Ben Benanke's Incompetent

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But, more debt write-downs can cause more debt write-downs. And, this is the problem of a debt deflation. It can become cumulative. And, this is something the Keynesian models cannot pick up.

And, writing down debt for some people just means that SOMEONE ELSE HAS TO "EAT" THE LOSS elsewhere…and then someone else has to take a loss…and so on and so forth. The consequences of debt do not just go away.

seekingalpha.com/article/307261-debt-deflation-is-it-a-possibility?ifp=0&source=email_macro_view

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Reuters) - The United States is ramping up attempts to safeguard its financial system from a worsening of Europe's debt crisis, joining nations in Asia, Latin America and elsewhere in trying to build firewalls.

U.S. policymakers, alarmed by the political upheaval in Italy and Greece, are digging deep into the books of American banks to find out how exposed they might be to euro zone creditors and the plunging value of sovereign debt.

Officials were stung by the implosion of Wall Street firm MF Global, which gambled and lost on European debt, and they are working on contingency plans for a worst-case scenario should another financial firm crumble.

A senior U.S. Treasury official said regulators are contacting big U.S. financial institutions to make sure they are scaling back exposure to Europe and are ready for a potential worsening of the crisis.

The Financial Stability Oversight Council, an inter-agency group set up after the 2007-2009 financial crisis, was trying to identify specific firms that could be hit by financial turbulence and then sort out ways that each one can fortify its balance sheet, the Treasury official said.

While the Treasury has been at pains to say that direct U.S. bank exposure to European countries now receiving bailout aid -- Greece, Ireland and Portugal -- is moderate, once the debt of Italy and Spain, plus credit default swaps, and U.S. bank indirect exposure through European banks are added, the potential sum could exceed $4 trillion.

"As such, the potential for contagion to the U.S. financial system is not small," the Institute of International Finance, the lobby group for major international banks, said last week.

Hedging and netting would limit the true size of any losses, so the $4 trillion figure would be the outer edge of U.S. total exposure.

U.S. banks had about $180.9 billion of debt from Greece, Ireland, Italy, Portugal and Spain on their books at the end of June, based on Bank for International Settlements data. Italy accounted for the largest chunk, more than $250 billion. Guarantees and credit derivatives added another $586.6 billion, bringing the total to $767.5 billion, the IIF said.

There is a secondary level of exposure that is potentially more worrying -- through international banks lending to each other. Here the greatest risk stems from Italy and France. International bank claims on Italy total $939 billion, and French banks account for well over one-third of that, BIS data show. French banks also rely heavily on short-term loans from other international banks for their daily operations. If Italian debt slumps even further, causing deeper losses for French banks, international banks could stop lending to France. The losses would ripple through the whole global financial system.

The United States learned the hard way how these indirect financial linkages work when imploding credit default swaps forced it into a $180 billion bailout of insurance giant American International Group in 2008 to prevent further contagion in the banking sector.

The danger is that a steep drop in sovereign bond prices prompts similar margin calls at banks that could snowball into a seizing up of credit, the lifeblood of an economy.

European banks hold some $3.5 trillion of euro-zone sovereign bonds and U.S. banks have significant direct exposure to their European peers, the IIF said in a report.

Federal Reserve Chairman Ben Bernanke was frank last week about the risks: "It is not something that we would be insulated from ... I don't think we would be able to escape the consequences of a blow-up in Europe."

JPMorgan Chase, the largest U.S. bank, holds about $44 billion in debt of troubled euro-zone nations -- Greece, Ireland, Portugal, Spain and Italy -- and Citigroup, the third largest, has $24.3 billion, said Dick Bove, a banking analyst at Rochdale Securities in September.

MF Global's fall gave a taste of how contagion can rip through the financial system. Brokerage Jeffries Group Inc's shares plunged on concerns about exposure to Europe. The shares stabilized after the firm clarified its position.

CHECKING THE BOOKS

Fed Vice-Chair Janet Yellen said a new round of stress tests of U.S. banks will start in "a couple of weeks" to check their resilience should the value of their assets plunge.

"In light of such international linkages, further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States," she told a Chicago audience on Friday.

"We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system," she added.

Stress tests could lead to some banks raising more capital. The Financial Industry Regulatory Authority told MF Global to boost its net capital in August following concerns about its exposure to European debt.

A Fed survey last week showed that about half the top U.S. banks had loans to European banks or were extending credit to them. If European banks ran into trouble and were unable to repay their loans, U.S. banks could face sizable losses.

The chief economist for ratings agency Moody's Investors Service, Steven Hess, said last week that so far there were no signs that banks were unwilling to lend to one another.

"If ... the crisis becomes much worse and includes Italy for example -- and this is all if, not a forecast from the part of Moody's -- if that were to happen, you could see the financial system in the United States ... suddenly suffer problems," Hess told the Reuters Washington Summit.

Should that happen, the United States can turn to tools it honed during the financial crisis of 2007-2009, said Nellie Liang, director of the Fed's Office of Financial Stability Policy and Research.

"We were creative that time, and we could be creative this time," Liang said. "But I think, just step back, the first line of defense is doing proper risk management and supervision."

U.S. money market funds, for example, already have pulled back significantly from European debt exposure under the watchful eye of regulators, she said. Their holdings of European paper totaled $384 billion in September, down 30 percent from June when alarms were first rung, the IIF said.

Regulatory reforms have given the Fed much more authority to watch over and investigate financial firms considered so large that they could disrupt the whole financial system.

IMPATIENCE

U.S. impatience over Europe's inability to quash the spreading risk is palpable. Treasury Secretary Timothy Geithner tried again on Thursday to press for more decisive action.

"It is crucial that Europe move quickly to put in place a strong plan to restore financial stability," Geithner said in Hawaii, echoing the views of other finance ministers attending the Asia Pacific Economic Cooperation summit...

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Goldman Releases Q&A On Nominal GDP Targetting, Says It Is Not Coming For A Long Time

www.zerohedge.com/news/goldman-releases-qa-nominal-gdp-targetting-says-it-not-coming-long-time

Targeting nominal gDp is a policy for stable growth in the economy. Real-gdp, employment gaps, inflationary targets, real incomes, will all fluctuate within the path of nominal gDp. It is the easiest to hit & the least disruptive as a mandate.

