flow5
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Post by flow5 on Jun 28, 2011 11:36:16 GMT -5
JIM JUBAK - must read
Why the Treasury Won’t Crash
Basel III does promise to “solve” central banks' big balance sheet problems—for a few years anyway.
Basel III, the aptly named successor to Basel II, is an attempt to make the global banking system less susceptible to a replay of the global financial crisis that took Lehman Brothers and Bear Stearns into bankruptcy, threatened to take down American International Group (AIG), (C), and a Citigroup handful of European banks, and almost led to the collapse of the world’s financial system.
As part of that solution, banks will be required to show a higher Tier 1 capital, or core capital ratio, than before the crisis. The theory is that banks with more capital will have BIGGER CUSHIONS to fall back on in the event of a future crisis.
The core capital ratio under Basel II was set at 4%. Under Basel III, the base core capital ratio WILL CLIMB TO 7%.
The rules also set up capital surcharges for the 30 banks in the world that regulators have deemed "systemically important" to the global system as a whole. These banks have been divided into categories, with surcharges beginning at 1 percentage point and climbing to 2.5 percentage points. There’s even an empty category with a 3-percentage-point surcharge for banks that in the future exceed today’s top-tier banks.
How do regulators decide which banks go in which categories? A combination of factors includes regulators’ judgments on how important the bank is to other banks, the degree of a bank’s CROSS-BORDER BUSINESS, its own SOURCES OF CAPITAL, and the RISK of the bank’s portfolio of assets.
In fact, all of the Basel III core capital ratios—even the starting 7%—are ADJUSTED FOR THE DEGREE OF RISK in a bank’s portfolio of assets.
And this is where Basel III turns into a rescue plan for central bank balance sheets.
The riskier a bank’s portfolio is, the more capital it will have to raise. Capital isn’t cheap for banks right now, because the financial markets don’t much like the effect of changes in bank regulation on future profits.
The more capital a bank has to raise, the lower its return on capital is likely to be. And the less investors will pay for its stock.
But as we all should remember from the global financial crisis—when AAA-rated mortgage-backed securities suddenly turned out to be extremely risky—judging the risk of a portfolio asset isn’t totally objective. And in their regulations on risk, Basel III regulators have decided—so far at least—that GOVERNMENT DEBT securities will remain, as traditionally, risk-free.
Yep, despite:
•the fact that debt-rating companies have warned that they’ve got an eye out for a possible downgrade on US and UK debt;•and recent, even stronger warnings on Italy and Spain;•and multiple downgrades for Greece, Ireland, and Portugal...Despite all this, under Basel III, a bank that holds sovereign debt won’t be required to adjust its core capital ratio higher to make up for any extra risk.
Let’s say a bank wants to lower the amount of core capital it has to raise to meet Basel III rules, instead of paying the price to raise more capital or taking the hit that more capital would bring to the bank’s return on capital.
It could, of course, shrink its balance sheet by selling off assets. There’s probably not exactly a rip-roaring market for the kind of assets it would most like to sell—those with high risk, according to regulators. Selling would trigger a write-down in many cases, because banks haven’t marked down the price of many riskier assets to market values.
Or the bank can lower the risk on its balance sheet by buying and holding assets judged risk-free by Basel III regulators. There is plenty of SOVEREIGN DEBT to go around these days, so it’s not hard to buy as much as you want.
And while the less risky of this sovereign debt doesn’t yield much, it’s not like these banks are turning away more lucrative commercial loans. Deposits at US banks exceeded loans by a record $1.45 trillion in May, according to the Federal Reserve. (In the ten years before the financial crisis in 2008, loans exceeded deposits by an average of $100 billion.)
As long as the lending market remains in its current near-comatose state, buying sovereign debt seems like a no-brainer.
How big could the bank appetite for Treasuries be? It’s already quite healthy. Banks have increased their holdings of Treasuries and other government-related debt to $1.68 trillion in May, from $1.08 trillion in early 2008, according to Bloomberg.
Barclays Capital estimates that Basel III calculations of risk could reduce core capital ratios for the median US bank by 3 percentage points. If banks were to make up that core-capital-ratio shortfall strictly by raising capital, they’d have to raise about $250 billion in new capital, Barclays calculates. Adding Treasuries to a portfolio would reduce the need for new capital.
I’d say that the appetite for Treasuries from US banks would be enough to pick up a great deal of slack from the end of QE2.
But remember, we’re not talking about a problem for just US banks. Basel III is a set of global rules, and banks everywhere face the same challenge of higher core capital ratios. So you’ll see banks in the Eurozone, Japan, and the United Kingdom buying Treasuries right alongside their US counterparts.
And they’ll be buying the sovereign debt of Japan, the United Kingdom, France, Italy, and Spain, too, as long as the final Basel III rules and regulations give a thumbs-up to the concept of risk-free sovereign debt. This is a huge boon to the central banks of the United Kingdom and Japan—which have both expanded their balance sheets in the fight to stabilize their own banking systems and economies.
At one further remove, it will be a boon to the European Central Bank, which will be able to garner more support for its own expanded balance sheet from Eurozone central banks. The ECB relies on contributions from Eurozone member states for its funding.
So far, the Eurozone doesn’t issue its own common debt, but I think the Greek crisis and Basel III are likely to push the monetary union toward some kind of euro bond.
The dangers in this “solution” should be clear to anyone who has been following the Greek debt crisis:
First, it’s not really a solution. It merely kicks the problem down the road (as the proposed Greek “solution” would do), with a hope that better economic conditions in the future will provide an actual solution.
Second, it involves exactly the same kind of debt-rating deception that was at the heart of the US mortgage-backed securities collapse, and that contributed to the Greek debt crisis. Calling sovereign debt risk-free, and incentivizing banks to buy this debt, exposes them to potentially crippling losses if the debt turns out not to be risk-free.
I think it’s naive to assume that banks will resist such incentives. They certainly didn’t resist the incentives of higher yields and AAA ratings in the run-up to the mortgage-backed securities collapse.
Third, this “solution” comes with a built-in time limit. Banks will find the minimal yields of US Treasuries attractive ONLY AS LONG AS THE LOAN MARKET REMAINS IN THE TANK.
When loan demand picks up, the Treasury market is likely to see increased selling by banks eager to get back into the banking business. That could accelerate the pace at which Treasury prices fall and yields climb in any US economic recovery.
In short, Basel III may rescue the Treasury market in the short term, but it’s also another reason to worry...if not about 2011, then about 2013.
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flow5
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Post by flow5 on Jun 29, 2011 13:56:30 GMT -5
www.ritholtz.com/blog/2011/06/leen%E2%80%99s-lodge-fdic-the-fed/"The distribution of bank reserves has attracted a great deal of attention recently. Most analysts focus on the level of cash assets held by the largest domestic institutions compared with the US branches of foreign organizations. The cash assets of the non-US banks currently exceed $1trn compared with roughly half that amount at the 25 largest domestic banks. Moreover, these cash balances started rising sharply once QE began last November. Accordingly, there has been some speculation that the Fed’s liquidity expansion has mainly ended up on the balance sheets of the largest non-US institutions.” Source: Barclays Capital Weekly Federal Reserve Balance Sheet Update (24 June 2011)" ..."The banking institutions abroad have double the money on deposit with the Federal Reserve than the largest twenty-five banks in the United States. Why? This occurs because of an action of the Federal Deposit Insurance Company. The FDIC changed the formulation of its assessments to expand to assets, not just deposits. The assets that are assessed include those that are excess reserve deposits of American banks placed at the Federal Reserve. Those deposits earn twenty-five basis points. AMERICAN SUBSIDIARIES OF FOREIGN INSTITUTIONS ARE NOT SUBJECT TO THAT ASSESSMENT of foreign institutions are not subject to that assessment. That is the outcome since the FDIC introduced this fee assessment mechanism on April 1st" ==== This is explains the anomaly. ==== Zerohedge says no, assessment initiated 3 months ago, IORs started piling up "as soon as QE2 was launched".
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flow5
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Post by flow5 on Jun 29, 2011 22:01:14 GMT -5
www.bloomberg.com/news/2011-06-29/institutions-pull-out-of-prime-money-funds.htmlInstitutions pulled out of U.S. prime money-market funds at the fastest pace in 15 months, shifting to funds that INVEST ONLY IN U.S. GOVERNMENT-BACKED SECURITIES out of concern the European debt crisis would worsen. Institutional funds eligible to buy corporate debt lost $39 billion to NET WITHDRAWALS in the week ended June 28 and $75 billion in the past two weeks, falling to $1.04 trillion, according to data from research firm iMoneyNet in Westborough, Massachusetts. Institutional money funds that buy only U.S. government-backed securities gathered $27 billion in net deposits, rising to $599 billion. A GREEK DEFAULT could pose a potential threat to money funds because they have lent to European banks that, in turn, have lent to Greece and other heavily indebted European countries. Prime U.S. money funds had about $800 billion, or HALF THEIR ASSETS as of May 31, IN SECURITIES ISSUED BY EUROPEAN BANKS, Fitch Ratings estimated. The $39 billion withdrawal was the MOST PULLED from prime institutional funds in one week SINCE investors took $42 billion out in the week ended March 16, 2010. Retail prime funds lost $4.77 billion, falling to $531 billion. Total money-market fund assets decreased $18 billion to $2.66 trillion.
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flow5
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Post by flow5 on Jun 30, 2011 16:50:35 GMT -5
RON PAUL: Before the U.S House of Representatives, Committee on Financial Services, Subcommittee on Domestic Monetary Policy & Technology Hearing on Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data , June 1, 2011
Today's hearing deals with one of the most pressing issues this subcommittee will face during this Congress, the issue of Federal Reserve transparency. While the Federal Reserve is still far less transparent than it should be, recent disclosures of the Federal Reserve’s lending programs have greatly increased our knowledge of the Fed's monetary policy during the height of the financial crisis.
