I was curious last year when central banks were reported ‘injecting’ billions to shore up the ailing banking system. As it turned out these injections were overnight loans to facilitate transfers between banks.
It seems the banks were unwilling or unable to run with their own short term transfer buffers. At the heart of the global issue is that banks and other financial institutions will no longer lend to each other. As it happens the central banks were making a handy profit on those transactions, it was just a poorly sold concept. The US Fed has upped the ante now.
When the Fed announced lending Treasury notes in exchange for debt that includes mortgage-backed securities, to the tune of $200 billion, it was obviously a different scenario. A far more problematic scenario, rather than an overnight turnaround we are talking more extended periods to the greedy bastards behind the sub-prime fiasco.
Shave and a haircut
The deal, it appears, is that the Fed will auction treasury notes off to a bunch of their primary dealers including Goldman Sachs Group. Inc., Bear Stearns Cos. and Merrill Lynch & Co., who will then lend the Treasuries on to other firms in return for cash, to help the dealers finance their balance sheets
The loans will be made in exchange for a wide variety of collateral, including mortgage debt, which will be discounted by up to 10% in recognition of the dubious value. I guess the lenders involved would be happy to take a mega interest rate and risk losing their dodgy mortgage portfolios in return for cash in hand. They call this discounting a haircut; cute…
The good news is this is a creative alternative to the unsuccessful toying with interest rates. The bad news it seems would fill a major text book. It is, at best, a stop gap measure. Like interest rates and other tools being employed the time frame for any sort of positive movement is months, not days or weeks.
But worst of all is the risk of giving the Beagle Boys the keys to the bank vault. You can be sure they aren’t going to just go in and dust the shelves and polish the gold bars. At best these sub-prime lenders were incredibly incompetent, at worst they were outright crooks. Either way it was all about greed and now the Fed is going to give them another bite of the apple.
Papering over the problems
At least since
For instance, the credit problems began when there was too much cash available. Decreasing rates is meant, in the
At present it seems the Fed doesn’t know if it’s an armpit or an ear hole. On the one hand it is keen to work market economics, the free market then on the other it is wildly interventionist, socializing debt. Rather than punishing predatory lenders the Fed wants everyone to reward them.
Surely it is time for a reality check - it is time to bite the bullet and recognise it is not business as usual – it is time to get down and reduce money supply! Every time the
The notion is now out of control. Doubtless the remedy will be painful, but putting off taking the bitter pill is hardly an answer when the country is suffering anyway, and beginning to infect other economies as well. Before we have another great crash the
11 comments:
I agree with the sentiment and the wisdom of your post.
However below are a few points for you to also consider in the shorter term.
When the crisis was first acknowledged Dr Benn Bernanke moved very quickly to instill confidence in the capital markets, but at the same time was also one of the first to declare cases of fraud and ensure legislation was immediately placed before Congress to tighten prudential standards for lenders. Currently there are also 15 large companies being investigated for fraud and trading breaches.
Notwithstanding banking and securities sector woes, most US companies are sound, with relatively low borrowings and good prospects, particually for those whose earnings are largely from offshore. In my view Bernanke temporarily has no other current choice than to continue to make available facilities, run a loose monetary policy and reduce interest rates. Reason: If your in danger of dying don’t worry about the effects of too much adrenalin but go ahead anyway and inject it and to hell with the inflationary effect. Greenspan before him was in similar bind with a run away Govt spending although you could argue he did not se the sub prime mortgage coming, but to be fair you can’t formulate policy on the basis of expecting fraudulent behaviors and when your Govt is a spending on an unsustainable basis for current consumption, (Not investment) you policy is limited.
So the real culprit is the massive spending by the government which curtails policy options for stimulatory packages. The Budget was in surplus 10 years ago but is now massively in deficit! The amount owing is now reaching staggering proportions and as you say the Federal Reserves can only use the blunt instruments available to them
But I agree a dose of reality would be welcome and some old fashioned churchlilian oratory, saddled firmly into rhetoric of the current presidential contenders would not go astray, yet none in my view give any inkling as to the task ahead. Why aren’t voters more concerned ? Time is running out for more IOU’s but the situatiuon is not terminal.
The US still has some great Assets, as Sovereign Funds ouside the US are keen to buy.