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The market for U.S. Treasury bills is poised to shrink the most since early 2010, creating a shortage in the debt and helping keep government borrowing costs near record lows.

The Treasury Department will issue about $72 billion less debt due within 12 months than it retires in December and January, bond strategists at New York-based JPMorgan Chase & Co. estimate. The contraction partly reflects a surge in corporate tax receipts that the Treasury receives this time of year, lessening its need to borrow.

The shrinkage underscores a shift in the financing strategy of the government, which boosted bills outstanding to a record $2.07 trillion in August 2009 as it raised cash to bail out the nation’s banks amid the worst financial crisis since the Great Depression. As those stresses abated, the amount has dropped to $1.48 trillion, or about 15 percent of all Treasuries, the smallest percentage in almost half a century, driving investors to securities maturing in more than a year.

“People have no choice,” said Eric Pellicciaro, the head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets. Demand for short-term notes “is expected to remain extremely strong mostly as alternatives to place cash have diminished,” he said in a telephone interview on Nov. 10.

Record Bids
Last week’s auction of $32 billion in three-year Treasuries by the government received bids for 3.41 times the amount offered, the highest so-called bid-to-cover ratio since at least 1993, according to data compiled by Bloomberg. The notes yielded 0.379 percent, below the 0.393 percent average forecast in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers.

Two-year note yields were 0.23 percent at 1:17 p.m. London time, based on Bloomberg Bond Trader prices. The price of the benchmark 0.25 percent security due October 2013 was little changed at 100.01.

Rates on three-month bills ended last week at 0 percent, and were little changed today, down from the this year’s high of 0.157 percent in February and 5 percent in mid-2007, just before credit markets froze as losses on subprime mortgages accelerated.

The rate has averaged 0.11 percent since the start of 2009. It fell below zero at times as investors sought the securities at any price while the sovereign debt crisis in Europe worsened, threatening to send the global economy back into recession.

‘Insatiable Desire’
“People are looking for low risk,” said Deborah Cunningham, the chief investment officer for money markets at Pittsburgh-based Federated Investors Inc., which manages $352 billion. “There’s almost an insatiable desire to own” bills, she said in a Nov. 11 telephone interview.

Low borrowing costs are a bonus for the government as lawmakers struggle to reduce a budget deficit that exceeds $1 trillion. Even though the government spent $414 billion in interest expense in fiscal 2010 ended Sept. 30, the amount represented 2.7 percent of gross domestic product, less than the average of 3.9 percent when the U.S. was running surpluses from 1998 through 2001, Bloomberg data show.

“The winner in the short term is the U.S. Treasury and the Fed,” Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $9.5 billion, said in a telephone interview on Nov. 7. “The biggest unintended consequence is that it’s damaging for money market accounts, the cornerstone of our financial system.”

Money Fund Rates
Taxable money-market funds paid an average seven-day compounded yield of 0.02 percent during the week ended Nov. 8, according to IMoneyNet Inc., a research firm based in Westborough, Massachusetts. Investors have put a net $108.9 billion into the funds this year through September, compared with $207.6 billion in the same period of 2010, based on data from the Investment Company Institute in Washington.

Bills peaked at 35 percent of outstanding Treasuries in 2008. The government has cut back on the debt as it sells more- longer-maturity securities to reduce refinancing risk like that facing Greece, Portugal and Ireland. The average maturity of Treasury debt has risen to 62.5 months from 49.4 in March 2009, data compiled by Bloomberg show.

The last time net issuance of bills fell more over the same two-month period was in December 2009 and January 2010, when it shrunk by $161 billion.

‘Well Bid’
This year the drop will start in mid-December and last through January, according to Terry Belton, the global head of fixed-income and foreign-exchange research at JPMorgan. The Treasury last had six consecutive weeks of net negative issuance in the period ended April 24, 2008, totaling $149 billion, Bloomberg data show.

“We expect bills to remain well bid for the foreseeable future,” Joseph Abate, a strategist at Barclays Plc in New York, wrote in a Nov. 11 research report to the London-based bank’s clients.

Net sales of bills have contracted by almost $300 billion this year, according to Abate. He estimates that supply will expand in February and March before shrinking again, especially if the Treasury doesn’t boost the size of its long-term debt sales and the deficit shrinks more than forecast.

Investors shut out of bills may gravitate toward longer- term securities, making it easier for Fed Chairman Ben S. Bernanke to lower borrowing costs for everything from mortgages to car loans to boost the economic recovery.

Fed’s Pledge
“The biggest impact on short-term interest rates is the commitment of the Fed toward the zero interest rate policy, extended till 2013,” Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $85 billion in fixed-income assets, said in a Nov. 8 telephone interview.

The central bank has pledged to keep its target rate for overnight loans between zero and 0.25 percent through mid-2013, and is now selling $400 million of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a policy traders call Operation Twist.

Rather than pushing up short-term borrowing costs, the sales are meeting with rising demand in another sign that the shortage of bills is pushing investors to buy coupon securities.

Traders submitted $757.4 billion in bids for the $55.7 billion of securities due from 2012 to 2014 the Fed sold from its holdings since Sept. 23. The 13.6-to-1 ratio exceeds the average 3-to-1 bid for the $1.85 trillion of new debt Treasury auctioned this year, government data show.

Demand is also coming from banks boosting holdings of the highest-quality assets to meet Basel III regulations set by the Bank for International Settlements in Basel, Switzerland. Bank holdings of Treasuries and government-related debt totaled a record $1.69 trillion at the end of October, up from less than $1.1 trillion in 2008.

“Treasuries are still considered the safe haven,” Brett Rose, an interest-rate strategist in New York at Citigroup Inc., said in an interview. “With the Fed on hold likely through mid-2013, there shouldn’t be a lot of expectations for much yield.”

www.bloomberg.com/news/2011-11-14/shrinking-treasury-bills-means-0-rates-persist-even-with-record-deficits.html

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Last week, I penned an article that discussed the mysterious disappearance of approximately $83.3 billion from the Federal Reserve balance sheet. A week later, most of the money has returned just as mysteriously as it left. Section 8 of the "Consolidated Statement of Condition..." subsection, "Liabilities" indicates that more than $83.3 billion has returned.

