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21 - Other path finders
Nouriel Roubini: Face of the crisis
“He’s been the most right of all the economists around,” - George Soros
Before this, he earned his PhD from Harvard, working in the economics department at Yale and spending two years as a policymaker in Washington, including serving as senior adviser to Tim Geithner, then an undersecretary at the Treasury.
Dr Doom, the professor who predicted the crisis.
(born on March 29, 1958 in is a professor of economics at New York University. He is also the chairman of RGE Monitor, an economic and financial analysis firm.
Two years ago, Nouriel Roubini predicted the current economic crisis. Now he sees things becoming far worse. BY STEPHEN MIHM August 15, 2008, New York Times Sunday Magazine
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
It appears almost everything Dr Doom describe here has eventuated by Oct 2008. The only variance is that the speed of these events unfolding is faster that Dr Doom’s prediction. On the front, Dr Doom appears “too optimistic!”. Eg. he said it takes 2 years for those investment back to fold, actually it only took 7 months. All big 5 individual Investment bank fell.
- The Roubini prophecy
The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster
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Nouriel Roubini Feb 5, 2008
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.
To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.
To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.
Start first with the recession that is now enveloping the US economy. Let us assume – as likely - that this recession – that already started in December 2007 - will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households – whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?
Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…
20 - IMF
CAPITALIZING ON THE CRISIS
RETURN OF THE IMF Laurence Neville http://www.gfmag.com/index.php?idPage=1073
Having avoided the headlines for years, the International Monetary Fund found itself squarely in the spotlight in October as it made a series of emergency loans to Hungary, Iceland and Ukraine.
In addition to flexibility on conditionality, there are other signs of new thinking by the IMF. At the end of October it announced a new Short-Term Liquidity Facility that will deliver funds to countries deemed to be responsibly managed almost immediatel and, crucially, with no conditions梚f they are hit by financial turbulence. 揟he IMF has had a long discussion about contingent credit lines and how to make them available without creating a stigma and risking that country抯 stability as well as ensuring some minimum degree of conditionality so that countries do not stray from responsible macro policies,?explains Barcap抯 Keller. 揟he Short-Term Liquidity Facility announced recently appears to meet these needs: Countries are pre-qualified so that help is immediate, and it is a confidential process, so there should be no market fallout.?br />
Countries will be able to borrow up to 500% of their quota through the Short-Term Liquidity Facility梒ountries?quotas are related to their size in the global economy梞eaning that Brazil, for example, could borrow up to $22.5 billion. Loans are for three months at regular IMF interest rates and can be renewed twice within a 12-month period.
Role of the saviors
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up. - Dow Will Equal Gold in 2009 Peter Cooper Dec 4 seekingalpha
The International Monetary Fund (IMF) came into official existence on December 27, 1945, when 29 countries signed its Articles of Agreement at a conference held in Bretton Woods, New Hampshire, USA, from July 1-22, 1944. The IMF began financial operations on March 1, 1947.
Source of funds:
Capacity:
IMF Global Financial Stability Report, October 2008 (GFSR):
RGE monitor: The IMF faces two big problems. First, its capital base is small relative to the size of global capital flows... A lending capacity of $250bn doesn’t amount to much in a world of $700bn bailouts and cross-border capital flows amounting to trillions of dollars. It is not easy for the IMF to raise capital — the begging bowl has to be taken around to all its member countries. One recalcitrant member such as the US can block the whole plan.
Second, the IMF has a huge credibility problem. It is seen as mostly taking orders from the US. The voting structure gives the US, which has a 17 per cent share, a veto over important decisions that require an 85 per cent super-majority. Meanwhile, even large emerging economies such as China and India have modest shares of 3.5 and 2 per cent respectively. But “governance” reforms to set right such imbalances have been fraught and painfully slow as redistribution of voting rights is a zero sum game.
By BOB DAVIS, MARCUS WALKER and JOHN LYONS – WSJ 30 Oct
The International Monetary Fund will offer as much as $100 billion in a new kind of loan to countries that are battered by the financial crisis, making available new cash to help ease the world credit crisis.
The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, wouldn't require countries to make the often severe changes in their policies that the IMF has demanded for decades.
That makes it potentially easier for crisis-hammered countries such as Mexico, Brazil and Korea to shore up cash reserves, their currency, and their ability to help ailing companies as shaken foreign investors withdraw.