In December 2010 and March 2011, a remarkable thing happened: the Fed disclosed information on its lending facilities and discount window operations, including who borrowed money, what amounts were loaned, maturity dates, interest rates, and collateral. It took an act of Congress, the Dodd-Frank Act, to bring about the December releases that discovered the details of the emergency lending facilities set up by the Fed during the crisis. The March 2011 disclosures covered discount window lending, the oldest Fed lending tool, whose operations had never before been disclosed. It took a three year legal battle regarding the Freedom of Information Act’s (FOIA) applicability to the Fed in order to gain access to this information. The suits brought by Bloomberg and Fox News resulted in 29,000 pages of unorganized, heavily redacted documents being provided. Combining these two data releases has given us a fuller, if still woefully incomplete, picture of the Fed’s operations during the financial crisis and the nearly $3 trillion balance sheet it has built up.
On November 25, 2008, the Fed created the Term Asset-Backed Securities Loan Facility (TALF) which was intended to "lend up to $200 billion... to holders of certain AAA-rated ABS [asset-backed securities]." When the Fed released TALF data in December of 2010, 18% of TALF loans were backed by subprime credit card and auto loan securities, 17% of TALF loans were backed by "legacy", a.k.a. troubled, commercial real estate securities, and 13% of TALF loans were backed by student loan securities. On March 11, 2008, the Fed created the Term Securities Lending Facility (TSLF) to "lend up to $200 billion...to primary dealers... secured... by... securities, including federal agency debt, federal agency residential mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS." When the Fed released TSLF data in December of 2010, 26% of loans were backed by AAA/Aaa-rated securities, 17% were backed by non-AAA-rated securities, and 57% of loans were backed by collateral whose rating was not published by the Fed.
Recent news reports have brought to light the existence of a previously undisclosed Fed lending program known as "single-tranche open market operations" (ST OMO). This program loaned money at rates as low as 0.01% to major firms such as Goldman Sachs, and was essentially a free loan to these politically well-connected firms. Data about this program was not published, but instead was gleaned through examination of charts published in March as a result of the Fed's Freedom of Information Act (FOIA) disclosure. The charts were found within a 327-page document which had 81% of its content redacted.
Out of the funds loaned through the Fed's credit facilities, NEARLY ONE-THIRD WAS LOANED TO FOREIGN BANKS. Some facilities and programs, such as the Mortgage-Backed Securities Purchase Program, the Commercial Paper Funding Facility, and the TSLF, provided more than half of their funding to foreign banks. During the peak of the financial crisis, up to 88% of overall discount window lending went to foreign banks, and nearly 100% of the New York Fed's discount window lending went to foreign banks.
Not surprisingly, these data disclosures have raised significant new questions about the Fed's behavior. Among many questions raised are: Why did foreign firms receive such a large percentage of Fed lending? What advantages were given to large financial institutions that had access to multiple lending facilities for prolonged periods of time? Did extending loans to non-financial firms go beyond the Fed’s emergency lending authority? Why did investors who participated in TALF have to have a relationship with the Fed’s primary dealers, and did this give an unfair advantage to wealthy investors, such as the wives of two Morgan Stanley executives? Why did the Fed set up single-tranche open-market operations (ST OMO) which gave primary dealers access to $80 billion at rates as low as 0.01%, essentially providing a direct government subsidy to these firms, and why did the Fed only disclose this information in chart form? Are there other programs that have yet to be disclosed? Why were so many pages redacted in the 327-page document that alluded to ST OMO? Can you really claim to be in compliance with FOIA when such significant portions of documents are redacted? How can we trust that this data was "not responsive" to the FOIA request? Are we to trust the non-transparent Fed that we really don't need to see that information? If the Fed claims to lend against AAA collateral and then does not, can we trust anything the Fed publishes in a press release? Can we trust that collateral classified by the Fed as AAA really is AAA?
More issues emerge from the Fed’s handling of the FOIA requests brought by Bloomberg and Fox News. The Fed used several arguments in refusing to comply. Among them was the Fed’s claim that it was a private institution and not subject to FOIA, since the documents requested were held by the New York Fed, a private bank, and thus exempt. Fortunately for the American people, the court rejected that assertion. But what exactly is the legal relationship between the private regional banks and the Board of Governors? The Fed also claimed that lending records of discount window borrowers were privileged or confidential information that COULD CAUSE IMMINENT COMPETITIVE HARM if disclosed, or even cause a run on banks, and therefore should be exempt from FOIA. This has been the Fed’s long-standing defense of the secrecy of the discount window. One of the judges in the case summed up the Fed’s secrecy succinctly: "[T]he risk of looking weak to competitors and shareholders is an inherent risk of market participation; information tending to increase that risk does not make the information privileged or confidential."
Given the massive amount of data released last December and this March, and the fact that much information in the March data release was redacted, it is all but certain that there remains much to be discovered about the Fed's bailouts through the discount window and its credit facilities. The Federal Reserve's actions in bailing out Wall Street through credit facilities and quantitative easing provoked a backlash among the American people and among many members of Congress. Trillions of dollars worth of loans and guarantees were provided to rich bankers and their worthless holdings of mortgage debt were snapped up by the Fed, while Main Street Americans continued to suffocate under harsh taxation and the prospect of increasing inflation. These events have awakened many Americans to the problems with the Fed's LOOSE MONETARY POLICY, THE BUBBLES IT HAS CREATED in the past, and the potential hyperinflation it might cause in the future. We should not neglect the fundamental need for more transparency of the Fed and a thorough audit that can help shed light on operations of the Federal Reserve System. We need stronger audit authority over the Fed, both looking back at previous market interventions and also ensuring that any future credit facilities, bailout vehicles, or large-scale asset purchase programs are subject to oversight.
At this hearing we hope to receive substantive answers from the Fed about its lending behavior during the worst part of the financial crisis, and we hope to receive assurances about the Fed's future compliance with the Dodd-Frank bill's requirements for public access to lending information. Aside from our ability to ask questions at the hearing, the hearing record will remain open for 30 days to allow the Fed time to respond to our written questions. At a time when the Fed's balance sheet is rapidly approaching the $3 trillion dollar mark, it is absolutely imperative that the Fed come clean with the details of its open market operations, lending operations, and asset purchases. Pumping trillions of dollars into the banking system with no oversight by Congress and no accountability to the American people cannot be allowed to continue.
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flow5
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Post by flow5 on Jun 30, 2011 16:56:36 GMT -5
stlouisfed.org/events/20110630QE/Bullard_QE_Conference_June_30_2011_Final.pdfST. LOUIS, June 30, 2011 /PRNewswire/ -- Federal Reserve Bank of St. Louis PRESIDENT JAMES BULLARD delivered remarks titled "QE2: An Assessment" at the St. Louis Fed's Quantitative Easing (QE) Conference on Thursday. During his presentation, Bullard discussed the use of balance sheet policy (or quantitative easing) to conduct stabilization policy once short-term nominal interest rates are near zero. "The purchase and sale of liquid assets, such as Treasury securities, is very similar to ordinary monetary policy, EXCEPT THAT A PARTICULAR NOMINAL INTEREST RATE TARGET IS NOT SET," he said. Bullard focused mostly on the Fed's second round of quantitative easing (which is commonly referred to as "QE2"), analyzing the motivation for and effectiveness of this policy action. Overall, Bullard said that QE2 was classic monetary policy easing. "This experience shows that monetary policy can be eased aggressively even when the policy rate is near zero," he said. Balance Sheet Policy When short-term nominal interest rates are near zero, Bullard said, "asset purchases at longer maturities can substitute for ordinary monetary policy." THESE PURCHASES PUT DOWNARD PRESSURE ON NOMINAL INTEREST RATES FURTHER OUT THE YIELD CURVE AND UPWARD PRESSURE ON EXPECTED INFLATION. Thus, expanding the balance sheet puts downward pressure on real interest rates. With the policy rate near zero since December 2008, the FOMC has voted to pursue a balance sheet policy twice. The first quantitative easing program—announced in late November 2008 and expanded in March 2009—consisted of more than $1.7 trillion in purchases of agency debt, agency mortgage-backed securities, and long-term Treasury debt. The second quantitative easing program—announced in November 2010—included $600 billion in purchases of longer-term Treasury debt. "Balance sheet policy, like all monetary policy, should be conducted in a state-contingent way," Bullard added. (In other words, policy should be adjusted based on the state of the economy.) QE2: Motivation Regarding the motivation for QE2, Bullard highlighted the disinflation trend that developed during 2010 and the slower pace of recovery during the summer of 2010. "These developments left the U.S. at risk of a Japanese-style outcome," he said. The "Japanese experience with mild deflation and a near-zero nominal interest rate has been poor." In 2010, U.S. monetary policy included a near-zero policy rate, a large balance sheet, and "extended period" language for the near-zero policy rate. Lengthening the "extended period" in response to the economic developments could potentially be counter-productive and send the U.S. to a Japanese-style outcome. In order to avoid that, the FOMC voted to pursue QE2. Bullard said that macroeconomists and policymakers are generally very fragmented on the issues raised by Benhabib, Schmitt-Grohe, and Uribe.(1) QE2: Was It Effective? Markets began pricing in additional FOMC action after Chairman Ben Bernanke's Jackson Hole speech in late August 2010. Although the FOMC made the decision to purchase additional assets in November 2010, "most effects were already priced into financial markets at that point," Bullard said. "The financial market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially," Bullard said. "In particular, real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose. These are the 'classic' financial market effects one might observe when the Fed eases monetary policy in ordinary times." Although the financial market effects were priced in ahead of the November decision, Bullard said that the effects of QE2 on the real economy would be EXPECTED TO LAG BY SIX TO TWELVE MONTHS. "REAL EFFECTS ARE DIFFICULT TO DISENTANGLE BECAUSE OTHER SHOCKS HIT THE ECONOMY IN THE MEANTIME," he said, adding this seems to have happened during the first half of 2011. Disentangling the real effects is a standard problem in evaluating monetary policy, he noted. "QE2 has shown that the Fed can conduct an effective monetary stabilization policy even when policy rates are near zero," Bullard concluded. ================ I.e., the liquidity preference curve is a false doctrine.