Almost $71.9 billion has come back in the form of "Other deposits held by depository institutions". Another $14.8 billion has come back to the "other" category. A Federal Reserve official has disclosed to me that the "Other" category includes "balances of international and multilateral organizations with accounts at FRBNY, such as the International Monetary Fund, United Nations, International Bank for Reconstruction and Development (World Bank); the special checking account of the ESF (where deposits from monetizing SDRs would be placed); and balances of a few U.S. government agencies, such as the Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB)." Finally, the US Treasury withdrew about $39.7 billion from its account.

Summing up the numbers, about $47 billion flowed back into the Federal Reserve since two Wednesdays ago. But the Treasury withdrawal should not really count. Even though that money will flow into the economy through US government program spending, it does not have the immediate effect on stock and commodity prices that other changes in the Federal Reserve balance sheet often have. So, if we negate the Treasury withdrawal, about $86.7 billion flowed back into Fed reserve coffers this week. That is well in excess of the $75 billion or so that flowed out last week.

We do not know the exact dates upon which money is deposited and withdrawn from the Federal Reserve. This creates ambiguity as to the effect the perturbations in its balance sheet have on markets. We do know, however, that to offset the loss of $83.3 billion on November 2nd, the Fed entered into very large reverse repo agreements with someone other than its primary dealers, as noted in the prior article. We don't know who these people were but guessed that they were foreign central banks.

These reverse repo actions are "open market operations", or, in this case, "closed market operations" wherein the central bank borrows cash and gives securities, such as bonds, as collateral to its counterparty. By taking "cash" out of circulation, a reverse repo will usually have the net effect of reducing market liquidity depending on from whom the cash is taken. It is quite interesting that in the first part of last week, stock markets across the world saw deep losses while the dollar soared. Then, in the second part of the week, stock markets sharply rebounded, and the dollar tanked.

These movements were all attributed to the ups and downs of Europe and unsustainable interest rates on debt being faced by Italy, but are also consistent with the perturbations in the Fed balance sheet. It is not entirely clear, but the pundits may have it all wrong. All these earth-shaking movements may have been due simply to changes in liquidity by the Federal Reserve. We have no way of knowing for sure. That is because we don't know the exact date on which cash was withdrawn from Federal Reserve deposits two weeks ago, who withdrew the money, why they needed it or what they did with it.

If someone had used the withdrawn "cash" to buy stocks, it might have sterilized the reverse repo operations, or we would have seen a huge rally. But we didn't see that at the end of the week before last. If, on the other hand, they needed it to prop up their balance sheet, or backstop some non-market oriented bet that looked like it was about to go bad, the Fed's reactive reverse repo action, as a withdrawal of liquidity, would have caused markets to go down. That is what we saw.

Assuming the withdrawn money was not bet on the market, and was simply withdrawn to create some sort of balance sheet veneer, if the reverse repos were unwound toward the end of the day on Wednesday last week, that would have been likely to cause a massive rally starting the next day. That is very close to what happened last week. We saw huge declines early in the week, and a tremendous two day rally at the end of the week. And it was all blamed on Italy.

More complete disclosure by the Federal Reserve as to who, what, when and why would allow for much more accurate predictions on market movement, but it is doubtful that the Fed wants us to be able to do that. One thing is sure. Liquidity, rather than fundamentals, now drives asset markets. Before the Fed became a Politburo-like micro-manager of the economy, it was easier to understand the ebb and flow of liquidity. The biggest money flows were a function of private money coming in and out of the markets. Now, however, the stock, bond and commodity markets ride on a wave of Fed liquidity and are completely dependent upon it. Whether, how and when cash is released or removed determines whether and how far asset prices rise or fall, and the movements of the US dollar.

The Federal Reserve Bank of New York manages these operations. It once issued daily information as to how much and when the open market window was going to be used. That allowed independent traders to get a handle on how much was moving in and out of the Fed. Since open market operations were almost always with primary dealers, you knew that any influx of cash would result automatically in a market pump, whereas big reverse repos would result in the market going down that day. Now, however, with a myriad of other cash windows operating in the shadows, the level of precision in predicting market movements from Fed data has dropped considerably.

Only the tentative buying schedule for treasuries is disclosed on a daily basis. Other cash windows, as well as operations undertaken with non-primary dealer entities, are also profoundly affecting asset prices. Detailed information on these operations are no longer disclosed to independent traders. Only Fed staffers and perhaps some of the firms who have managed to place operatives on the New York Fed Board of Directors have access. And if they are doing that, it is of course, illegal inside information. The bottom line is that while liquidity theory still works, for the independent investor who lacks the detailed knowledge to implement it, these markets have become mine fields of volatility.

seekingalpha.com/article/307637-last-week-s-missing-83-3-billion-returns-to-fed-balance-sheet

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U.S. exports to China account for just under 1% of GDP, and EXPORTS TO THE EUROZONE COUNTRIES ACCOUNT FOR ABOUT 2.4% of GDP. Even if we were to lose all sales to China and the eurozone effective tomorrow—an almost impossible assumption—that would only represent a loss of about 3% of GDP. And if we include the loss of exports to all Pacific Rim and eurozone countries—truly unimaginable and essentially apocalyptic—that would represent a loss of only 5.7% of GDP. In a more realistic worst-case scenario, if eurozone and Pac Rim purchases of U.S. goods and services declined by 20%, this would subtract only 1.1% from U.S. GDP. In short, the U.S. economy is not very vulnerable to foreign disturbances.

seekingalpha.com/article/307859-trade-data-shows-contagion-risk-is-small-for-u-s

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1. Measured by real output (GDP), the U.S. economy has made a complete recovery from the 2007-2009 recession now that real output in Q3 was higher than the 2007 Q4 level when the recession started.

2. While real output has completely recovered to above pre-recession levels, U.S. employment at 139.6 million is still 6.6 million jobs (and 4.5%) below the 2007 peak of 146.2 million, and that translates into the ongoing "jobless recovery."

3. The recovery of real output to historical highs with 4.5% fewer employees has also translated into record-level corporate profits, which are now almost 40% above pre-recession levels.

