by ilene - September 26th, 2009 7:21 pm
Courtesy of The Pragmatic Capitalist
As I ponder the implications of the Fed’s printing press and the potentially disastrous bank run rally I question the actions taken by our Central Bank. Reader Finn posted some excellent quotes the other day. Fortunately for the reader these quotes/thoughts are from men far more intelligent than I. To say that these comments have withstood the test of time is a great understatement:
“We have come to be one of the worst ruled, one of the most completely controlled governments in the civilized world – no longer a government of free opinion, no longer a government by a vole of the majority, but a government by the opinion and duress of a small group of dominant men.
“Some of the biggest men in the United States, in the field of commerce and manufacture, are afraid of something. They know that there is a power so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it”
- Woodrow Wilson
“These international bankers and Rockefeller-Standard Oil interests control the majority of newspaper and the columns of these papers to club into submission or drive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible government.”
-Theodore Roosevelt
“I have two great enemies, the Southern Army front of me and the financial institution in the rear. Of the two, the one in my rear is my greatest foe.”
-Abraham Lincoln
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”
– Andrew
…
Tags: bank runs, central bank, Federal Reserve, international bankers, money printing, Rockefeller-Standard Oil interests
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by ilene - September 26th, 2009 11:24 am
Courtesy of Jesse’s Café Américain
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The Fed is holding a significant amount of assets on its books in the form of Treasuries. For example, the Fed has purchased an enormous amount of US Treasury issuance in the past six months as part of its quantitative easing program, aka monetization. It has also taken on tranches of mortgage debt obligations from the banks, purportedly to improve the banks capitalization profile because of the dodgy nature of the assets.
This has added significant short term liquidity to the system, much of it held by the banks for interest at the Federal Reserve itself.
At some point the Fed will wish to reduce the levels of liquidity in the system. One way to do this is by increasing interest rate targets. It can achieve this, for example, by increasing the amount it pays for reserves.
The traditional way for the Fed to drain liquidity is to conduct what is known as a reverse repurchase agreement, or reverse repo.
In a normal repurchase agreement or repo, the Fed purchases assets held by the banks, normally Treasuries, which obviously increases the ‘cash’ being held by the bank. A repurchase agreement is by definition for a specific amount of time. At the end of the period the Fed sells the asset back to the bank. The difference in amounts is the ‘interest’ which changes hands for the transaction.
There is also a type of purchase agreement with no buyback. It is known as a PMO, or Permanent Market Operation. These are used to add liquidity as the name implies, permanently.
A reverse repo is just the opposite. In this case, the Fed sells an asset from its balance sheet to an institution for ‘cash’ and thereby drains or takes cash liquidity out of the system.
Aren’t Treasuries as good as ‘cash?’ Why does it matter whether a bank is holding Treasuries or cash on its books? Apparently not the case, at least for accounting and regulatory purposes. Remember that the next time someone tells you that banks do not need depositors. Sometimes they do.
Typically the Fed has only done this type of operation with a group of about twenty or so financial institutions known as the Primary Dealers.
According to this news piece, the reason the Fed is looking to the…
Tags: Ben Bernanke, central bank, Federal Reserve, Money Market Funds, reverse repos, Wall Street investment banks
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by ilene - September 11th, 2009 8:21 pm
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Courtesy of Charles Hugh Smith, Of Two Minds
The conventional wisdom is that the current financial meltdown resulted from the failure of "capitalism" (As if crony/State capitalism was ever anything but a simulacrum of free market enterprise.)
But perhaps the current slow-moving collapse is merely the final failure of the Grand Experiment: that central banks can manipulate the economy to some steady-state "growth" without end.
It is an irony, to be sure, that the emergence of central banks in the early years of the 20th century was in reaction to short-lived but scary financial seizures like the 1907 Panic. The irony is that such panics were sharp but also short-lived. Now that the central banks have spent decades manipulating the economies of the world with mad "behind the scenes" pulling of monetary and fiscal levers, downturns are not getting shorter but longer, and not getting shallower but deeper.
I think the following charts make a good case that the Grand Experiment was ontologically doomed to fail. I would argue that policy is not a feedback loop like the market; you cannot eliminate feedback from the real world and substitute manipulation in its stead. This is akin to enforcing the "policy" that relieving the patients’ symptoms is equivalent to restoring their health.
Relieving symptoms is not equivalent to being healthy, as these charts suggest.
Courtesy of my astute colleague Karl Denninger at Market Ticker:
It is not coincidence that the deep recessions of 1974-75 and 1981-83 were followed by a rise in debt. Look at the first chart and then the second one. Note the ramp-up of debt after the Federal Reserve realized that its usual levers of monetary "loosening" were ineffectual.
Their "solution" was to create credit--lots of it. the credit machine started gaining speed and finally achieved lift-off when Greenspan countered the modest 2001 recession with a full-blown explosion of low-interest-rate credit expansion.
Predictably, this explosion of debt triggered an asset bubble in a variety of asset classes, most notably real estate. The results are visible here:
Easy margin requirements and free-flowing credit helped boost the dot-com boom in the late 90s, which resulted in a rise in equity. As that bubble burst, the Fed turned the spigots wide open and…
Tags: capitalism, central bank, debt, financial meltdown, government, the Federal Reserve
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by ilene - June 25th, 2009 8:18 pm
Courtesy of Tom Lindmark at But Then What
The Fed has announced that it’s extending the maturity of most of its alphabet soup of lending program
s from the end of the year until February 2010. Here is the opening paragraph of their statement:
The Federal Reserve on Thursday announced extensions of and modifications to a number of its liquidity programs. Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time. As a consequence, to promote financial stability and support the flow of credit to households and businesses, the Federal Reserve is extending a number of facilities through early 2010. At the same time, in light of the improvement in financial conditions and reduced usage of some facilities, the Federal Reserve is trimming the size and changing the terms of some facilities.
You can check out the entire press release to see what’s happening to your favorite program.
At this point in time the financial markets are hooked on central bank support throughout the world. They have improved only in the sense that counterparties trade with one and other on the presumption of sovereign support. Until that support is withdrawn it seems to me relatively impossible to assess the true functionality of the markets.
I found this article that was published a couple of days ago by MarketWatch pertinent:
Who says the credit crunch is over?
Not banks that operate in the euro zone, evidently. The European Central Bank issued a pretty simple proposition: borrow whatever you want, for one year at 1%.
The answer to that historic first was — yes, please!
Over 442 billion euros, or over $600 billion, was lent. That was more than the loosely-pegged 300 billion euro consensus, though short of some whispers that up to 1 trillion euros would have been allocated.
And who could blame the banks?
True, they can borrow for even more cheaply than 1%. Three-month and six-month inter-bank lending rates in the euro zone are running over a quarter-point lower than that.
And whatever the hawkish noises from ECB members like Axel Weber, interest rates aren’t going up anytime soon with the euro-zone economy stuttering as it is.
But the
…
Tags: central bank, federal programs, financial markets, taxpayer subsidies
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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