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flow5
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Post by flow5 on Jun 30, 2011 19:19:55 GMT -5
What's the only figure to go up? Two weeks ended % CHANGE IN WEEKLY AVERAGES 6/29/2011 –6/15/2011..………………………………….…. 13-wk…26-wk…52-wk Total reserves……………………………………..……….……….….57.4….110.3…….50.8 Non-borrowed reserves…………………………………….……..60.1....121.6.……59.6 Required reserves…………………………..……………….……....30.1…...25.4…....21.9 Excess reserves………………………………….…….…..….....…58.8….116.3….…52.6 Borrowings from Fed…………………………. ………………….-137.7..-142.4...-81.0 Free reserves…………………………….……………………….……...61.8….128.7….…62.2 ==================== Two weeks ended % CHANGE IN WEEKLY AVERAGES 5/18/2011 --5/4/2011..………………………………….…. 13-wk…26-wk…52-wk Total reserves………………………………………..……….…….….142.0…..105.0……40.8 Non-borrowed reserves………………………………….……..147.4....116.3.……49.7 Required reserves………………..……..………………….……....18.4…...19.6…....15.4 Excess reserves……………………………….……….…..…...…150.0….110.9….…42.4 Borrowings from Fed……………………..…………………….-128.7..-134.1..….-80.0 Free reserves…………………………………………………….…….155.9….123.3….…52.0
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flow5
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Post by flow5 on Jul 2, 2011 8:49:49 GMT -5
Thursday, June 30th, 2011, 2:30 pm
Federal Deposit Insurance Corp. Chair Sheila Bair EXPECTS THE DEPOSIT INSURANCE FUND TO LAND IN POSITIVE TERRITORY for the first time since 2009 when the regulator reports its June results.
Bair will leave her post on July 8 and gave her last congressional testimony before the Senate Banking Committee Thursday, updating lawmakers on the state of the fund. When Bair took over controls at the FDIC in 2006, the banking industry hit its sixth-consecutive year of record earnings. Only 0.7% of loans on the banks' balance sheets were delinquent, only 50 banks populated the FDIC problem list and 952 days had passed without a failure.
"However, as we soon learned, the apparently strong performance of those years in fact reflected an overheated housing market, which was fueled by lax lending standards and excess leverage throughout the financial system," Bair said.
By early 2010, 5.5% of all loans on bank balance sheets were delinquent. More than 370 institutions failed since the start of 2007, peaking at more than 150 in 2010 alone. The number of banks on the problem list currently stands at 888.
The DIF estimated losses totaled $84 billion since 2006. At its lowest, the DIF sat at a negative $20.9 billion balance.
But Bair told Congress Thursday because of actions the FDIC took, the regulator never had to draw from the Treasury Department.
It increased assessment rates at the beginning of 2009, raising revenue to $12 billion that year, and up to $14 billion in 2010. In the summer of 2009, the FDIC imposed a special assessment, bringing in another $5.5 billion. Then in December 2009, the FDIC required banks to prepay almost $46 billion in assessments.
At the end of March, the DIF stood at a negative $1 billion balance.
The regulator implemented an assessment rate to achieve a reserve ratio of 1.3% of insured deposits by Sept. 30, 2020. This was required under the Dodd-Frank Act.
The market continues to stumble toward recovery. Bair said roughly 2.25 million mortgages remain in the foreclosure process, slowed by the inefficiencies of servicers.
As the market continues to mend, Bair pointed out the almost 7,000 community banks are more capitalized than their larger counterparts but suffer from a distinct competitive disadvantage.
"The competitive position of small and mid-sized institutions has been steadily eroded over time by the government subsidy attached to the too-big-to-fail status of the nation's largest banks," Bair said. "Every financial company, no matter how large, complex and interconnected, also must be constrained by the discipline of the marketplace and face the credible threat of failure."
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flow5
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Post by flow5 on Jul 2, 2011 9:04:38 GMT -5
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
06/24/11 0.01 0.02 0.07 0.16 0.35 0.57 1.40 2.13 2.88 3.83 4.17 06/27/11 0.01 0.02 0.10 0.18 0.41 0.64 1.47 2.19 2.95 3.94 4.28 06/28/11 0.01 0.03 0.11 0.21 0.48 0.75 1.62 2.33 3.05 4.01 4.33 06/29/11 0.01 0.02 0.11 0.19 0.47 0.79 1.70 2.44 3.14 4.08 4.39 06/30/11 0.01 0.03 0.10 0.19 0.45 0.81 1.76 2.50 3.18 4.09 4.38 07/01/11 0.01 0.02 0.10 0.20 0.50 0.85 1.80 2.54 3.22 4.12 4.40
=================
At the last minute - running scared. FED no longer to be largest government buyer.
high yield in 30 yr this year was on 2/8/2011 @ 4.76
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Post by flow5 on Jul 2, 2011 9:21:06 GMT -5
FINANCIAL TIMES:
The Federal Reserve Bank of New York has suspended plans to sell off the remaining mortgage bonds held by its Maiden Lane II vehicle, conceding that investors’ retreat from riskier assets had weighed on the auction.
The decision highlights how the uncertain outlook for the US housing market and abundant supply of assets for sale had combined in recent months to damp demand for the securities the regulator chose to auction off over time.
“Given prevailing market conditions for non-agency RMBS [residential mortgage-backed securities], we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public,” the New York Fed said.
It sold only 36 of the 73 securities that it had intended to auction off on June 9. By contrast, a May 10 sale secured buyers for 74 of the 79 securities that were auctioned.
For the month in between the two, the Markit ABX Index, a benchmark for such securities, slipped almost 6 per cent. The regulator “may resume the sale of securities from the Maiden Lane II portfolio individually and in segments over time as market conditions warrant through a competitive sales process”, the New York Fed said. “There will be no fixed timeframe for the sales.”
The decision comes as the outlook for US home sales appeared to improve. More uplifting data, along with the New York Fed’s pause on additional sales, may in turn improve the market for mortgage-backed securities, credit analysts said.
The New York Fed formed its three Maiden Lane vehicles to house distressed assets it acquired following the collapse of Bear Stearns and AIG. Maiden Lane II housed securities backed by largely subprime mortgages that were once held by AIG’s securities lending business.
As AIG began to emerge from the financial crisis, the insurer sought to buy back higher-yielding assets as it moved closer to regaining its independence from government ownership. The company’s $15.7bn offer for the mortgage bonds was rejected in March by the New York Fed, which instead opted to auction off the securities over time.
“It appears ML II supply has become difficult to absorb, as buyers have failed to step up in recent auctions,” Ajay Rajadhyaksha, an analyst with Barclays Capital, wrote in a June 10 note to clients. “However, we have long maintained the Fed is not a distressed seller and will slow down sales if prices drop below reserve levels.”
To date, the New York Fed has sold 306 of the some 800 securities within Maiden Lane II. =================
Now, what was the discount window collateral criteria?
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flow5
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Post by flow5 on Jul 5, 2011 21:13:55 GMT -5
KATHY LIEN: Federal Reserve’s 5 Step Exit Strategy May 18, 2011 According to the minutes from the April Federal Reserve monetary policy meeting, here is the 5 step exit strategy that policymakers prefer at this time: 1) End QE2 in June 2) Stop reinvestment some time this yr 3) Remove the “extended period” language in Q4 or early 2012 4) Raise interest rates 5) Start selling assets in 2012/2013 Nearly all of the FOMC members agreed that the first step should be to stop reinvesting payments of principal on agency securities and then soon after Treasury securities. By doing this, they would be reducing the size of the central bank’s balance sheet which would be a small step towards policy tightening. Changes to the FOMC statement regarding forward policy should also happen at that time. The second step would be to raise interest rates and then gradually sell off their existing securities. The reason why they are leaning towards raising rates first is because it would give them the flexibility to lower rates later if economic conditions then warranted. Although talk of an exit strategy has helped to lift the U.S. dollar, the Fed also said that discussions of an appropriate exit strategy does not mean that they are looking implement one soon. www.kathylien.com/site/federal-reserve/federal-reserves-5-step-exit-strategy
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flow5
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Post by flow5 on Jul 7, 2011 8:52:51 GMT -5
www.tnr.com/article/politics/91224/ron-paul-debt-ceiling-federal-reserve DEAN BAKER: Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget. The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself. Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs. In addition, there’s a second reason why Representative Paul’s plan is such a good idea. As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed. In this case, the interest payments would be a burden to the Treasury since the Fed would no longer be collecting (and refunding) the interest. To be sure, there would be consequences to the Fed destroying these bonds. The Fed had planned to sell off the bonds to absorb reserves that it had pumped into the banking system when it originally purchased the bonds. These reserves can be created by the Fed when it has need to do so, as was the case with the quantitative easing policy. Creating reserves is in effect a way of “printing money.” During a period of high unemployment, this can boost the economy with little fear of inflation, since there are many unemployed workers and excess capacity to keep downward pressure on wages and prices. However, at some point the economy will presumably recover and inflation will be a risk. This is why the Fed intends to sell off its bonds in future years. Doing so would reduce the reserves of the banking system, thereby limiting lending and preventing inflation. If the Fed doesn’t have the bonds, however, then it can’t sell them off to soak up reserves. But as it turns out, there are other mechanisms for restricting lending, most obviously RAISING THE RESERVE REQUIREMENTS FOR BANKS. If banks are forced to keep a larger share of their deposits on reserve (rather than lend them out), it has the same effect as reducing the amount of reserves. To take a simple arithmetic example, if the reserve requirement is 10 percent and banks have $1 trillion in reserves, the system will support the same amount of lending as when the reserve requirement is 20 percent and the banks have $2 trillion in reserves. In principle, the Fed can reach any target for lending limits by raising reserve requirements rather than reducing reserves. As a practical matter, the Fed has rarely used changes in the reserve requirement as an instrument for adjusting the amount of lending in the system. Its main tool has been changing the amount of reserves in the system. However, these are not ordinary times. The Fed does not typically buy mortgage backed securities or long-term government bonds either. It has been doing both over the last two years precisely because this downturn is so extraordinary. And in extraordinary times, it is appropriate to take extraordinary measures—like the Fed destroying its $1.6 trillion in government bonds and using increases in reserve requirements to limit lending and prevent inflation. In short, Representative Paul has produced a very creative plan that has two enormously helpful outcomes. The first one is that the destruction of the Fed’s $1.6 trillion in bond holdings immediately gives us plenty of borrowing capacity under the current debt ceiling. The second benefit is that it will substantially reduce the government’s interest burden over the coming decades. This is a proposal that deserves serious consideration, even from people who may not like its source. =========== Debt monetization with a new twist. No need to unwind. Instead of reimposing legal reserve and reserve ratio requirements against the Federal Reserve Note, demand deposit, and inter-bank demand deposit liabilities of the Reserve banks (removed in 1968), Paul suggests raising commercial bank reserve ratios.
