in a possible glimpse into the future, one New York banking giant is even CHARGING BIG CUSTOMERS FOR THE RIGHT TO PARK MONEY THERE. The Bank of New York Mellon is forcing institutional clients to pay fees if they deposit more than $50 million into an account.

For bankers like John Biggs, who runs Santa Rosa, Calif., thrift Luther Burbank Savings, the strategy was to always court deposits using high rates to enable growth while keeping costs down. Now he's not sure what to do.

In 2007, Luther Burbank was offering a whopping 5.4% interest rate on a one-year CD. The Sonoma County bank used money from new customers to expand into Southern California by OPENING BRANCHES in Encino, Burbank, Pasadena and Beverly Hills.

Those days are definitely over. Biggs' savings bank now pays just 0.9% on the investment. That means for every $100 his customers lock up for a year, they'll get back just 90 cents extra — a difficult thing to explain, he says, to retirees accustomed to living off their interest checks.

Still, it beats the 35 cents that savers in Southern California would get from Bank of America, the 30 cents they'd get from Citibank and the 10 cents they'd get from Wells Fargo, according to researcher Bankrate.com.

"In all honesty, I'm not happy," said Biggs, who has been with the company since the mid-1980s. "Our philosophy is that we are a savings bank; we are rate payers. We will continue to pay you rates at the top of the market. That's just not very good right now."

Part of the problem, he said, is that the "government has chosen to drive down rates to abnormally low levels" — a reference to the Federal Reserve slashing interest rates to the bone to encourage Americans to borrow money cheaply and spend it.

But the negligible bank rates have punished retirees and others who depend on interest income, which plunged 40% to $546 billion last year from $903 billion in 2008, according to the federal Bureau of Economic Analysis.

The Fed has pledged to hold short-term rates near zero through mid-2013 unless the economy improves as a way to combat the nation falling back into a recession. That's going to continue to cause pain to savers, and could force banks to become even more stringent about their intake of new deposits.

Bankers such as Robert H. Smith, former chairman of L.A.'s Security Pacific Corp., say the industry is being throttled by a COMBINATION OF THE WEAK ECONOMY AND REGULATIONS THAT WERE TIGHTENED IN THE AFTERMATH OF THE FINANCIAL CRISIS.

"What little demand that is out there for loans is regarded very skeptically [by the banks] because of the pressures from the regulators," said Smith, who sold Security Pacific to Bank of America 20 years ago and is now a founding director of Commerce National Bank in Newport Beach.

The banks also have another problem: what to do with all the billions of dollars in temporary deposits being parked by giant corporations, institutional investors and retail customers.

Like Biggs' depositors, they are stashing it in a safe but unrewarding place: Federal Reserve banks, which are paying them an interest rate of just 0.25% to tend the funds. Such deposits rose to more than $1.6 trillion at the end of August from about $1 trillion a year earlier, according to the Fed.

And until new lending grows strong and depositors start pulling funds out to invest elsewhere, banks will have little reason to increase rates. They now are even lower than in 2003, when the Fed pushed rates down to then-record lows after the Internet bubble popped.

"I never imagined yields would get lower than what we saw in 2003," said Greg McBride, senior analyst with Bankrate.com. "Well, in Japan maybe. But not here."

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

I.e., the means-of-payment money isn't growing, depositors are shifting their balances between deposit classifications (from interest-bearing savings accounts to non-interest-bearing transaction accounts).

[flow5]

wallstreetpit.com/83960-the-smaller-banks-continue-to-lose-ground

JOHN MASON:

FOREIGN RELATED INSTITUTIONS, QE2, AND THE EUROPEAN BANKING CRISIS

Dollar deposits CONTINUE TO FLOW OUT OF THE United States into foreign banking offices through domestically located foreign related institutions. From August 2010 through August 2011, cash assets at these domestically located foreign related institutions rose by about $470 billion! This increase in cash assets tracks closely the Federal Reserve’s implementation of QE2 and represents about 75 percent of the roughly $630 billion rise in cash assets of the whole United States banking system.

The interesting thing for our purposes is that the item on the other side of the balance sheet that most closely tracks this increase in the cash assets of foreign related banking institutions is “NET DUE TO FOREIGN OFFICES.” That is, this MONEY IS GOING OFF SHORE.