Those countries have shunned the IMF because of the strings attached to the loans, which often force sharp budget cuts or interest-rate increases. The conditions are designed to help governments save money and pay for necessary imports, but they also often deepen an economic downturn, making the IMF deeply unpopular around the world.
Now it essentially is dividing developing countries into an A-list of nations that qualify for loans without strings, and a B-list of everyone else.
Late Tuesday, the IMF unveiled a $25 billion package of loans organized for Hungary. That package and a $16.5 billion loan for Ukraine require painful belt-tightening in exchange for help. Hungary must cut its budget deficit further, plans to cut bonus payments to retirees and public-sector workers, and predicted on Tuesday that the economy would shrink by as much as 1% next year.
The new program, which will use up to about half the IMF's resources, represents a big break
The Fed also took new steps to flood dollars into markets outside the U.S., where banks' unwillingness to lend has left foreign firms without dollars they need. In recent weeks, the Fed has created arrangements with central banks in Europe, Australia, Canada and other developed economies to make dollars available overseas. On Wednesday, it extended those lines, for up to $30 billion each, to Brazil, Mexico, Korea and Singapore.
The two moves underscore deepening problems in developing nations, which have sent currencies plunging and blown holes in the balance sheets of healthy companies. In recent days, Brazil's financial capital of São Paulo has been awash in speculation that the plunging currency and lack of dollar financing could spur a wave of corporate defaults that might even bring down key parts of the financial system.
The IMF said it won't disclose the names of countries that it rejects for condition-free loans to try to make sure its decision doesn't worsen the applicant's problems. But Mr. Strauss-Kahn said in a news conference that Argentina wouldn't qualify because it hasn't had an IMF review of its finances for more than a year. Argentina is also on the outs with many lenders because it defaulted on its loans in 2001 and offered only partial repayment, which many borrowers considered inadequate.
The program would offer three-month loans of as much as five times a country's so-called quota, meaning its financial stake in the IMF. Mexico, for instance, has a quota of $4.75 billion, so it could borrow as much as $23.6 billion. Borrowers can renew their loans twice during a year.
The IMF is funded by contributions from its members and its large holdings of gold, among other sources. By itself, IMF money might be enough for the needs of Mexico or other countries. IMF funding also can often unlock other lending. The World Bank, for instance, chipped in $1.3 billion for the Hungary package. The World Bank has said it may double its lending to countries that might be affected by the financial crisis to $27 billion from $13.5 billion in 2007.
In many ways, the new plan is a reprise of a proposal by President Bill Clinton in late 1998 to have the IMF lend to pre-approved countries. That was in response to criticism of the IMF by countries caught up in the Asia financial crisis in 1997 and 1998 in which IMF pushed them to make deep economic changes. Tough IMF requirements in Indonesia, for instance, played a role in violent riots that led to President Suharto's resignation. Korea, however, still may have little interest in the new arrangements. Koreans view the fact they needed IMF help a decade ago as a national humiliation.
Mr. Strauss-Kahn said the IMF is trying to learn the lessons from the Asia crisis and is limiting its demands for change even for its traditional loans. IMF economists should pick policy changes necessary "to make a program a success," he said, not to remake the economy
IMF's new liquidity facility in which countries can borrow up to 5 times their quota, with a three month duration, comes without specific conditions and is front-loaded rather than delivered in tranches. But other countries will receive packages to encourage a more significant policy adjustment given that past policies contributed to their vulnerabilities.
Strauss-Kahn: "We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position"
IMF: Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens (public and private sector) may qualify. Policies should have been assessed very positively by the IMF's most recent country assessment. with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period
FDIC – RGE Can FDIC handling the banking bust?
Nov 22: Seizure and sale of Downey Financial Corp. and two smaller lenders may cost the FDIC more than $2 billion--> federal deposit insurance fund declines from $45bn to $43bn.
On October 7, FDIC proposes to more than double premiums that banks pay to fund the deposit insurance fund: Starting January 1, 2009, banks would have to start paying from 12 cents to 50 cents per $100 of deposits. They now pay from 5 cents to 43 cents. Agency also expects bank failures will cost the FDIC's deposit insurance fund about $40 billion from 2008 to 2013, with almost $13 billion of that amount used this year.