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flow5
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Post by flow5 on Jul 7, 2011 21:39:57 GMT -5
www.econbrowser.com/archives/2011/07/ron_pauls_debt.htmlRon Paul's debt default proposal (JIM HAMILTON): Congressman Ron Paul (R-TX) is apparently proposing that the U.S. Treasury simply refuse to pay interest and principal on the $1.6 trillion in Treasury securities currently owned by the Federal Reserve. Dean Baker, Greg Mankiw, Steve Williamson, and Stephen Gandel all seem to think it's not a totally crazy idea. Here's what I think they're missing. Steve Williamson frames the question as follows: Now, to work through this, consider two alternative scenarios. First, suppose that, in the absence of Paul-default, the Fed holds the Treasury debt it has acquired until maturity. In this case, clearly Paul-default cannot make any difference. Without Paul-default, the Treasury makes the payments on the Fed's Treasury holdings to the Fed, and the Fed sends those payments back to the Treasury. With Paul-default, the net flow between the Fed and the Treasury is the same: zero. Here we need to distinguish between the Fed's income statement, which keeps track of its profit or loss, and the Fed's balance sheet, which keeps track of its assets. It is true that the Fed routinely turns over its income to the Treasury. It is not true that the Fed routinely turns over its assets to the Treasury. Holding an asset to maturity does not generate an income flow equal to the asset's par value. Maturation just means that the asset is replaced with another (cash) of equivalent value, a transformation that generates no income. What would actually happen under Williamson's first scenario, if the Treasury were to retire the debt held by the Fed when the bonds reach maturity, is that the Treasury would have to debit its account with the Fed by the amount of the maturing principal. The funds in that account in turn would have been collected from taxpayers-- when they wrote checks to the IRS, those checks were cleared by debiting the Federal Reserve deposits held by the taxpayers' banks and crediting the Treasury's account with the Federal Reserve. The net result, if the Fed were to hold the securities to maturity, would be that tax receipts would be used to retire the reserves that the Fed initially created when it originally bought the Treasury debt. In the normal course of affairs, if the Fed holds Treasury securities to maturity, upon maturity total reserves would contract. What Williamson has in mind with his first scenario is not the Fed simply holding the debt to maturity, but instead the Fed rolling over its holdings of Treasury securities in perpetuity. In this case, his analysis would be correct. Each month the Treasury makes a payment to the Fed (which counts as the Fed's income), and each month the Fed returns that income to the Treasury (which counts as an offsetting Treasury receipt). This transaction is a complete accounting wash, and it would be entirely equivalent if both the Fed and the Treasury simply agreed to cancel the obligation. The correct conclusion is that, if the Fed intends to allow the $1.6 trillion currently held as Federal Reserve deposits by private banks to remain as currency or reserves on which it pays no interest forever, then there would be no need for the Treasury to think of the Treasury securities held by the Fed as something for which it ever needs to raise taxes to repay. But of course the issue is that the Fed does not intend to allow the $1.6 trillion to remain forever as zero-interest reserves or turn into currency. If they did, that would mean more than doubling the currency in circulation and would certainly be highly inflationary. We haven't seen inflation from the Fed's reserve creation because most people understand that the Fed is never going to allow those reserves to become currency in circulation. Congressman Paul has been asserting that the Fed's actions already have produced inflation, a claim for which I see no evidence. But the congressman's latest proposal would help improve the quality of his forecast considerably. Congressman Paul's position seems to be that he never approved of the Fed's purchases of U.S. Treasuries, so why should taxpayers have to sacrifice to pay back the Fed? The key point to remember here is that it was the Treasury, not the Fed, that initially decided to borrow these sums. Any time Congress spends more than it takes in as taxes, it is imposing a commitment on future taxpayers to make up the difference. The taxpayers owe that money whether the Fed buys the securities or not. The Fed made a determination that by temporarily holding a greater portion of that Treasury debt than usual, it could alleviate some of the suffering and waste that results from unemployment and idle production capacity. Reasonable people can and do disagree about the extent to which the Fed's measures were helpful for that purpose. But that has nothing to do with the commitment on future taxpayers to pay the bill for the previous decisions of the U.S. Congress and President. That commitment was made when the Treasury first issued the securities, and that commitment did not change when the Fed bought those same securities. Now, in fairness, Dean Baker is not endorsing the proposal of a starkly inflationary outright default, but instead proposes preventing the reserves from becoming currency in circulation by simply requiring banks to hold onto the reserves. I give this part of Greg Mankiw's answer to his exam question a grade of A+: Assuming the Fed does not pay market interest rates on those newly required reserves, it is like a tax on bank financing. The initial impact is on those small businesses that rely on banks to raise funds for investment. The policy will therefore impede the financial system's ability to intermediate between savers and investors. As a result, the economy's capital stock will be allocated less efficiently. In the long run, there will be lower growth in productivity and real wages. Posted by James Hamilton at July 6, 2011 02:04 PM ================== "THE POLICY WILL THEREFORE IMPEDE THE FINANCIAL SYSTEM'S ABILITY TO INTERMEDIATE BETWEEN SAVERS & INVESTORS" Came from Harvard no less. Never are the CBs intermediaries in the savings-investment process.
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flow5
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Post by flow5 on Jul 8, 2011 7:32:35 GMT -5
(Reuters) - The Federal Reserve's $600 billion Treasury buying spree is over and the bond market is growing nervous now that its biggest bidder has stepped aside.
Barring possible hiccups in August as Congress wrestles with the task of raising the legal borrowing limit, the government will go on issuing around $166 billion in Treasury bonds and notes a month, and primary dealers aren't quite sure where demand will come from, and at what price.
One possibility lies in investors such as foreign central banks, insurance companies and fund managers, but pulling them in may be tricky; some Treasury yields are near all-time lows. And for the FIRST TIME SINCE 2005, JPMorgan is reporting THERE ARE NO LONG POSITIONS IN TREASURIES.
Where Europe's sovereign debt troubles once pumped up demand for safe-haven U.S. debt, news that Portugal's debt had been downgraded to junk barely stirred the market this week. Brighter economic data, most recently the ADP National Employment Report, which showed a surprising jump in private- sector employment in June, has further dulled Treasuries' shine at such low yields. Treasuries sold off on Thursday following the ADP number and strong June retail sales.
And Congress is still struggling to RAISE THE DEBT CEILING, with the latest talks leaving a wide gulf in place between President Barack Obama and Republican lawmakers, as the Treasury's Aug 2 deadline for a potential default draws near.
FAREWELL TO PRICE CERTAINTY
For now, primary dealers, the banks and securities firms authorized to bid on behalf of clients in Treasury auctions, will have to wager on a price without the certainty they had of being able to sell the securities quickly in the secondary market, or to the Federal Reserve.
...Duration is a measure of interest-rate risk.
That has already led to sloppier auctions, with higher borrowing costs for the government as auction high yields fix at a higher mark than available in the open market, a phenomenon known as a "tail."
This happened two weeks ago when three separate auctions "tailed" in the worst week for government debt sales since March 2010.
Auctions tail when bidders insist on cheaper prices for a given security, or when confusion about the demand for that security causes bidders to behave cautiously.
The next test will be next Tuesday when the government sells $32 billion in three-year notes.
..."The Fed was buying the on-the-runs (in those maturities) in volume, usually soon after the auctions and building up a pretty sizable position," he said.
"On-the-runs" refers to the most recently issued bonds in a given maturity.
The Federal Reserve's second round of quantitative easing measures, which began in mid-November and ended June 30, changed the way primary dealers bought and sold Treasuries, presenting a stable -- if temporary -- way to earn profits from spreads.
Primary dealers doggedly tracked the prices of various securities along the yield curve, determining which were relatively expensive and which were cheap, bulking up on the cheap securities, and then selling them to the Fed at a higher price.
Since the Fed kept dealers informed with a pre-announced purchasing schedule in which it listed groups of securities it intended to choose from each day, dealers had plenty of time to plan.
"The fast money (investors such as hedge funds) wanted to play the rich/cheap game as well and play some of the volatility, but that's partly going to go away,"
...The Fed's first round of quantitative easing, which ended in March last year, amounted to less than half the size of QE2, and traders did not engage in such rigorous efforts to predict Fed purchases the first time around.
During QE2, the Fed bought between roughly $2 billion and $9 billion in Treasuries each day it entered the market. In some weeks, it carried out a purchase operation every day. In others, it bought Treasuries on three or four days out of the week.
The Fed plans to reinvest the proceeds of maturing securities in its portfolio, but with no new purchases, the buying schedule is slowing to a trickle.