From August 2010 through August 2011, this account, “Net Due to Foreign Offices”, rose by almost $540 billion. In the last quarter it rose by over $160 billion. In the last month it rose by $112 billion.

Can the rise in this this account be associated with the sovereign debt crisis in Europe and the recent problems faced by many of the large European banks?

I believe one can make a pretty strong case for this conclusion. The Fed’s QE2 preceded the agreements that the central banks made last week to PROVIDE MORE US DOLLARS TO EUROPEAN BANKS.

Of course, this provision of US dollars to the world is not spurring on economic growth although it may be helpful to preventing another Lehman Brothers meltdown.

[flow5]

Operation twist was introduced in January 20, 1961. The FED wanted to lower long-term interest rates because the U.S. was in a recession while at the time Europe’s economies were much stronger. This magnified interest rate differentials igniting carry trade activity within Bretton Wood’s fixed exchange rate system.

Opportunists were able to convert U.S. dollars to gold & capitalize on higher investment returns in Europe. The administration wanted to curb this excessive outflow of gold by speculators. Thus operation twist was designed to freeze the short-term rates (used by speculators), while lowering longer-dated rates (& stimulate housing).

But flattening the yield curve does not increase the incentive for new bank lending & investing. Banks require a profitable spread between their costs & their revenues. Banks aren't refinancing because the ROI isn't there (why accept a narrower spread & therefore lower profits). And refi applications are being submitted by homeowners who, due to the recession, now have lower average credit scores.

The markets got it right: lower stocks & a higher dollar.

[flow5]

JOHN MASON:

Remember the old story about commercial banks? Commercial banks only lend to people who don’t need to borrow.

Well, that seems to be the “truth” about bank lending now. The story going around is that the larger banks have increased their business lending, but the lending is really only going to those institutions that have a lot of cash on hand. Otherwise, the commercial banks will sit on their excess reserves.

This also seems to be the story in Europe: commercial banks are just not lending anywhere.

And, the relevant question is not “Why aren’t commercial banks lending?” The relevant question is “Why should commercial banks be lending at this time?”

The first reason why many banks shouldn’t be lending right now is that there is still a large number of banks who may be severely undercapitalized or insolvent. Many commercial banks have assets on their balance sheets whose economic value is substantially below the value the asset is accounted for on that balance sheet.

The most notorious case of this is the sovereign debt issues carried on the balance sheets of many European banks. The values that many of these banks have on their balance sheets for these assets have the credibility that the recent “stress tests” administered to more than 90 banks by European banking authorities. (Note that the European Union moved today to recapitalize 16 banks)

But, the problem is not limited to Europe. How many assets on the books of American banks have values that need to be written down to more realistic market values. For example, small- and medium-sized commercial banks in the United States have a large portion of their loan portfolios in commercial real estate loans. The commercial real estate market is still experiencing a depression and market values continue to decline in many areas. The write off of these loans can take large chunks out of the capital these banks are still reporting.

The bottom line here is that commercial banks that still have problems are not willing to take on any more risk than they have to while they still have to “work out” these depreciated assets, or, at least, wait until the markets recover and asset values rise once again to former levels. If you don’t make another loan … it will not go bad on you … so why take the risk of making a new loan.

And there are 865 commercial banks on the FDIC’s list of problem banks and many more surrounding that total that have not met the specific criteria of the FDIC to be considered a problem bank.

The second reason why many banks shouldn’t be lending right now it that the NET INTEREST MARGIN they can earn on loans is hardly sufficient to cover expense costs. I have talked with many bankers now that say the only way to make any money through bank operations is to charge for transactions. That is, to generate fee income.

A general figure that represents the expense ratio of a bank is by taking expenses and dividing them by total assets. Recent data indicate that this expense ratio is in excess of 3 percent, being around 3.15 percent to be more exact. This means that on basic lending operations a commercial bank MUST EARN a net interest margin of 3.15 percent in order to “BREAK EVEN.”

Is there a problem here? You betcha!