4. The recovery of both output and profits to above 2007 levels with 6.6 million fewer workers could explain the sluggish job growth that will probably continue for several more years. If companies can produce more output now than in 2007 with fewer workers and record profits, where's the incentive to hire more workers?

The Great Recession stimulated huge productivity and efficiency gains as companies shed marginal workers and learned how to do "more with less (fewer workers)." The surge in productivity over the last few years may be unprecedented in recent history and may be responsible for a "structural shift" in the U.S. economy that will have long-lasting effects, e.g. an extended period of time with a jobless rate above 7%

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

The rich get richer.

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Speaking to soldiers in Ft. Bliss, Texas last week, Fed Chairman Ben Bernanke said the Fed is "certainly falling short" of its goal of maximum employment....

At 9%, the unemployment rate is well above what anyone would call "full employment". On its other mandate, price stability, the Fed is missing on the low end: it's preferred inflation rate, core PCE, is up just 1.6% on a year-over-year basis vs. the Fed's target of 2%.

Based on those metrics, Romer says the Fed's current policies aren't working and believes "it's worth a try to do something bolder and more dramatic."

Specifically, she is an advocate of the Fed targeting nominal GDP, which is the inflation rate plus real (inflation-adjusted) GDP. Nominal GDP is a technical term for the dollar value of everything produced in the economy and a proxy for our collective ability to service our debt.

"Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path," Romer writes in a recent NY Times op-ed. "It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap."

In layman's terms, adopting a nominal GDP target would commit the Fed to "taking very aggressive actions" to reignite growth and get America's economy back to pre-crisis levels, Romer tells Henry and me in the accompanying video.

Clearly, there are many observers who believe the Fed has already done way too much, including all the leading GOP Presidential candidates. The idea of the Fed doing more and overtly trying to weaken the dollar is heresy to anyone worried about inflation. (See: To Hell With What the Fed Says, "Inflation Is Already Here": Mike Pento)...

But Romer wholeheartedly disagrees with the hawks. "To my mind the real risk is the Fed doing too little," she says. "I think they're currently doing too little and worry they will continue doing too little."



Read more: finance.yahoo.com/blogs/daily-ticker/christina-romer-fed-failing-terribly-needs-more-not-

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WASHINGTON, Nov 15 (Reuters) - The U.S. economy showed signs it maintained speed into the fourth quarter as retail sales increased in October and a gauge of manufacturing in New York state rose this month for the first time since May.

www.reuters.com/article/2011/11/15/usa-economy-idUSN1E7AE0A020111115

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

MVt headed up. It mirrors the bottom in crude oil in Oct.

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Wednesday, November 16th, 2011, 1:53 pm
www.housingwire.com/2011/11/16/occ-basel-capital-requirements-top-priority-dodd-frank-complicates

John Walsh, acting chief executive of the Office of the Comptroller of the Currency, said updating and implementing Basel Committee on Banking Supervision capital requirements for banks are a top concern, but that Dodd-Frank regulations convolute matters.

He spoke before the Special Seminar on International Finance Wednesday in Tokyo and addressed changes proposed for the global financial system in the wake of the financial crisis.

Walsh also mentioned the Basel committee's development of a suitable liquidity framework to help maintain short-term and long-term bank stability. This will focus on two aspects: Liquidity Coverage Ratio reflecting shorter-term aspects of liquidity and net stable funding ratio reflecting longer-term aspects.

The LCR requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days. The NSFR requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.

"The draft framework has been found wanting, and efforts to refine it are continuing," Walsh said. "But its importance is beyond question, and the committee’s liquidity initiatives reflect broad agreement that liquidity is a first-order concern for financial firms."

However, in June, JPMorgan Chase (JPM: 31.47 -3.76%) Chief Risk Officer Barry Zubrow testified before Congress detailing the excessive amounts of cash upcoming Basel III requirements will keep in the vaults of major banks.

The U.S. is making little progress with Basel III phase-in, due to begin Jan. 1, 2013, in that draft regulations are not even available. Large financial institutions were scheduled to start the process in 2011.

In a race to adopt financial reform under the Dodd-Frank Act, big banks have placed Basel III implementation on the sidelines, it appears. The EU, on the other hand, published draft regulation as planned on July 20, 2011.

Walsh noted that the U.S. faces the Dodd-Frank Act as an additional complication to adopting Basel rules.

"Dodd-Frank added additional capital and liquidity requirements that align reasonably, but not precisely, with the various Basel agreements," he said.

The requirements include heightened standards for all banks with more than $50 billion in assets, floors under risk-based capital requirements and elimination of the use of external credit ratings from financial regulations.

The OCC is one of the three federal banking regulators in the U.S., along with the Federal Reserve and Federal Deposit Insurance Corporation. It regulates about 2,000 banks and thrifts institutions at the federal level, accounting for 70% of the $13.6 trillion in total banking and thrift assets in the country.

The Basel Committee put forward a variety of proposed enhancements for the capital treatment of risks that were prominent during the financial crisis. Most recently, it's been establishing methods to assess the systemic importance of banks, together with a system of capital requirements that would lead the most systemically important banks – the globally systemically important banks, or G-SIBs – to hold significantly more capital than other banks.

Prior to the financial crisis, the Basel Committee developed the framework for capital adequacy requirements known as Basel II. While many countries were in the process of implementing Basel II, but it had not yet taken effect in the United States. regulators and the industry were not doing enough to ensure adequate liquidity under conditions of stress at the time, Walsh said.

Problems at a number of major financial institutions in the depths of the crisis revealed significant deficiencies of bank capital and liquidity.

"It is hard to argue (Basel) was the source of these problems, but given the depth of those problems, it was essential for the Basel committee to undertake a fairly broad reconsideration of the capital framework, and to try to identify aspects that might warrant improvement in view of the lessons learned during the financial crisis," Walsh said.

The U.S. is continuing to implement Basel II in its largest banks, and is working on rules to address Basel III, as well as some of the earlier enhancements known as Basel 2.5 dealing with trading activities and securitization.

"Interweaving all these national and international requirements, and meeting our statutory mandates and our commitments in Basel, will be the challenge of the next six to 12 months," Walsh said.