The Fed bought just $2.91 billion on Wednesday. Only one more purchase operation is set for this two-week period; the Fed will announce another purchasing schedule on July 13.
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flow5
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Post by flow5 on Jul 9, 2011 8:26:50 GMT -5
QE2 Shocker: The Whole $600 Billion Wound Up Offshore Wednesday 6 July 2011 by: Ellen Brown, Truthout | News Analysis
On June 30, QE2 ended with a whimper. The Fed's second round of "quantitative easing" involved $600 billion created with a computer keystroke for the purchase of long-term government bonds. But the government never actually got the money, which went straight into the reserve accounts of banks, where it still sits today. Worse, it went into the reserve accounts of FOREIGN banks, on which the Federal Reserve is now paying 0.25 percent interest.
Before QE2 there was QE1, in which the Fed bought $1.25 trillion in mortgage-backed securities from the banks. This money, too, remains in bank reserve accounts collecting interest and dust. The Fed reports that the accumulated excess reserves of depository institutions now total nearly $1.6 trillion.
Interestingly, $1.6 trillion is also the size of the federal deficit - a deficit so large that some members of Congress are threatening to force a default on the national debt if it isn't corrected soon.
So, here we have the anomalous situation of a $1.6 trillion hole in the federal budget, and $1.6 trillion created by the Fed that is now sitting idle in bank reserve accounts. If the intent of "quantitative easing" was to stimulate the economy, it might have worked better if the money earmarked for the purchase of Treasuries had been delivered directly to the Treasury. That was actually how it was done before 1935, when the law was changed to require private bond dealers to be cut into the deal.
The one thing QE2 did for the taxpayers was to reduce the interest tab on the federal debt. The long-term bonds the Fed bought on the open market are now effectively interest free to the government, since the Fed rebates its profits to the Treasury after deducting its costs.
But QE2 has not helped the anemic local credit market, on which smaller businesses rely; and it is these businesses that are largely responsible for creating new jobs. In a June 30 article in The Wall Street Journal titled "Smaller Businesses Seeking Loans Still Come Up Empty," Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17 percent of smaller businesses said they were able to land needed bank financing.
How QE2 Wound Up in Foreign Banks
Before the Banking Act of 1935, the government was able to borrow directly from its own central bank. Other countries followed that policy as well, including Canada, Australia and New Zealand; and they prospered as a result. After 1935, however, if the US central bank wanted to buy government securities, it had to purchase them from private banks on the "open market." Former Fed Chairman Marinner Eccles wrote in support of an act to remove that requirement, that it was intended to keep politicians from spending too much. But all the law succeeded in doing was to give the bond-dealer banks a cut as middlemen.
Worse, it caused the Fed to lose control of where the money went. Rather than buying more bonds from the Treasury, the banks that got the cash could just sit on it or use it for their own purposes; and that is apparently what is happening today.
In carrying out its QE2 purchases, the Fed had to follow standard operating procedure for "open market operations": it took secret bids from the 20 "primary dealers" authorized to sell securities to the Fed and accepted the best offers. The problem was that 12 of these dealers - or over half - are US-based branches of foreign banks (including BNP Paribas, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS, and others); and they evidently won the bids.
The fact that foreign banks got the money was established in a June 12 post on Zero Hedge by Tyler Durden (a pseudonym), who compared two charts: the total cash holdings of foreign-related banks in the US, using weekly Federal Reserve data; and the total reserve balances held at Federal Reserve banks from the Fed's statement ending the week of June 1. The charts showed that after November 3, 2010, when QE2 operations began, total bank reserves increased by $610 billion. Foreign bank cash reserves increased in lock step, by $630 billion - or more than the entire QE2.
In a June 27 blog, John Mason, professor of finance at Penn State University and a former senior economist at the Federal Reserve, wrote:
In essence, it appears as if much of the monetary stimulus generated by the Federal Reserve System went into the Eurodollar market. This is all part of the "Carry Trade" as foreign branches of an American bank could borrow dollars from the "home" bank creating a Eurodollar deposit....
Cash assets at the smaller [US] banks remained relatively flat.... Thus, the reserves the Fed was pumping into the banking system were not going into the smaller banks.... usiness loans continue to "tank" at the smaller banking institutions....
The real lending by commercial banks is not taking place in the United States. The lending is taking place off-shore, underwritten by the Federal Reserve System and this is doing little or nothing to help the American economy grow.
Durden concluded:
... [T]he only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains ... why US banks have been unwilling and, far more importantly, unable to lend out these reserves ....
... [T]he data above proves beyond a reasonable doubt why there has been no excess lending by US banks to US borrowers: none of the cash ever even made it to US banks!... This also resolves the mystery of the broken money multiplier and why the velocity of money has imploded.
Well, not exactly. The fact that the QE2 money all wound up in foreign banks is a shocking finding, but it doesn't seem to be the reason banks aren't lending. There were already $1 trillion in excess reserves sitting idle in US reserve accounts, not counting the $600 billion from QE2.
According to Scott Fullwiler, associate professor of economics at Wartburg College, the money multiplier model is not just broken, but is obsolete. Banks do not lend based on what they have in reserve. They can borrow reserves as needed after making loans. Whether banks will lend depends rather on (a) whether they have creditworthy borrowers, (b) whether they have sufficient capital to satisfy the capital requirement, and (c) the cost of funds - meaning the cost to the bank of borrowing to meet the reserve requirement, either from depositors or from other banks or from the Federal Reserve.
Setting Things Right
Whatever is responsible for causing the local credit crunch, trillions of dollars thrown at Wall Street by Congress and the Fed haven't fixed the problem. It may be time for local governments to take matters into their own hands. While we wait for federal lawmakers to get it right, local credit markets can be revitalized by establishing state-owned banks, on the model of the Bank of North Dakota (BND). The BND services the liquidity needs of local banks and keeps credit flowing in the state. For more information, see here and here.
Concerning the gaping federal deficit, Congressman Ron Paul has an excellent idea: have the Fed simply write off the federal securities purchased with funds created in its quantitative easing programs. No creditors would be harmed, since the money was generated out of thin air with a computer keystroke in the first place. The government would just be canceling a debt to itself and saving the interest.
As for "quantitative easing," if the intent is to stimulate the economy, the money needs to go directly into the purchase of goods and services, stimulating "demand." If it goes onto the balance sheets of banks, it may stop there or go into speculation rather than local lending - as is happening now. Money that goes directly to the government, on the other hand, will be spent on goods and services in the real economy, creating much-needed jobs, generating demand and rebuilding the tax base. To make sure the money gets there, the 1935 law forbidding the Fed to buy Treasuries directly from the Treasury needs to be repealed.
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A left-wing activist but after 11 books maybe a little more interesting to read.
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flow5
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Post by flow5 on Jul 9, 2011 8:39:12 GMT -5
www.fool.com/investing/general/2011/07/07/ron-pauls-big-idea.aspx#commentsBoxAnchor -- MORGAN HOUSEL I remember the first time I heard Rep. Ron Paul (R-Texas) speak when I was in college. I thought to myself, this guy is brave. He's bold. He doesn't give a damn what anyone else thinks. I like that. But he's also living in his own wacky bubble of reality. Just look at his latest big idea. The government is buried in debt (or have you heard that already?) and quickly approaching default if it can't or won't raise the national debt ceiling over the next few weeks. Paul's solution is simple: The Federal Reserve has purchased $1.6 trillion worth of government bonds since the financial crisis began in 2008. These bonds, while owned by a government agency (the Fed), are liabilities included in the government's $14 trillion-plus total debt load. If the Fed simply ripped them up (part of Paul's broader plan of eliminating the Fed), voila …total debt would shrink by $1.6 trillion. "They're nobody," said Paul last week. "Why do we have to pay them off?" The idea has its merits. Canceling debt owned by the Fed doesn't directly burden anyone. Interest payments the Fed receives on these bonds are remitted back to the Treasury -- this really is money the government owes itself. So why not just forget about it? Well, there are a few big reasons. Most seriously, if Congress instructs the Fed to destroy its bonds, that would almost certainly qualify as selective default. Rating agencies -- Moody's (NYSE: MCO ) and friends -- would in all likelihood slash the government's credit rating sharply and immediately. Over time, a credit downgrade could cost the government more than it saves from the Fed's repudiation, thanks to higher interest rates on existing debt. Current projections see the government spending $562 billion on interest payments in 2016. You can safely double that figure if default sends interest rates lurching. Even if rating agencies don't consider the move a default (they're known to do funny things), private Treasury investors would find little solace in the government merely defaulting on itself. They'd see it as outright default, and respond accordingly. As Carmen Reinhart and Ken Rogoff painstakingly outline in their book This Time is Different, history is packed with examples of governments repudiating debt on a select group of investors (typically foreign investors, since they don't vote). Stiffing one group invariably spooks all others, sparking a who's next? guessing game, and sapping all hope that the government can make hard choices about tax hikes and spending cuts. Second, the Fed is a bank with assets, liabilities, and equity. If it tore up all its assets, it would be insolvent. This isn't a hard problem to fix, since it can print money and purchase assets -- typically Treasuries -- at will. But that creates a circular problem: Ripping up Treasuries would make the Fed insolvent, and regaining stability might require … purchasing Treasuries. Third, there's good reason for the Fed to own Treasuries. Quantitative easing expanded the monetary base by trillions over the past two years. This hasn't yet ignited inflation, because almost all the money is sitting in excess reserves at the Fed. Someday, though, the cash will enter the economy, sending inflation pressures rising. This needn't be scary, since the Fed can sop up excess liquidity by selling the Treasury bonds it now holds on its balance sheet, eliminating cash printed during the financial crisis. But that option gets really sticky if the Fed rips its Treasuries up. A decade ago, when budget surpluses promised to eliminate all government debt in due time -- ah, those were the days -- policymakers worried that the Fed wouldn't have enough Treasuries to do one vital part of its job. "Without Treasuries," wrote James Glassman in 2001, "the Fed will have a tough time conducting its 'open-market' operations, the practice of buying and selling bonds that keeps interest rates where the central bank wants them." Shredding the Fed's Treasuries today would create the same problem. Some, including economist Dean Baker, say we can avoid this by using reserve requirements to regulate monetary policy, making banks like Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , and JPMorgan Chase (NYSE: JPM ) hold more or less reserves at the Fed to keep money supply under control. He's right, but that opens up a whole new direction here. Do we really want to rewrite traditional monetary policy, all in the name of circumventing the inane rule of the debt ceiling? Here's a Paul-esque bold idea to work around the debt ceiling problem: Get rid of it. The ceiling has been raised 87 times since 1945, which has successfully prevented us from running up exactly zero dollars of debt. Its sole purpose, it seems, is to create something to argue about. If spending needs to be cut, cut it. If taxes need to be raised, raise them. Putting up a self-imposed roadblock that's nearly always quickly pushed aside, and talking about repudiating national debt and overhauling monetary policy when it can't be pushed aside, accomplishes nothing and harms everything.