Adding to this dilemma is the fact that the Federal Reserve has added on a new “operation twist” to the mix. All these banks need is a flatter yield curve. (See my post here)

There are two ways to respond to a flatter yield curve. First, one can take on more risk in their lending. (See here) Or, commercial banks can attempt to earn more money through additional fees, or principal investments (private equity or venture capital), or through the assumption of systematic risk taking. (See here)

Is this what the Fed wants? The Fed seems to be caught in the bind that it must be seen as doing something, even though that something may not be very productive (QE2) or even counter productive (leading to bubbles and other speculative activity).

The take on Fed behavior during the Great Depression has been that the central bank did not do enough. Hence, Mr. Bernanke and crew are taking the position that history will not brand them with the same interpretation. For the past three years they have operated so as to avoid the claim that they did not do everything in their power to counteract the forces causing a great recession, slow economic growth, or economic stagnation.

And, here they face the possibility of “unintended consequences.” If the FLATTENING OF THE YIELD CURVE results in even less bank lending than would have occurred otherwise, the Fed could actually be exacerbating the situation. The stock market declined upon hearing the Fed’s policy.

The third reason why banks may not be lending now is the absence of loan demand. Fifty years of government created credit inflation has resulted in excessive debt loads being carried by individuals, families, businesses, governments (at all levels) and not-for-profit institutions. People, faced with under-employment, declining asset values, and income/wealth inequities, are attempting to de-leverage. This de-leveraging will continue until people feel more comfortable with their debt loads, or, the Fed creates sufficient inflation so that people will start to take on more debt again.

If the Fed achieves the latter, then we have returned to the credit inflation situation that has existed for the past fifty years. This period of credit inflation has resulted in an 85 percent decline in the purchasing power of the dollar, more and more under-employment of labor, and greater income/wealth discrepancies within the society.

The fourth reason is the uncertainty created in “the rules of the game.” The Dodd-Frank financial reform act has created a great deal of uncertainty within the financial community. For one, only about 25 percent of the regulations have actually been written and only a portion of these have passed. As a consequence, commercial banks don’t know what rules they will have to follow…or, even more important, what rules they will have to find ways to circumvent.

Another new set of rules, these on taxation, were introduced by President Obama this week. George Shultz, former Secretary of the Treasury, has argued that new, complex tax proposals not only lead to short-term uncertainty about what must be dealt with, but that over time “the wealthy and GE” will find ways to manipulate the tax laws in their favor. (See my posts of September 20 and 22) But, unfortunately, people, families and businesses, will devote time and resources to dealing with these “rules of the game” and not allocate this time and resources to more productive activities.

Again, I raise the question “Why should banks be lending?” is not the question “Why aren’t banks lending?”

seekingalpha.com/article/295630-why-banks-aren-t-lending

[flow5]

“Next they looked at data going back to 1952 on interest rates one year into a recovery, and found that the interest-rate spread was an average of nearly FIVE PERCENTAGE POINTS HIGHER”

online.barrons.com/article/SB50001424052702303741704576580921026997928.html?mod=googlenews_wsj?mod=googlenews_barrons

“This means that on basic lending operations a commercial bank must earn a NET INTEREST MARGIN of 3.15 percent in order to “break even”

maseportfolio.blogspot.com/

Obviously, the level of inflation expecations is unhealthy.

[flow5]

"The ATTACK AGAINST PEOPLE ON FIXED INCOMES & RETIREES began several years ago in earnest. In October of 2008, Congress’ top budget analyst estimated that Americans’ retirement plans lost as much as $2 trillion in a fifteen month period. Bernanke’s latest bogus effort to “stimulate” the economy will accelerate the pace considerably."

www.infowars.com/operation-twist-and-shout-fed-launches-stealth-attack-on-pensions/

[flow5]

INTC low 19.19 Aug 19.

Breakout Sept 9.

22.07

[flow5]

Euro Crisis Makes Fed Lender of Only Resort as Funding Ebbs
September 28, 2011

www.businessweek.com/news/2011-09-28/euro-crisis-makes-fed-lender-of-only-resort-as-funding-ebbs.html

Sept. 28 (Bloomberg) -- The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.

Three years after the collapse of Lehman Brothers Holdings Inc., MONEY-MARKET BORROWING RATES for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to EURO-ZONE BANK DEPOSITS & COMMERCIAL PAPER, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data.

...The extended funding comes as the U.S. central bank is already under fire for its unprecedented monetary stimulus. Republican leaders including Representative John Boehner of Ohio and Senator Mitch McConnell of Kentucky wrote Chairman Ben S. Bernanke and the Board of Governors on Sept. 19, asking them to “resist further extraordinary intervention in the U.S. economy.”