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Houston: We Have A Funding Crisis (And A Broken Libor Primer)



As the ECB remains the liquidity provider of last and only resort, we suspect the oh-so-transparent central bank is causing some banks to avoid it and look to the cross-currency basis swap market to fund themselves in USD as the 3 month EUR-USD swap reaches 126bps (-6bps more today). These levels are the lowest (widest and most USD desperate) since December 2008 and perhaps, away from the SMP-driven sovereign spread markets, are the cleanest and least interfered with market view of the extraordinary USD funding crisis that is occurring. These stresses are just as evident in the GC repo markets and Goldman agrees with us that this crisis is escalating and offers a primer on why the GC repo / Libor markets are dysfunctional currently.....

www.zerohedge.com/?page=1

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NEW YORK (AP) -- A warning from Fitch Ratings that large U.S. banks could be hit hard if Europe's debt crisis spreads sent stocks falling late Wednesday.

finance.yahoo.com/news/stocks-sink-fitch-warns-us-210619571.html

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finance.yahoo.com/blogs/daily-ticker/outrage-day-insider-trading-congress-170308910.html

You cannot read the description of the personal stock trading allegedly conducted by Rep. Spencer Bachus and other members of Congress during the financial crisis and conclude anything other than that our government is corrupt.

Yes, this behavior may be technically legal, because of an absurd loophole that some argue makes insider-trading rules not apply to Congress.....

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NEW YORK, Nov 16 (Reuters) - Traders are looking at the Federal Reserve Bank of New York's new margin requirements for mortgage-backed securities trades as one method of protection against events similar to MF Global's failure two weeks ago.

The step could be a move by the New York Fed to shed some vulnerability in the wake of MF Global's demise, since the broker-dealer had primary dealer status and was engaged in trades with the New York Fed when it declared bankruptcy.

"I think the reason that the Fed did this was likely because of the situation with MF Global," said one source at a primary dealer.

"The Fed had $1 billion of unsettled trades with MF Global that it had to cancel and replace with trades with other dealers. In mid-November to mid-December they're doing $28 billion in MBS purchases, and it's important that they are protected."

The New York Fed told mortgage-backed securities desks at primary dealers in a conference call on Tuesday that it would initiate a margin requirement for dealers selling MBS to the Fed. The tentative requirement will be 2.5 percent, sources familiar with the call said, but the number could change.

The requirement will impel primary dealers making agreements to sell MBS to the Fed to post money up front in cases where the settlement date of the deal is far enough into the future. That way, if the deal collapses or its value changes in the interim, the Fed doesn't lose money.

"The Federal Reserve Bank of New York informed its primary dealers today that it will require dealers to margin against their outstanding agency MBS forward transactions with the NY Fed," a spokesman for the New York Fed told Reuters late on Tuesday.

"Dealers are required to post collateral in a number of other types of operations with the NY Fed," he added.

The New York Fed requires margins for securities lending operations -- in which it makes the securities on its balance sheet available for market participants to borrow and use as collateral in the repo market -- as well as for repo trades and discount window loans.

Mahesh Swaminathan, head of RMBS credit strategy at Credit Suisse in New York, said the MBS margin requirements were not likely to have a large impact on trading in the market.

"It's an incremental cost to the dealers but it's not extraordinary in the grand scheme of things," he said.

"I think if volume of trading with the Fed gets very large, especially in a QE3 context, it could be an issue for smaller dealers to the extent that they have liquidity challenges -- if there's some scarcity there that's a potential problem for smaller institutions."

The New York Fed is currently carrying out the Fed's pledge to reinvest maturing MBS securities into the MBS market, a part of the Fed's "Operation Twist" plan to stimulate the economy, which also includes a $400 billion program to lengthen the average maturity of its Treasuries portfolio.

The last time the Fed bought MBS was during its first round of quantitative easing; that program ended in March 2010.

MF Global was one of the 22 banks and securities firms authorized to deal directly with the Federal Reserve and the Treasury Department to help carry out monetary policy and distribute debt. When it failed, market participants began to question why the New York Fed had allowed it to make the primary dealer list in the first place.

The New York Fed grants dealers primary dealer status after an extensive vetting process that can last for years. The perceived rigor of the application process has led market participants to view primary dealer status as a stamp of approval from the New York Fed, despite a statement to the contrary on the New York Fed's website.

MF Global's failure was the first by a primary dealer since Lehman Brothers collapsed in 2008

notmsnmoney.proboards.com/index.cgi?board=moneytalk&action=post&thread=9118&page=19

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The S&P 500 has formed a “triangle” pattern, a sign to analysts who study charts that the rally is about to resume after the benchmark gauge for U.S. stocks rose as much as 20 percent last month. The index’s trading range has narrowed since October, as the index stalled after rising to its average level over the past 200 days. Based on the size of this triangle pattern, the index may climb as high as 1,430, said Craig W. Johnson, a technical market strategist with Piper Jaffray Cos.

“A triangle or a pennant formation forms during the middle part of a move, and typically these patterns resolve themselves in the direction of the preceding trend,” Johnson, based in Minneapolis, said in a telephone interview yesterday. “That would suggest that this is ‘the pause that refreshes’ before we get the next leg up.”

www.bloomberg.com/news/2011-11-17/u-s-stock-index-futures-are-little-changed-applied-materials-j-j-drop.html

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IOR caps: a new instrument of monetary policy?


As the MMT-ers emphasize, in aggregate bank lending is almost never reserve-constrained. Unless a central bank is willing to tolerate arbitrarily high interest rates, it must be willing supply reserves in response to increasing demand.

www.interfluidity.com/v2/2333.html

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

This is of course economic nonsense. William McChesney Martin used free reserves as an operating guide to monetary policy & the "trading desk" never experienced unusal volitility in the inter-bank lending market (interest rates). This is a widespread mis-conception and one that lead the FED to using Keynesian interest rate targeting for its monetary transmission mechanism (as opposed to legal reserve management).