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flow5
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Post by flow5 on Jul 9, 2011 8:43:57 GMT -5
"Keep in mind that the Fed is also reinvesting proceeds from maturing securities on its balance sheet. That amounts to about another $300 billion or so in Treasury purchases. Norris called that a "shadow QE3." money.cnn.com/2011/07/08/markets/thebuzz/
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Post by flow5 on Jul 11, 2011 10:43:28 GMT -5
America’s Federal Reserve is continuing to repurchase assets despite the end of its second round of quantitative easing, or QE2, in amounts large enough to be labelled “QE2.5”. Bernd Kraan, a senior portfolio manager for global currency at Henderson, says the Fed has committed itself to reinvesting the proceeds of holdings in maturing debt. This means it will buy about $300 billion (£187.5 billion) of debt in the coming 12 months, half the amount of QE2. QE2 started in November and was brought to a close at the end of June. Neither the Fed nor Henderson has invented a label for the central bank’s continuing reinvestments, but they are equivalent in size to a “QE2.5”. Ben Bernanke, the Fed chairman, committed the bank earlier this year to buying American treasury bonds with maturing debt, including mortgage-backed securities (MBS). This followed an announcement in August 2010 that the Fed would reinvest debt repayments in Treasury bonds. Kraan notes that the size of the bank’s portfolio of treasuries, the asset purchased during QE2, increased from $821 billion to $1,617 billion between November 2010 and June this year, a rise of $796 billion. During the same period the Fed’s MBS portfolio fell from $1,078 billion to $908 billion, meaning that $169 billion was pre-paid and invested back into treasuries. In addition, Kraan concludes that about $26 billion of coupons was reinvested in debt during QE2. www.fundweb.co.uk/fed%E2%80%99s-repurchasing-of-assets-%E2%80%98amounts-to-qe25%E2%80%99/1034302.article
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Post by flow5 on Jul 11, 2011 10:59:12 GMT -5
By Scott Fullwiler Jul 10, 2011 Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf and several previous posts by fellow MMT blogger Joe Firestone that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins. Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets. As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.” The following is a description of how the process would work and the implications for monetary operations: 1. The Treasury mints a $1 trillion coin, or whatever amount is desired. 2. The Treasury deposits the coin into the Treasury’s account at the Fed. The Fed’s assets (coin) and liabilities (Treasury’s account) increase by the same amount. As Beowulf notes later in a comment to the same post from Cullen, were the Fed to resist, the Federal Reserve Act clearly states that “wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” The Fed is legally an agency operating at the pleasure of the government, not vice versa. Regardless, the actions I describe here and below by the Treasury in no way interfere with the normal operations of monetary policy (explained in various places below). 3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin. The result is a decrease in the Treasury’s account at Fed and an increase in bank reserve balances held at the Fed. 4. Total debt service for the Treasury falls, too, as higher interest earning bonds are replaced with reserve balances earning 0.25%. Effective debt service on purchased bonds now is 0.25% since interest on reserve balances reduces the Fed’s profits that are returned to Treasury each year. 5. The retirement of bonds is an asset swap, no different from QE2, except that the Treasury has purchased the bonds instead of the Fed. But since the Treasury’s account is on the Fed’s balance sheet, there is no operational difference. That is, this is effectively “QE3, Treasury Style.” As with QE2, no net financial assets have been created for the non-government sector. The net effect, like QE2, is to reduce the term structure of US debt held by private investors, as bonds have been replaced with reserve balances. 6. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown. Banks can’t “do” anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is flawed, as I explained here over two years ago. 7. Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%. Again, this is not inflationary. There are three points to make in explaining why. First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a treasury security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no “taking money from one person to give it to another” zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and are known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets. Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all. Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income or dissaving, as opposed to additional spending out of additional income. The commonly held view that “more money” necessarily creates spending confuses “more money” with “more income.” QE—whether “Fed style” or “Treasury style”—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, “money” doesn’t spend itself. Further, by definition, spending more out of existing income is a re-leveraging of private sector balance sheets. This is highly unlikely in the current balance-sheet recession and is aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE. The exception is that QE may reduce interest rates, particularly if the Fed or (in this case) the Treasury sets a fixed bid and offers to purchase all bonds offered for sale at that price—though this again may not lead to more credit creation in a balance-sheet recession and has the negative effect of reducing the net interest income of the private sector. (As an aside, a key difficulty neoclassical economists are having at the moment is they do not recognize the difference between a balance-sheet recession and their own flawed understanding of Keynes’s liquidity trap.) 8. The debt ceiling crisis is averted, as US debt outstanding has been reduced by the dollar value of the minted coin, and can continue to be reduced as desired. This simple asset swap demonstrates that the self-imposed constraints of the debt-ceiling, counting Treasury securities held by the Fed against the debt ceiling, and forbidding the Fed from “lending” to the Treasury directly are just that—self-imposed—and are not operational constraints at all. The only constraint is in the flawed understanding of the monetary system that is standard today among the macroeconomists writing textbooks and advising policymakers, or acting as policymakers themselves. From points 6 and 7 above, this asset swap is not inflationary—spending without issuing bonds is not any more inflationary than spending with bond sales, as I explained here and here. 9. Fed is the monopoly supplier of reserve balances, the Treasury is the monopoly supplier of coins. Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed. It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients. Deficits would increase the quantity of reserve balances circulating and currently earning 0.25%. As MMT’ers have explained for years (even decades), the operational purpose of the Treasury’s sale of a bond is merely to aid the Fed’s ability to achieve its overnight target by draining reserve balances created by a deficit. But even selling bonds isn’t operationally necessary if the Fed pays interest on reserve balances at a rate equal to its target rate. On the other hand, if the Fed set the rate on reserve balances below its target and the Treasury no issuing bonds, the Fed could issue its own time deposits (with Congress’ blessing) to drain reserve balances created by a deficit. Whether the Fed’s target rate were set above the rate paid on reserve balances or equal to it, effective interest on the national debt clearly would be a monetary policy variable (as interest paid on reserve balances or on time deposits by the Fed reduces the Fed’s profits returned to the Treasury), as it at the very worst can be even under current operating procedures (see here and here). 10. This approach to dealing with the debt ceiling is far better than the recent proposal by Ron Paul, as again it lifts the veil on current monetary operations and recognizes the currency-issuing status of the US federal government. Instead, Paul proposes that the Fed destroy its holdings of Treasury securities. What’s strange about the proposal is that it shows that Paul either doesn’t understand monetary operations or is trying to have it both ways. Destroying the securities requires reducing the Fed’s capital by the same amount. Given the Fed’s miniscule level of capital (because, again, it has virtually no retained earnings after transferring them all to the Treasury each year), its capital would be way into negative territory. This isn’t a problem operationally, given that the Fed is the monopoly supplier of reserve balances. But recall that Paul was one of those protesting Credit Easing and QE1 the loudest, claiming that these would surely destroy the Fed’s capital and leave it insolvent. (Again, this is only relevant operationally under a gold standard or similar monetary arrangement—Paul and others like him want to analyze the US national debt and the Fed as if a gold standard existed, and then claim that a going on the gold standard is the solution to all of our problems, but I digress.) So, effectively Paul’s proposal would leave the Fed in a state of (in his view) “insolvency”—perhaps he does know what he’s doing and his debt ceiling proposal is just part of his grand plan to “end the Fed.” Otherwise, it would have been simpler to simply propose exempting the Treasury securities held by the Fed from counting toward the debt ceiling. Lastly, giving credit where it is due, I want to again recognize the efforts of both Joe Firestone and Beowulf in researching and explaining the legal basis for and operational implications of the Treasury’s Constitutional authority to mint its own coin(s). This post benefits significantly from their important, original work. wallstreetpit.com/79216-qe3-treasury-style-go-around-not-over-the-debt-ceiling-limit#comment-981461===================== "The Treasury mints a $1 trillion coin" What, the Treasury hit the mother load? Maybe 15 newly discovered sunken (gold laden), Spanish galleons? Or is it that a new audit by Ron Paul has discovered that the Treasury has previously stockpiled one trillion dollars worth of some combination of silver, gold, & platinum, ready to be stamped into the proper coinage? Or is the gold content of the dollar just to be revalued by administrative fiat (like in 1933), far above current market rates?