...U.S. regulators also are becoming less patient with what are turning out to be DOLLAR-FUNDING RUNS against foreign banks. Financial institutions are too dependent on short-term money- market investors that tend “to flee at the first signs of distress,” William C. Dudley, president of the Federal Reserve Bank of New York, said Sept. 23 in a Washington speech.

Regulators also lack access to data on foreign institutions operating in the U.S. that would allow them to “make informed judgments about the adequacy of such firms’ capital and liquidity buffers,” he said.

Investors are fleeing because of concern that banks will take large losses if a euro-zone nation such as Greece defaults. Europe’s debt crisis has generated as much as 300 billion euros ($408 billion) in credit risk for the region’s banks, the International Monetary Fund said last week.

...The London Interbank Offered Rate at which banks say they can borrow for three months in dollars rose for a 14th day today to 0.36856 from 0.36522 percent yesterday, according to data from the British Bankers’ Association.

The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide THREE-MONTH DOLLAR LOANS to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its COUNTERPARTY.

There were $575 million in outstanding SWAPS with foreign central banks as of Sept. 21, Fed data show. The ECB loaned a similar amount of cash to two euro-area banks earlier this month in seven-day transactions. The first of three ECB three-month dollar-loan offers starts Oct. 12.

The Fed facility provides a critical “ceiling” on FUNDING SQUEEZES that allows investors to avoid panic and distinguish between healthy and troubled banks, said Jerome Schneider, head of the short-term strategies and money-markets desk at Pacific Investment Management Co. in Newport Beach, California.

“What you don’t want to have is liquidity risk become intertwined with solvency risk,” Schneider said. The swap lines are “the foundation right now to provide a backstop.”

After the criticism earlier this year of lending to overseas institutions -- including Arab Banking Corp., part- owned by the Central Bank of Libya, after Lehman collapsed in 2008 -- New York Fed researchers said U.S. branches of foreign banks were among the biggest borrowers from the discount window because they lack DEPOSIT BASES. The window is the Fed’s oldest backstop-lending tool.

In an April 13 post on the New York bank’s research blog, the researchers said these institutions have relied more heavily on so-called WHOLESALE FUNDING FOR DOLLARS, including the money markets and foreign-exchange swaps. Supporting these banks helped maintain foreign investment in the U.S., they said.

Euro-zone banks and other institutions were more than $350 billion in debt to the Fed’s EMERGENCY-LENDING FACILITIES at one point during the 2008-2009 financial crisis, according to data compiled by Bloomberg News. The analysis was based on Fed documents released earlier this year after court orders upheld Freedom of Information Act requests by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. Fed lending to these entities totaled more than $100 billion on an average day.

Dexia SA, based in Brussels and Paris, was the biggest euro-area borrower, with as much as $58.5 billion of Fed loans on Dec. 31, 2008. BNP Paribas SA in Paris borrowed as much as $29.3 billion on April 18, 2008. The largest U.S. borrower, New York-based Morgan Stanley, took $107.3 billion of loans on Sept. 29, 2008.

Banks that rely on unstable short-term funding risk having to return to official sources for money until liquidity and capital are bolstered, said Viral Acharya, a New York University Stern School of Business professor and author of books on financial stability.

“All the national regulators have to agree that their banks need to raise capital,” he said. “The regulators are not sufficiently united. No one country is taking the leadership to realize the problem is getting out of hand.”

The Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations including the U.S., has agreed on liquidity guidelines; the first round is slated to be phased in by 2015.

While the Fed is legally required to lend to banking entities in its districts, it “does have a choice” regarding how it will extend the swap lines, said William Poole, former president of the Federal Reserve Bank of St. Louis.

“European governments have substantial dollar holdings of U.S. Treasury securities, so why not sell some of their dollar securities to support their own banks?”

[neoh]

Big mess. I wonder how long this will drag on.
Thanks for all the effort Flow.

[flow5]

Money Market Investors May Get Relief From Fed’s Operation Twist
September 28, 2011,

Sept. 28 (Bloomberg) -- Investors in U.S. money market funds may get some relief from record-low returns when the Federal Reserve begins to sell short-term debt as part of its latest stimulus effort that’s been dubbed Operation Twist.