Best wishes
“The US still has some great Assets, as Sovereign Funds outside the US are keen to buy.” I don’t doubt that and the pickings should be rich.
I know I was a little intemperate, but I expect I could go back two years on this blog and find warnings of the looming crisis. It was that far back that concern was being expressed over the Fannie/Freddie links to the mortgage market. There was concern the industry was running out of control.
More than that the 2006 mid terms showed the major parties had no idea of the depth of suburban hardship, particularly through the rust belt states. The focus was still on booming markets.
It seems to me that the longer this drags on the greater the final damage. I accept your more cautious approach, but will still stand as the rabble rouser :)
Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold 1/2 OF ALL UNITED STATES WEALTH. Unlike ‘lesser’ estimates, this includes all stocks, bonds, cash, and material assets held by America’s richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own ‘humanitarian’ spin on it. Calling attention to her own ‘good will’. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST 1% HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don’t fall for any of their ‘humanitarian’ CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can’t just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world’s richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy..... Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars. Transfered FROM US TO THEM. Over a period of about 27 years. Thats Reaganomics for you. The wealth does not ‘trickle down’ as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They will never settle for a reasonable share of ANYTHING. They will do whatever it takes to get even richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductible crumbs and call themselves ‘humanitarians’. Cashing in on the PR and getting even richer the following year. IT CAN’T WORK THIS WAY. Their bogus efforts to make the world a better place can not possibly succeed. Any 'humanitarian' progress made in one area will be lost in another. EVERY SINGLE TIME. IT ABSOLUTELY CAN NOT WORK THIS WAY. This is going to end just like a game of Monopoly. The current US recession will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. Crime, poverty, and suicide will skyrocket. So don’t fall for all of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductible contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah, Ellen, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. Now, there are commercial ties between nearly every industry and every public figure. IT MAKES THEM RICHER. So don’t fall for their ‘good will’ BS. ITS A LIE. If you fall for it, then you’re a fool.. If you see any real difference between the moral character of a celebrity, politician, attorney, or executive, then you’re a fool. WAKE UP PEOPLE. THEIR GOAL IS TO WIN THE GAME. The 1% club will always say or do whatever it takes to get as rich as possible. Without the slightest regard for anything or anyone but themselves. Reaganomics. Their idea. Loans from China.. Their idea. NAFTA. Their idea. Outsourcing. Their idea. Sub-prime. Their idea. The commercial lobbyist. Their idea. The multi-million dollar lawsuit.. Their idea. $200 cell phone bills. Their idea. $200 basketball shoes. Their idea. $30 late fees. Their idea. $30 NSF fees. Their idea. $20 DVDs. Their idea. Subliminal advertising. Their idea. Brainwash plots on TV. Their idea... Prozac, Zanex, Vioxx, and Celebrex. Their idea. The MASSIVE campaign to turn every American into a brainwashed, credit card, pharmaceutical, love-sick, couch potatoe, celebrity junkie. Their idea. All of the above shrink the middle class, concentrate the world’s wealth and resources, and wreak havok on society. All of which have been CREATED AND ENDORSED by celebrities, athletes, executives, entrepreneurs, attorneys, and politicians. IT MAKES THEM RICHER. So don’t fall for any of their ‘good will’ ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTIBLE PR CRAP.. In many cases, the 'charitable' contribution is almost entirely offset.. Not to mention the opportunity to plug their name, image, product, and 'good will' all at once. IT MAKES THEM RICHER. These filthy pigs even have the nerve to throw a fit and spin up a misleading defense with regard to 'tax revenue'. ITS A SHAM. THEY SCREWED UP THE EQUATION TO BEGIN WITH. ITS THEIR OWN DAMN FAULT. If the middle and lower classes had a greater share of the pie, they could easily cover a greater share of the federal tax revenue. They are held down in many ways because of greed. Wages remain stagnant for millions because the executives, celebrities, athletes, attorneys, and entrepreneurs, are paid millions. They over-sell, over-charge, under-pay, outsource, cut jobs, and benefits to increase their bottom line. As their profits rise, so do the stock values. Which are owned primarily by the richest 5%. As more United States wealth rises to the top, the middle and lower classes inevitably