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flow5
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Post by flow5 on Jul 11, 2011 11:13:04 GMT -5
Financial crisis lands more bank examiners on job By Rick Rothacker Posted: Sunday, Jul. 10, 2011 The Federal Reserve has budgeted for 1,948 field examiners in 2011, up from 1,677 in 2008. At the Federal Deposit Insurance Corp., total examiners have climbed to 2,353 from 1,707 in 2008. The FDIC's numbers include retired examiners who were brought back on a temporary basis because of their experience dealing with past housing crises. After absorbing the Office of Thrift Supervision on July 21, the Office of the Comptroller of the Currency will have about 2,800 examiners. Because of the reorganization, it's difficult to make a comparison to past numbers, spokesman Bryan Hubbard said. Rick Rothacker Nearly a year after passage of a major financial reform law, federal bank examiners are beefing up their staff in Charlotte and around the country as they work to prevent another financial meltdown. On the hot seat in the aftermath of the crisis, regulators are focusing more intently on mortgage-related issues, reviewing capital plans before allowing banks to raise their dividends and implementing new rules mandated by Congress. The three major bank regulators boosting staff are the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. The OCC is gaining people through a merger with another agency, while the FDIC has added to its ranks by bringing back retired examiners. Highly confidential about their task, the regulators don't say how many people monitor each bank, where they all are located or exactly how they do their work. In many cases, the examiners are working side by side in the offices of the bankers they're regulating, a process known as "embedding." This allows examiners to work with sensitive information on-site and gives them easy access to executives, but can lead to tension from time to time, officials said. While banks often appreciate guidance from seasoned examiners, sometimes regulators are pointing out violations of law or disagreements in accounting methods, or they're raising questions about activities that can damage an institution's reputation, said Mike Brosnan, senior deputy comptroller for large bank supervision at the OCC. "You end up having conversations that are not really agreeable," said Brosnan, whose agency monitors national banks, including Bank of America and Wells Fargo. "But if we think we're right, and we have to be right ... we are pretty much undefeated in terms of resolving the issue." While banks have faced the lion's share of criticism in the aftermath of the financial crisis, regulators also have taken blame for their failure to head off the economic disaster. In a report this year, the Financial Crisis Inquiry Commission found that "regulators either failed or were late to identify the mistakes and problems of commercial banks and thrifts or did not react strongly enough when they were identified." The Dodd-Frank financial reform law passed last July imposed a litany of new restraints on the banking industry, from new limits on debit card interchange fees to a requirement that banks write "living wills" describing how to break up their companies in an emergency. The law has required regulators to write new rules - and to enforce them. Prior to the last financial crisis, regulators weren't vocal or proactive enough about the problems brewing in the industry, said Anthony Sabino, a law professor in the Peter J. Tobin College of Business at St. John's University. Having more trained examiners can only help, he said. "As they say in the military, it's more boots on the ground," Sabino said. Having embedded examiners is "absolutely an imperative" at a time when billions of dollars can be transferred around the globe at the touch of a button, he said. The big question going forward will be whether top regulators properly deploy their examiners. "Now that they have the troops," Sabino said, "are they sending them to the right battlefront?" Beefing up staffs In Charlotte, the Federal Reserve Bank of Richmond is looking to add eight examiners to its staff of 40. The OCC has about 100 here, up slightly from years past. For major exams, it can bring in 200 more from its own staff and other agencies. Under Dodd-Frank, the FDIC gained new powers to close down failing large financial institutions outside of bankruptcy court to avoid future bailouts. While the agency has long been able to smoothly close banks, regulators didn't previously have legal authority to shutter insurance firms and investment banks in a way that limits damage to the rest of the financial system. The FDIC's new Office of Complex Financial Institutions now maintains three to five resident analysts at 10 of the "largest and most complex" U.S. banking organizations, spokesman David Barr said. These analysts, working with other agencies, monitor and evaluate risks, review plans for closing companies in emergencies and conduct additional examinations when needed, he said. The FDIC doesn't disclose where these analysts are based, although Bank of America and Wells Fargo would be likely candidates for the program. Bank of America is the nation's biggest bank with more than $2 trillion in assets; Wells Fargo is No. 4 with $1.2 trillion. The agency is in the process of determining staffing for other banking organizations with assets of more than $100 billion, Barr said. Among other large N.C. banks, Winston-Salem-based BB&T has about $157 billion in assets. In Charlotte, the staffing changes come amid a time of transition for the city's big banks. Wachovia is now owned by San Francisco-based Wells Fargo, and Bank of America has bulked up with its purchase of Merrill Lynch. The OCC, for example, continues to monitor Wells Fargo in Charlotte but more of the work is now done in San Francisco, Brosnan said. The agency, however, now has more people than before covering the larger Bank of America, he said. While the FDIC has a new embedding program, the OCC and Fed have had examiners working inside Charlotte's banks for years. OCC examiners work in separate space leased by the agency and have access to their own terminals and bank systems. While they're not regularly looking over the shoulders of bank employees, they share hallways and elevators and hold meetings with their bank counterparts. Richmond Fed examiners spend time at the banks they cover but are considered based at the agency's branch in Charlotte. "Our practice of embedding is long established and will continue as we acclimate to the new financial regulations as part of Dodd-Frank," said Richmond Fed spokeswoman Laura Fortunato. Highly secretive process Bank examinations are a highly secretive process, although investigations of the financial crisis have shed some light on it. Documents released by the Financial Crisis Inquiry Commission revealed regulators' concerns about Wachovia's management in the years leading up to its near collapse. Examiners criticized Wachovia's board and top executives for lax risk management, "questionable strategic decisions" and a slow reaction to changing market and business conditions. A congressional examination of Bank of America's Merrill Lynch deal disclosed email exchanges among examiners who were alarmed at the bank's financial condition and agitated by its attempt to back out of the deal in December 2008. In one email, a now-retired Richmond Fed official, Mac Alfriend, passed along "preliminary thoughts on getting a pound of flesh" out of former Bank of America CEO Ken Lewis, including slashing the bank's dividend and hiring outside consultants to review corporate governance and risk management. The safety and soundness issues examiners faced in 2008 and 2009 were "absolutely brutal," Brosnan said. One of the lessons examiners learned has been to "hold your ground better in peacetime," he said. "Once a loan is delinquent it's too late." Brosnan stressed the importance of being fair, even in a time of tighter scrutiny of the industry. "My job is to make sure we do the right thing, be balanced and be tough because circumstances warrant it, not because it's the popular thing to do," he said. Patricia Callahan, Wells Fargo's chief administrative officer, said the bank is under scrutiny from more examiners today but that's partly because it's so much bigger after the Wachovia merger. "We get along fine with our regulators," Callahan said. "It's not an adversarial relationship. They are trying to do the right thing, and so are we." The focus of regulators will change as the world changes, she said. "Regulators have always looked at the mortgage business, but obviously it's a bigger focus today," Callahan said. A few years ago, regulators pressed Wells to improve its compliance with money-laundering regulations, and since then it has refined its internal controls, she said. At Bank of America, "our goal is to be clear and transparent with our regulators," spokeswoman Eloise Hale said. "We are committed to being responsive to any additional staff or questions that our regulators may have." At the OCC, examiners in charge for each bank have contracts to cover a bank for up to five years. After that, they are rotated to another bank or assignment, which can mean a move to another city. "We want to keep them fresh and learning," said Brosnan, who has been at the OCC since 1983, except for a four-year stint at MBNA and Bank of America. "It's a very healthy thing to do. It's not always convenient for them." At the OCC, typical examiner pay ranges from about $85,000 to $154,000. Those wages are in line with the average pay in Mecklenburg County for finance and insurance workers of $99,000, but pale in comparison to the millions that top bank executives can bring home. Examiners are paid well enough to attract and retain talent, Brosnan said, but he knows they could take other jobs and triple their pay. Examiners stay on the job because of the value they bring to the financial system and because of the influence they can wield in a company. In their roles, they can meet with top executives and boards and make constructive changes, he said. "They believe in what they do," he said, "and the impact of it." Read more: www.charlotteobserver.com/2011/07/10/2442855/financial-crisis-lands-more-bank.html#ixzz1RoWI3xzR=================== Better late than never? No, better never late.
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flow5
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Post by flow5 on Jul 11, 2011 17:18:36 GMT -5
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
06/29/11 0.01 0.02 0.11 0.19 0.47 0.79 1.70 2.44 3.14 4.08 4.39 06/30/11 0.01 0.03 0.10 0.19 0.45 0.81 1.76 2.50 3.18 4.09 4.38 07/01/11 0.01 0.02 0.10 0.20 0.50 0.85 1.80 2.54 3.22 4.12 4.40 07/05/11 0.01 0.02 0.08 0.19 0.44 0.77 1.70 2.46 3.16 4.09 4.39 07/06/11 0.01 0.01 0.06 0.19 0.43 0.75 1.66 2.41 3.12 4.05 4.35 07/07/11 0.03 0.03 0.07 0.20 0.49 0.83 1.74 2.48 3.17 4.08 4.37 07/08/11 0.03 0.03 0.07 0.17 0.40 0.70 1.57 2.32 3.03 3.97 4.27 07/11/11 0.02 0.03 0.07 0.17 0.37 0.64 1.49 2.22 2.94 3.88 4.20
============
QE2 ends > economy sinks > long-term rates fall.