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Money supply at annual rates of change

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

3 Months from July 2011 TO Oct. 2011.............29.2..........13.3
6 Months from Apr. 2011 TO Oct. 2011.............26.6..........14.5
12 Months from Oct. 2010 TO Oct. 2011...........20.8............9.9

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US Dollar = 78.286

Gold = 1722

Dollar climbed forcing gold & crude down.

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Reuters) - St. Louis Federal Reserve Bank President James Bullard said on Thursday the debt crisis in Europe probably will not hit the U.S. economy hard, although it poses a risk.

"If it blows up in a big disorderly way, which is what everyone is worried about, than that could come back to haunt the U.S.," Bullard told CNBC. "If it just tumbles along for a long period of time, which is the most likely outcome, then I'm not sure that you get much feedback to U.S."

"Europe does not have to morph into a global macroeconomic shock. I think it could just be a rocky road for the Europeans without coming back to bite the U.S.," he said.

Bullard said U.S. regulators and banks were much better positioned than they were in 2008 when the bankruptcy of Lehman Brothers sparked a virulent crisis.

"It's once bitten, twice shy," he said. "I think the firms themselves are much more careful about where exactly is our exposure and who exactly are the ultimate counterparties."

However, he cautioned that the markets for credit default swaps lacked transparency and presented an "unknown," and he called a warning from the rating agency Fitch on the potential impact of the euro zone crisis on U.S. banks a "a prudent statement of the situation."

"The CDS markets are hard to trace; it's hard to figure out who is really holding the bag at the end of the day," Bullard said.

MESSAGE FOR WASHINGTON

The St. Louis Fed chief said Europe's crisis offered a blunt warning that politicians in Washington were not yet heeding, saying he expected a special congressional committee charged with finding at least $1.2 trillion in budget savings to either deadlock or reach only a small agreement.

"Washington got the wrong message from the debt ceiling debate," he said of a summer battle in Washington over raising a statutory cap on the nation's debt. "They got the message that the (U.S. ratings) downgrade didn't matter very much for the ability of the U.S. Treasury to float debt. That's the wrong message," he said.

"You should be watching Europe. ... One day it will come to the U.S. and we have got to be ready for it and our politicians on both sides of the aisle are not ready for it," Bullard warned. "They do not think that they will ever have trouble borrowing on international capital markets but they will.".....

www.reuters.com/article/2011/11/17/us-usa-fed-bullard-idUSTRE7AG19I20111117

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Central bank liquidity swaps (12) 2,349 + 404 + 2,285 2,349
Other Federal Reserve assets (13) 143,781 + 1,095 + 43,860 138,731

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DUDLEY : ABILITY TO PAY INTEREST ON RESERVES CRITICAL TO KEEPING ECONOMY FROM OVERHEATING

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Why Hasn’t the Fed Lowered the Rate It Pays on Reserves?
By Mark Thoma Nov 17, 2011

I’ve been wondering why the Fed hasn’t lowered the interest it pays on bank reserves from its current value of .25 percent to zero. It probably wouldn’t do much, but it would slightly lower the incentive for banks to hold cash rather than loaning it out, and more loans would help to spur the economy, so why not give it a try? In addition, unlike some other policies the Fed might pursue, this would be easily reversible, and it would help to convince critics that the Fed is trying everything it can think of.

Though it’s buried deep within the post, the NY Fed explains the FOMC’s reluctance to pursue this option. The argument is that it’s possible for some interest rates to go slightly negative, and if they do it will cause various problems the Fed would rather avoid (see below). Since banks can borrow from anyone charging less than the rate they earn on reserves and arbitrage the difference away, paying interest on reserves puts a floor on interest rates. Here’s the full argument:

Why Is There a “Zero Lower Bound” on Interest Rates?, by Todd Keister, Liberty Street: Economists often talk about nominal interest rates having a “zero lower bound,” meaning they should not be expected to fall below zero. While there have been episodes—both historical and recent—in which some market interest rates became negative, these episodes have been fairly isolated. In this post, I explain why negative interest rates are possible in principle, but rare in practice. Financial markets are generally designed to operate under positive interest rates, and might experience significant disruptions if rates became negative. To avoid such disruptions, policymakers tend to keep short-term interest rates above zero even when trying to loosen monetary policy in other dimensions. These policy choices are the source of the zero lower bound.

The standard description of the zero lower bound begins with the observation that the nominal interest rate offered by currency is always zero: If I hold on to a dollar bill, I’ll still have one dollar tomorrow, next week, or next year. If I invest money at an interest rate of -2 percent, in contrast, one dollar of saving today would become only ninety-eight cents a year from now. Because everyone has the option to hold currency, the argument goes, no one would be willing to hold some other asset or investment that offers a negative interest rate.

This argument is only part of the story, however. Safeguarding and transacting with large quantities of currency is costly. One only needs to imagine the risk and hassle of making all transactions in cash—paying the rent or mortgage, utility bills, etc.—to appreciate the safety and convenience of a checking account. Many individuals would likely be willing to keep funds in deposit accounts even if these accounts pay a negative interest rate or charge maintenance fees that make their effective interest rate negative.

Large institutional investors are in a similar situation. They use a variety of short-term investments, such as lending funds in the “repo” (repurchase agreement) market and holding short-term Treasury bills, in much the same way individuals use checking accounts. These investments will remain attractive to large investors even at negative interest rates because of the security and convenience they offer relative to dealing in currency. Some repo rates did in fact become negative in 2003 (see this New York Fed study) and again more recently (see Bloomberg). Interest rates in the secondary market for Treasury bills have also been slightly negative recently (see Businessweek).

In other words, market interest rates can move somewhat below zero without triggering a massive switch into currency. Nevertheless, central banks typically maintain positive short-term interest rates even while using less conventional tools (such as large-scale asset purchases) to provide additional monetary stimulus.

The Federal Reserve, for example, currently pays an interest rate of 0.25 percent on the reserve balances that banks hold on deposit at the Fed. The ability to earn this interest gives banks an incentive to borrow funds in a range of markets (including the interbank market and the repo market) and thus has the effect of keeping market interest rates positive most of the time. The Federal Open Market Committee (FOMC) discussed the idea of reducing the interest on reserves (IOR) rate at its September meeting, but no action was taken. Reducing this rate would tend to lower short-term market interest rates and might push some rates below zero. The minutes from the meeting report that “many participants voiced concerns that reducing the IOR rate risked costly disruptions to money markets and to the intermediation of credit, and that the magnitude of such effects would be difficult to predict.”