suffer. This reduces the potential tax reveue drawn from those brackets. At the same time, it wreaks havok on middle and lower class communities and increases the need for financial aid.. Not to mention the spike in crime because of it. There is a dominoe effect to consider. So when people forgive the rich for all of the above and then praise them for paying a greater share of the FEDERAL income taxes, its like nails on a chalk board. If these filthy pigs want to be over-paid, then they should be over-taxed as well. Remember: The richest 1% STILL own 1/2 of all United States wealth EVEN AFTER taxes, charity, and PR CRAP. A similar rule applies worldwide. There is nothing anyone can say to justify that. Anyway, there is usually a higher state and local burden on the middle class. They get little or nothing without a local tax increase. Otherwise, the red inks flows like a waterfall. Service cuts and lay-offs follow. Again, because of the OBSCENE distribution of bottom line wealth in this country. I can not accept any theory that our economy would suffer in any way with a more reasonable distribution of wealth. Afterall, it was more reasonable 30 years ago. Before Reaganomics came along. Before GREED became such an epidemic. Before we had an army of over-paid executives, celebrities, athletes, attorneys, investors, entrepreneurs, developers, and sold-out politicians to kiss their asses. As a nation, we were in much better shape. Lower crime rate, more widespread prosperity, stable job market, free and clear assets, lower deficit, ect. Our economy as a whole was much more stable and prosperous for the majority. WITHOUT LOANS FROM CHINA. Now, we have a more obscene distribution of bottom line wealth than ever before. We have a sold-out government, crumbling infrastructure, energy crisis, home forclosure epidemic, 13 figure national deficit, and 12 figure annual shortfall. ALL BECAUSE OF GREED. I really don't blame the 2nd -5th percentiles. No economy could ever function without some reasonable scale of personal wealth and income. But it can't be allowed to run wild like a mad dog. GREED KILLS. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, Drew, and Bill are not part of the solution.. They are part of the problem. THERE IS NO SUCH THING AS A MULTI-MILLIONAIRE HUMANITARIAN. EXTREME WEALTH HAS MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.
we are talking more extended periods to the greedy bastards behind the sub-prime fiasco
This and anon's comment says it all. The biggest problem that the US faces is that our economic pyramid is so top heavy that the weight of the capstone is crushing the base. The combined wealth of the top 1% exceeds that of the bottom 90%, and the Fed's latest move is for the benefit of that top 1%.
Thanks Tom. It really is getting to the stage when being sort of right still doesn't help much.
There has been an unprecedented movement of wealth to the top 1% in the US, particularly in the past 10 years.
The taxation system is skewed towards the wealthy and in my view needs urgent review; disappointedly there is very little debate on this factor at this point in time.
In the latest on the sub prime effects I noticed Bear Stearns Cos, a Wall Street banker may have seen its last days to trade independently as the much larger JP Morgan Chase is considering buying the company currently suffering from a lack of cash.
On Friday it was reported they got emergency funding from the Federal Reserve and JP Morgan in a deal which failed to quell the mounting concerns of both customers and shareholders as its shares plunged over 40%.If a Wall Street banker files for bankruptcy all assets are frozen, including customers deposits, so the deal will ensure that doesn’t happens, the perceived better option.
Otherwise you will have widespread panic amongst depositors.
Once again I don’t think the Fed had any other option, considering the 2 bad outcomes, undoubtedly it was best not to allow the company to go to the wall as it would compound and further exasperate panic and compound the credit crunch.
There may be more to come although the worst of the write offs are probably now known and realized.
What is most puzzling to many is the idea of lack of accountability in the whole of the sub prime fiasco involved 3 essential ingredients, each being interdependent upon the other for its continuance.
eg
Lenders didn’t care who they lent money and the ability to repay providing it was backed up by real estate. They didn’t care about any obligation to pay it back. This is foreign type of thinking to most.
A large number of borrowers were equally reckless and didn’t care about the financial implications and give any thought as to the repayment or the contract they were signing, read it and realise its onerous future outcomes , or alternatively presumably went along with the guise. This is also foreign type of thinking to most, how many were genuinely misled is hard to tell.
Large measures of fraud and greed was necessary on a scale sufficient to fuel the fire and provide its continued lifeblood.