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flow5
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Post by flow5 on Jul 12, 2011 6:39:28 GMT -5
Sheila Bair blames Geithner, Paulson and Bernanke for the credit crisis Political Economy | Edward Harrison | 11 July 2011 Former FDIC chair Sheila Bair’s departure from government has been unusual for a number of reasons. First, she is not getting on the gravy train in the private sector that former officials usually do. What’s more is she allowed the New York Times Joe Nocera to pen an exit interview with Bair that was scathing in its condemnation of both the Bush and Obama Administrations in which she served. More compellingly, she has now gone on the record with an Op-Ed in the Washington Post writing those same sharp criticisms herself. The nation is still struggling with the effects of the most serious financial crisis and economic downturn since the Great Depression. But Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago.And some in government who claim to be representing Main Street seem all too ready to help. Already we have heard rationalization of the subprime mortgage debacle and denigration of those of us who have advocated long-term, structural changes in the way we regulate the financial industry. Too many industry leaders, as well as some government officials, compare the crisis to a 100-year flood. “Who, us?” they say. “We didn’t do anything wrong. Nobody saw this coming.” The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society. -Short-termism and the risk of another financial crisis Bair is too diplomatic to name names. But she is as blunt and direct as you can be without doing so. While no names were named it is abundantly clear from the Nocera piece at whom she points a disapproving finger: Paulson, Summers, Geithner, Bernanke, Greenspan. In fact, looking through the Credit Writedowns archives I see myself using the same language as Bair, pointing at the same characters. For example, on the ‘100-year flood’ I wrote the following parody of Geithner and Summers’ thinking last November (click the links and read to see the falsity of this parody narrative): "Wow, this crisis has been more severe than anyone could have imagined. Obviously, none of this was foreseeable because the U.S. banking system is basically sound. We have the most robust and competitive institutions in the world. So my calls for gutting regulation in the past [Summers as Treasury Sec.] and my looking the other way as leverage built up all around me in the lead up to crisis [Geithner at the NY Fed] cannot be faulted. Certainly, if some government watchdogs had picked up on an epidemic of financial fraud being perpetrated, that would be another story. So, what do we do now that this 100-year flood has come our way? We'll probably be forced to do deeply unpopular, deeply hard to understand things like bailing out the banks. It's not like we want to do this. But we have to because the banks are suffering a liquidity crisis; we can't just put them into receivership like the obviously insolvent Fannie and Freddie. They just need a little push, some stress tests and we can get through this. Anyway, people would panic if we took a big bank into receivership. They couldn't open for business. -A few comments about Tuesday's election's impact on the economy On these Voodoo People and their short-termism causing another crisis, I wrote last April: "it's the debt, stupid." When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy. This short-termism that [William] White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don't work anymore. And that's when the next crisis occurs. -The origins of the next crisis This is the exact same terminology Bair is using. So clearly, when she says “some of us did see this coming”, it is true, some of us did see this coming. And what we are saying now is that we are headed for another crisis in short order. And I suspect when this is over , that’s when people will start taking her view more seriously. www.creditwritedowns.com/2011/07/sheila-bair-blames-geithner-paulson-and-bernanke-for-the-credit-crisis.html
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flow5
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Post by flow5 on Jul 12, 2011 12:15:12 GMT -5
WASHINGTON -(Dow Jones)- Big-money investors such as hedge funds received more-favorable credit terms during the spring, a U.S. Federal Reserve survey said Monday.
The quarterly Senior Credit Officer Opinion survey focuses on WHOLESALE CREDIT MARKETS, and the findings of the latest report were similar to those in the last survey, released in March.
The report is modeled on the better-known Senior Loan Officer Survey, which tracks traditional bank lending to households and companies. The credit survey looks at the so-called "shadow" banking system.
The shadow-banking system has played an increasingly important role during the past decade in getting credit to firms and individuals but ran into trouble in the financial crisis.
The survey released Monday found lenders gave more-favorable credit terms to HEDGE FUNDS, PRIVATE-EQUITY FIRMS, INSURANCE COMPANIES, PENSION FUNDS, and other big investors. The reasons cited were more-aggressive competition from other lenders and an improvement in market liquidity.
The survey also found more than one-half of the respondents noted an increase in the intensity of efforts by PRIVATE POOLS OF CAPITAL to negotiate more- favorable price and nonprice terms over the past three months. "Looking forward over the next three months, a majority of DEALERS expected price and nonprice terms applicable to private pools of capital to remain basically unchanged, while one-fifth of respondents, on balance, indicated that they anticipated further easing of terms," the report said.
As for securities financing, firms responding to the survey reported an easing of some financing terms for a broad spectrum of SECURITIES, including HIGH-GRADE CORPORATE BONDS, EQUITIES, AGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES, & OTHER ASSET BACKED SECURITIES.
The survey found little change in the terms for over-the-counter derivatives.
The central bank's survey was conducted from May 23 to June 3. Twenty big financial institutions in the U.S. were asked about changes between March and May.
-By Jeff Bater, Dow Jones Newswires; 202 862 9249;
================
The increased worldwide reliance of financial institutions on short-term WHOLESALE FUNDS was a major contributor to the Great Recession.
For example, a brokered deposit (wholesale funds), is a large-denomination deposit similar to a certificate of deposit. It is a non-retail deposit. "A brokered deposit is sold by a bank to a brokerage, which then divides it into smaller pieces for sale to its customers."
The sharp increases in the TED & LIBOR-OIS spreads during 2007-2008 reflected a liquidity crunch and maturity mis-matches.
Ted Spread (difference between the 3-month US LIBOR and US T-Bill rate) and the LIBOR-OIS Spread (difference between the 3-month US LIBOR and the overnight interest swap rate).
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Post by maui1 on Jul 13, 2011 11:17:22 GMT -5
"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.
Bernanke also said it was possible that inflationary pressures spurred by higher energy and food prices may end up being more persistent than the Fed anticipates. He said that the central bank would be prepared to start raising interest rates faster than currently contemplated, if prices don't moderate.
two conflicting statements in the same speech should let everyone know that he doesn't have the foggiest idea of what the hell he is doing, but he is certianly certain, that he will do something to "fix" something.
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silverguy25
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Post by silverguy25 on Jul 13, 2011 11:30:38 GMT -5
This is bullshit. Is it not obvious that the economy can't run anymore without "additional policy support"? Additional, that makes me laugh. What that douchebag should really say is "perpetual policy support" because thats what it really is. All this talk of recovery on this site, its complete horseshit. And I'll continue to think that until the economy can run without taxpayer support.
3 years of this nonsense, and were no better for it.
*Rant over*
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Post by maui1 on Jul 13, 2011 12:00:17 GMT -5
Is it not obvious that the economy can't run anymore without "additional policy support"?
same thing with welfare........welfare creates a dependence on more welfare.
money support creates a dependence on more money support.
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flow5
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Post by flow5 on Jul 13, 2011 19:56:45 GMT -5
LEE ADLER wallstreetexaminer.com
The Fed will announce its POMO schedule for the next month [Wednesday] at 2 PM. The purpose of these operations will be to replace maturing GSE paper and MBS paydowns to keep the total size of the balance sheet level at roughly $2.65 trillion. This should translate to operations averaging about $2 billion, per week. That is a drop in the bucket and will put the Primary Dealers, and hence the financial markets, on a starvation diet. The PDs will be left to absorb the bulk of $120-$150 billion in Treasury supply each month with no help from Dr. Bernankenstein. He's now experimenting with starving his monster to see what happens. It will be ugly.
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bimetalaupt
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Post by bimetalaupt on Jul 13, 2011 21:51:14 GMT -5
This is bullshit. Is it not obvious that the economy can't run anymore without "additional policy support"? Additional, that makes me laugh. What that douchebag should really say is "perpetual policy support" because thats what it really is. All this talk of recovery on this site, its complete horseshit. And I'll continue to think that until the economy can run without taxpayer support. 3 years of this nonsense, and were no better for it. *Rant over* Silver Guy25, Two point you may have missed..\ 1: The Federal Reserve makes a ton of money on QE1 and QE2... They rebated the Treasury department about $50 Billion dollars 2010 for rent of the paper FIAT money the Federal; Reserve used to buy bonds with. 2: The USA industrial base is re-tooling to be the most efferent producer in the world.. OK we may be stingy in pay and SS Benefits but we can underbid most major World industrial posers.. OK China makes things cheaper because they burn open coal fires and destroy the farm land but that will catch up with them real soon. See chart on USA being #1 in productivity.. We are now lower cost of EFFECTIVE wages then JAPAN, Germany , Finland and Sweden. THE USA IS #1 IN OUTPUT PER HOUR ..CHECK OUT THE CHART..WE ARE NOW SEEING "MADE IN THE USA".. ADD SHORT SUPPLY LINE AND LOWER COST TO SHIP.. Just a thought, Bi Metal Au Pt Yes Posers.. Not real but pretending to be by using vast bank loans to create the elution of profits. Attachments:
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silverguy25
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Post by silverguy25 on Jul 13, 2011 22:35:06 GMT -5
1. Sure, alot of money that wasnt earned. Meaning it was created out of nothing, supported by nothing, and continues to lanquish in nothing. Kiting checks is a bad offense if done by the average person, not so much the banking sector I suppose...
2. I agree on that matter, it seems alot of demand is not being filled on the manufacturing front, but eventually will.
Thanks for the link, Bi Metal
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Aman A.K.A. Ahamburger
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Viva La Revolucion!
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Post by Aman A.K.A. Ahamburger on Jul 13, 2011 23:00:57 GMT -5
The banking sector had to get bail out for writing bad checks to people who were irresponsible with their money.. It was bad all around. However, right now the UST is going to profit from from acting with the FED in the situation. The bonds are supported by the US which as BTI points out is looking better all the time. Banking panics aren't new, however the UST making money off of irresponsible banks is.
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bimetalaupt
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Post by bimetalaupt on Jul 14, 2011 0:02:09 GMT -5
1. Sure, alot of money that wasnt earned. Meaning it was created out of nothing, supported by nothing, and continues to lanquish in nothing. Kiting checks is a bad offense if done by the average person, not so much the banking sector I suppose... 2. I agree on that matter, it seems alot of demand is not being filled on the manufacturing front, but eventually will. Thanks for the link, Bi Metal Silver guy 25, What more can I say..FIAT money to borrow and payback with hard assets to own.."Money for Nothing, Pay-go for FREE"... Well all the major European SS Plans are now pay as you go.. that is why Germany just reduced payments to 42% replacement income...The does reduce the risk of inflation to zero as money in France or Germany system stays in the system for the average of 14 days... This is why France had policeman in the streets on both sides of the riot fence. Fence that!!! Greek workers are about the revolt.. Yes kman I said revolt.. Guns and Molitoff cocktails...with real gasoline.. So who would buy a bond from them? Just a thought, Bi Metal Au Pt Attachments:
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