Similarly, the Monetary Policy Committee (MPC) of the Bank of England discussed the possibility of lowering the official Bank Rate below 0.5 percent at its September meeting, but decided against doing so. The MPC had previously expressed concern that “a sustained period of very low interest rates would impair the functioning of money markets.”

Some examples of areas where disruptions could potentially arise in U.S. financial markets are:

•Money market mutual funds: Money market funds operate under rules that make it difficult for them to pay negative interest rates to their investors, either directly or by assessing fees. Many of these funds would likely close down if the interest rates they earn on their assets were to fall to zero or below, possibly disrupting the flow of credit to some borrowers.

•Treasury auctions: The auction process for new U.S. Treasury securities does not currently permit participants to submit bids associated with negative interest rates. If market interest rates become negative, new Treasury securities would be issued with a zero interest rate—effectively a below-market price—and bids would be rationed if demand exceeds supply. Such rationing, which has occurred in recent auctions, would generate an incentive for auction participants to bid for more than their true demand, leading to even more rationing. This situation could generate market volatility, as unexpected changes in the amount of rationing in each auction could leave some investors holding either many more or many fewer securities than they desire.

•Federal funds: A decrease in the IOR rate would also likely affect the federal funds market, where banks and certain other institutions lend funds to each other overnight. A lower IOR rate would give banks less incentive to borrow in this market, which would likely decrease the amount of activity. When less activity takes place, the market interest rate will be influenced more by idiosyncratic factors, making it a less reliable indicator of current conditions. This decoupling of the federal funds rate from financial conditions could complicate communications for the FOMC, which operates monetary policy in part by setting a target for this rate.

These examples demonstrate that many current institutional arrangements were not designed with near-zero or negative interest rates in mind. In principle, these arrangements—such as the rules governing mutual funds and Treasury auctions—could be changed. The implementation of a “fails charge” in 2009 for the settlement of Treasury securities (see this New York Fed study) is one example of an institutional adaptation that allows markets to function better at very low interest rates. (A similar charge is scheduled to take effect in some mortgage-related markets in February 2012.) In practice, however, such changes may take significant time to implement and could simply move disruptions to other markets.

Given the markets’ limited experience with very low interest rates, it is difficult to predict with any degree of certainty how they will react to them. If the types of disruptions described above turn out to be significant, taking steps to lower short-term interest rates could actually make financial conditions tighter rather than looser and thus hinder the economic recovery. To avoid this outcome, policymakers tend to choose policies that keep market interest rates positive. In other words, the potential for negative interest rates to disrupt financial markets limits the extent to which policymakers can stimulate economic activity by lowering interest rates. This limit is known as the zero lower bound.

wallstreetpit.com/86117-why-hasnt-the-fed-lowered-the-rate-it-pays-on-reserves

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Fed's Dudley: Fed Done Lot Of Easing,Will Evaluate More Steps
By Steven K. Beckner

(MNI) - New York Federal Reserve Bank President William Dudley said Thursday night that the Fed has already "done a lot" to stimulate the economy, but he reiterated that Fed officials will "evaluate" whether more monetary easing is needed.

Dudley, the vice chairman of the Fed's policymaking Federal Open Market Committee, said the FOMC could do more to boost the economy either through clearer communication of how long it will keep the federal funds rate near zero and/or through further balance sheet expansion.

If the FOMC decides on a third round of large-scale asset purchases or quantitative easing, it should look at buying more mortgage-backed securities, he said in a televised interview on PBS's "Nightly Business Report."

Dudley expressed concern about the European debt crisis and said a worsening of the situation could impede credit flows and damage the U.S. economy, even though U.S. banks' direct exposure to European sovereign debt is "quite modest."

In a vote of confidence on the survival of the European single currency, he asserted, "Oh, I absolutely think the Euro survives."

Dudley seemed at least as concerned about the United States' own fiscal problems and urged that the Congressional Super Committee reach an agreement that avoids a sequestration of spending and an "abrupt shift" to "restrictive" fiscal policy next year.

Dudley's comments on monetary policy resembled those he gave earlier Thursday in a speech at West Point.

"Well, we've done a lot," he said when asked what more the Fed could do, but said it "could" do more.

"I think that on the communications side ... we could probably make more further progress in terms of explaining exactly what it would take for us to actually start to want to raise short term interest rates. You know, what level of unemployment, what level of inflation might be thresholds where until we reach those thresholds we'd be pretty comfortable keeping short term rates where they are."

"The second thing we could is we could obviously do more on the balance sheet side," he said. "And I think that if we were to go down that path, one obvious area to consider would be to do more in terms of purchasing mortgage backed securities because to the extent that we expand our balance sheet on that dimension, we directly help the housing sector."

Dudley said the FOMC "need to think about the cost and benefits" and then "we have to decide, given that state of the economy, given the outlook, do the benefits of further action outweigh the costs, or not."

Later in the program, Dudley said, "we're going to continue to evaluate whether there are other steps we can take."

He said a changed communication strategy and further balance sheet expansion are "two things that (are) ... very much on the table."

First, "can we continue to refine our communication strategy to be clearer to people in terms of how we are going to react to incoming information," he said, "and by providing greater clarity there, give people more confidence."

"And the second thing, of course, is that we will continue to evaluate whether further expansion of our balance sheet would be helpful in supporting economic conditions."

Dudley contended that past quantitative easing has worked by "helping support the stock market and housing values, and yes, the economy." While the Fed "wish(es) the economy were stronger than it's been," he said "But we're pretty convinced that the economy would have been significantly worse if we hadn't engaged in these programs."

Unlike Chicago Fed President Charles Evans, who has proposed holding the funds rate near zero until unemployment falls below 7% and/or inflation rises above 3%, Dudley declined to give specific numerical triggers.

But he said "the general framework I think is something that we definitely want to explore."

Dudley conceded it won't be easy to reach agreement on the FOMC. "Of course the devil is in the details to get all the members of the committee to agree on what those right numbers are: what's the right unemployment rate, what's the right inflation rate."