The rate to borrow and lend Treasuries for one day in the repurchase agreement market MAY RISE SIX TO EIGHT BASIS POINTS, according to Barclays Plc. Overnight general collateral repo agreements for Treasuries averaged 0.069 percent since June, while one-month Treasury bill rates averaged 0.0113 percent. The one-month bill has traded below zero almost every day since mid- August.

The Fed’s plan to begin selling $400 billion of Treasuries due in three years and less next month to fund purchases of a similar amount of longer-maturity debt comes as investors park cash in money funds. Investors have been SEEKING A REFUGE from Europe’s debt crisis and slowing growth. Custody banks have also been hurt by persistent low interest rates, which reduce income from lending cash and securities and cut fees from the funds. Bank of New York Mellon Corp., the world’s largest custody bank, said last month it will begin CHARGING CUSTOMERS for “extraordinarily high” cash deposits.

“A significant portion of the Fed’s sales of shorter-dated holdings will ultimately find a home with money market funds,” Kenneth Silliman, head of U.S. short-term rates trading at Toronto Dominion Bank’s TD Securities unit in New York, said in a telephone interview. “MONEY FUNDS HAVE BEEN DESPERATELY SEEKING TRESURIES WITH A POSITIVE YIELD.”

...The influx of securities from the Fed’s sales may cause repo rates to rise six to eight basis points through June, according to Joseph Abate, money-market strategist in New York at Barclays, one of the 20 primary dealers that trade government debt with the central bank. The Fed purchases as slated to be completed in June.

General Collateral

The fall in bill supply, as the Treasury stopped sales of bills on behalf of the Fed, also cut the amount of Treasuries available in the repurchase agreement markets, pushing Treasury repo rates lower as investors grew more willing to take lower interest rates on loans to get needed securities.

...Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate, which now is in a range of zero to 0.25 percent, are called general collateral. Those in highest demand have lower rates and are called “special.”

U.S. money funds REDUCED LENDING TO EUROPEAN BANKS further last month, with the biggest U.S. funds cutting their holdings to the lowest in at least five years, as the region’s sovereign debt crisis worsened. The 10 biggest U.S. funds eligible to purchase corporate debt, with a combined $676 billion in assets, reduced European bank assets to 42 percent of holdings, the lowest level since at least 2006, Fitch Ratings said in a Sept. 23 report.

“The Fed’s sales of shorter-maturity coupons will make some supply available to Treasury-only money market funds, which are a massive buyer of bills and investor in Treasury repo,” Michael Cloherty, head of U.S. interest-rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets, said in an telephone interview. “When the Fed sells a short-term security, it means that when it matures the Fed won’t have any paper to roll over at the Treasury auctions,” which will cause the Treasury to receive less money at its auctions than it otherwise would.

The Treasury will need to raise auction sizes to offset that drop in cash, added Cloherty, who said that given the bills are at a historic low percentage of the Treasury’s total debt, they are most likely to get a greater share of any increase in issuance.

Treasury bills as a percentage of the government’s total debt portfolio have fallen to 16 percent as of June 30, down from as high as about 35 percent in the fourth quarter of 2008, and an average of 24 percent from 2000 through 2007, according to Treasury Department data.

www.businessweek.com/news/2011-09-28/money-market-investors-may-get-relief-from-fed-s-operation-twist.html

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

Short-term rates still way under remuneration rate.

[flow5]

According to Alan Blinder, writing in the Wall Street Journal, the Fed’s latest operation includes a detail (“the sleeper in the package”) that is aimed at boosting the housing market:

For more than a year now, the Fed has been allowing its portfolio of agency debt (e.g., Fannie Mae and Freddie Mac) and mortgage-backed securities (MBS) to shrink naturally as mortgages are paid off and securities mature. To maintain the size of its balance sheet, the Fed has been reinvesting the proceeds in Treasurys. But starting “now” (the Fed’s word), and continuing indefinitely, those proceeds will be reinvested in agency bonds and MBS instead. The objective here is exactly what it was for the first round of quantitative easing, QE1: to REDUCE SPREADS between MBS and Treasurys (which had widened a bit), and thereby to help the ailing housing market.