Best wishes.
Lindsay, I saw the Bear Stearns collapse as just more evidence of a major problem looming.
This is still dealing with the mortgage issue to a great extent, the potential commercial loan mess hasn't started to unfold yet.
It seems a bit late for the US Fed to start talking about regulating the loan market. Though I guess they have to start sometime.
Time for some good news on our home front ?
The Reserve Bank of Australia released its minutes to day from its previous meeting and together with other economic news which highlight the following facts:
Primary inflation risk remains a risk as higher wages flowing from tight labour markets are likely to aggravate inflation. Outlook for commodity prices is further improving, with very big increases recently negotiated. Terms of trade remain strong and represent the best in the past 50 years, adding federally to an additional tax windfall now expected upwards of $8 billion. The Budget surplus is consequently now likely to reach $ 20 Billion or even more, miles in front of Swans 1.5% of GDP.
Australian Banks are securing their finance requirements at interest rates at a fraction of their US counterparts (although still very high) as their quality of their assets and earnings remain relatively strong. Some have almost fully secured their requirements for the whole of this year already, much, much further advanced in the cycle than in any previous years.
I would like to see their Govt make these points more widely known to the general populace, to encourage people that are worried about their Super Fund, which incidentally are heavily invested in Australian banks, and to prevent a run on the Super funds should people panic with lower values. The bank market indices have declined 36% from its peak last year. This is overblown in my view, a crazy reaction in my view driven by fear and a lack of understanding of their actual financial position.
However moderation has been noted recently in business and consumer spending and in housing finance which means we remain uncertain for their rest of the year, but Australia is superbly posited to ride out the storm, and invest upwards of 10 billion in sustainable energy alternatives and in infrastructure to secure our long term future. It’s time for Swan to step up to the pulpit and deliver this message, not an old codgers like me!! .
I think the tightening period has now ended, its time to talk about the good news for a change. With 20 Billion in the pocket, what' the problem?
“It’s time for Swan to step up to the pulpit and deliver this message, not an old codgers like me!!”
Lindsay, I don’t buy the old codger bit, though you could be right about Swan. Actually, until he brings down a budget I suspect Ken Henry and Glenn Stephens should be talking this up.
Back to the old, I’m finding your insights as valuable as those of Ross Gittins in the SMH, and I argue with Gittins more. I’m fearful of the mid term US situation, but we should weather the storm, as you point out. The China steel approach to BHP and Rio is a storm in a tea cup, as they need the iron ore and can’t rely on one supplier.
I’m up to my cart-lobes this week, trying to meet some funding deadlines. I look forward to just being an almost old codger and regurgitating your news. Thanks
Update
The Reserve bank is still concerned, but this time about Immigration.
Immigration is not something we talk about much these days. It has been of huge benefit to Australia but it seems the Reserve Bank is concerned over demand noting an overall net increase of 318,500 in Australia for the year of which 180,000 was in skilled migrant labour.
This will keep adding to the property price bubble, and demand driven inflation. Most of the increased demand, for established homes is due to the influx of skilled immigrants and their demands for new housing etc.We have to be careful we don’t build our own home grown property bubble and I thnk maybe its time for fresh debate on immigation numbers.
The mining sector only employs relatively few .
Best wishes
I am ambivalent about immigration. The gut feeling is opposed to the hard border, as history tends to ebb and flow across them regardless. The environmental limitations, the level of population that can be sustained from available resources is a worry.
The economic argument seems analogous to the women in the workforce argument. We’ll do it when it suits then attack the women or immigrants (and recently older workers) when they are no longer needed.
I know for someone who champions regulation ad intervention I sound a little contradictory, and I probably am. But again, the gut feeling; Society finds its own levels, just like water.
Immigration is no doubt worth exploring, but not as a potential pariah, any more than women in the workforce should be revisited as an issue. It sounds like another easy excuse while we continue to ignore the fundamentals.
Among those fundamentals is how the country’s wealth is distributed. Surely if we accept a paradigm an equitable distribution of wealth we’d be closer to an answer to a smoother economic regime.
I know it sounds socialist, but I’d argue that it is close to where Galbraith took Keynes. It is a logical extension of classical liberalism (though our American friends will misunderstand that term.)
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