"This is something that I definitely want to continue to work on and see if we can bring the Committee to a consensus," he said later. "The problem here, of course, is it's very hard to specify with just a couple numbers, you know, what the conditions are for when you'd actually think is the appropriate time to raise short term interest rates."

At the Aug. 9 meeting the FOMC stopped saying it expected to keep the funds rate "exceptionally low ... for an extended period" and instead declared that it "currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

Dudley indicated he is not happy with that formulation.

"Right now we have this mid-2013 date," he said. "That's what we've said. But you know, what's that date based on? And so I think it'd be helpful if we could provide little bit more detail about, well, what was the underlying thinking that caused us to arrive at that particular date.

Dudley said the FOMC adopted the mid-2013 language because it realized that the "extended period" phraseology was "a little bit empty because...the market perceived it as only lasting ... as short as several months, to as long as whatever."

"And we thought that it would be better to make it clear to market participants that extended period actually lasted quite a long time," he continued. "So when we did that it was in the middle of this year. So we're saying extended period is two years or more. And we thought that would be helpful and provide greater clarity to the market."

The FOMC arrived at mid-2013 "because I think it was the sense of the committee that we were unlikely to reach an unemployment rate and inflation rate that would cause us to want to exit sooner than that," he explained. "So implicit behind the number was some notion that the economy was unlikely to be strong enough to generate an unemployment rate low enough or inflation rate high enough that would cause us to want to leave sooner."

Dudley suggested that forward guidance language that was based on economic conditions rather than a calendar date would be a great improvement.

"I think the important thing it allows people, investors to have more certainty about how the Federal Reserve is going actually behave in the future, is likely to behave in the future," he said. "And if people have more confidence in how the Fed is likely to react to future incoming economic information, that reduces the riskiness of them going out and buying financial assets."

"So it reduces risk premiums which supports the economy," he added

mninews.deutsche-boerse.com/index.php/feds-dudley-fed-done-lot-easingwill-evaluate-more-steps?q=content/feds-dudley-fed-done-lot-easingwill-evaluate-more-steps

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www.newyorkfed.org/newsevents/speeches/2011/dud111117.html

Dudley "Securing the Recovery"

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.....U.S. Economy Growing at Fastest Pace of the Year

By Rich Miller | Bloomberg – 7 hours ago

The U.S. economy may end 2011 growing at its fastest clip in 18 months as analysts increase their forecasts for the fourth quarter just a few months after a slowdown raised concern among investors.

Economists at JPMorgan Chase & Co. in New York now see gross domestic product rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. Macroeconomic Advisers in St. Louis increased its forecast to 3.2 percent from 2.9 percent at the start of November, while New York-based Morgan Stanley & Co. boosted its outlook to 3.5 percent from 3 percent.

“The incoming data on consumption, business spending and residential investment all point to GDP growth in the fourth quarter tracking 3.3 percent,” said John Herrmann, senior fixed-income strategist at State Street Global Markets in Boston.

Herrmann, who is the second most-accurate forecaster of GDP based on Bloomberg data, had been looking for fourth quarter growth of 2.4 percent at the start of this month. The economy expanded at an annualized pace of 2.5 percent in the third quarter.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, said he wouldn’t be surprised to see fourth-quarter growth of 4 percent, though for now he is sticking with his forecast of 3 percent.....

finance.yahoo.com/news/u-economy-growing-fastest-pace-131205567.html

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www.businessweek.com/news/2011-11-18/dudley-says-fed-doing-everything-in-its-power-for-growth.html

Dudley said there “should be no anxiety” about whether the Fed’s enlarged balance sheet will cause the economy to overheat. The ability to pay interest on excess reserves “basically allows us to keep credit expansion under control,” he said. Market participants “accept this view,” as long-term inflation expectations are “very well-behaved,” he said.

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Keynes's disciples will have their way (the Keynesian macro-economic persuastion that maintains a commercial bank is a financial intermediary).

IOeRs will reduce economic growth rates.

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From the ABA (American Bankers Association):

The past two decades have seen major changes in the financial services industry, with many new competitors vying for the consumer's dollar. Growth in mutual funds, money market funds, equity markets and the like HAVE LURED CORE DEPOSITS OUT OF THE BANKS. This shift in consumer funds has coincided with exceptionally strong loan demand over the past decade, causing loan-to-deposit ratios among banks to reach historic highs.

Impossible. Money flowing to the intermediaries never leaves the CB system as anyone who has applied double entry bookkeeping on a national scale should know.

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CHICAGO (Dow Jones)--Traders of U.S. interest-rate futures were not quite as traumatized Friday by the prospect that liquidity will dry up in Europe's debt-strapped financial system, a scenario that would likely result in a sharp increase in a key interbank lending rate.

Friday, short-dated Eurodollar futures contracts reflected the view that the three-month London Interbank Offered Rate will continue to rise in the coming months, but at a slower pace.

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johnbtaylorsblog.blogspot.com/2011/11/more-on-nominal-gdp-targeting.html

What Would Nominal GNP Targeting Do to the Business Cycle?” Carnegie-Rochester Series on Public Policy, 1985. Although much has changed in the past quarter century I find many of the same problems with the recent proposals.

One change is that, in comparison with earlier proposals, the recent proposals tend to focus more on the level of NGDP rather than its growth rate. This removes some of the instability of NGDP growth rate targeting caused by the fact that NGDP growth should be higher than its long run target during the catch up period following a recession. But it introduces another problem: if an inflation shock takes the price level and thus NGDP above the target NGDP path, then the Fed will have to take sharp tightening action which would cause real GDP to fall much more than with inflation targetting and most likely result in abandoning the NGDP target.

A more fundamental problem is that, as I said in 1985, “The actual instrument adjustments necessary to make a nominal GNP rule operational are not usually specified in the various proposals for nominal GNP targeting. This lack of specification makes the policies difficult to evaluate because the instrument adjustments affect the dynamics and thereby the influence of a nominal GNP rule on business-cycle fluctuations.”

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www.pyramis.com

U.S. dollar funding from money market funds contributes to less than 3% of European banks’ total liabilities, which indicates that eurozone banks are not reliant on U.S. money market funds.