In Q2 FDIC reports $4'462bn insured domestic deposits out of $7'036bn total domestic deposits--> only 63% of domestic deposits are insured. By law, the FDIC maintains a rainy-day fund (i.e. reserves) equal to 1.25 percent of the level of insured deposits. After IndyMac's failure and others in the past quarter, the federal deposit insurance fund declined from $53 billion to $45 billion. Fund is invested in ultra-safe Treasuries.
Sep 25: WaMu is the largest bank failure in the U.S. and the 13th FDIC takeover this year and the 15th since the crisis startet. JPMorgan assumes all deposits and with no additional costs to the FDIC.
FDIC troubled bank list increases to 117 in Q2 from 90. Total assets of troubled banks jumped from $26 billion to $78 billion in Q2 (incl. $36bn from IndyMac). On average, 13% of banks that make the list fail.
August 11: FDIC plans to increase premiums after IndyMac failure (no new fee established yet.), although this will hurt banks precisely at the wrong time--> premiums could rise to 10 to 15 cents per $100 of domestic deposits from the current 5 to 7 basis points premium for most institutions (American Banker). In comparison: all institutions had to pay 23 basis points in the wake of the savings and loan crisis.
If necessary, the agency can also tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.
Whalen (IRA via SF Gate): Our analysis puts roughly 8% of all FDIC insured institutions in the stressed category as of Q1 2008 and roughly that same number headed in that direction. That 8% of all US banks translates into over 700 institutions as of Q1 2008. At the end of March, the FDIC had 90 institutions on its troubled institution list.
Whalen (RGE FinanceMonitor): By July 2009, we estimate the number of US banks likely to fail at 110 and total assets of said failed banks at $800 billion.
RBC (via MarketWatch), May 27: If U.S. slips into recession on the scale of those from the 1980s and early 1990's, the number of failures will be probably as high as 300.
Jones/Oshinsky (FDIC): The insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the ten largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of the banking insurance fund insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.
Slate: The FDIC was created, over the vociferous opposition of its beneficiaries—the banking industry—in the dark spring of 1933, when 4,000 banks had closed. In 75 years, no insured deposit—the current limit for a regular account is $100,000—has been lost, even in the lean years between 1986 and 1992, when 2,304 institutions went bust.
RETURN OF THE IMF Laurence Neville http://www.gfmag.com/index.php?idPage=1073
Having avoided the headlines for years, the International Monetary Fund found itself squarely in the spotlight in October as it made a series of emergency loans to Hungary, Iceland and Ukraine.
In addition to flexibility on conditionality, there are other signs of new thinking by the IMF. At the end of October it announced a new Short-Term Liquidity Facility that will deliver funds to countries deemed to be responsibly managed almost immediatel and, crucially, with no conditions梚f they are hit by financial turbulence. 揟he IMF has had a long discussion about contingent credit lines and how to make them available without creating a stigma and risking that country抯 stability as well as ensuring some minimum degree of conditionality so that countries do not stray from responsible macro policies,?explains Barcap抯 Keller. 揟he Short-Term Liquidity Facility announced recently appears to meet these needs: Countries are pre-qualified so that help is immediate, and it is a confidential process, so there should be no market fallout.?br />
Countries will be able to borrow up to 500% of their quota through the Short-Term Liquidity Facility梒ountries?quotas are related to their size in the global economy梞eaning that Brazil, for example, could borrow up to $22.5 billion. Loans are for three months at regular IMF interest rates and can be renewed twice within a 12-month period.
Role of the saviors
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up. - Dow Will Equal Gold in 2009 Peter Cooper Dec 4 seekingalpha
The International Monetary Fund (IMF) came into official existence on December 27, 1945, when 29 countries signed its Articles of Agreement at a conference held in Bretton Woods, New Hampshire, USA, from July 1-22, 1944. The IMF began financial operations on March 1, 1947.
Source of funds:
Capacity:
IMF Global Financial Stability Report, October 2008 (GFSR):
RGE monitor: The IMF faces two big problems. First, its capital base is small relative to the size of global capital flows... A lending capacity of $250bn doesn’t amount to much in a world of $700bn bailouts and cross-border capital flows amounting to trillions of dollars. It is not easy for the IMF to raise capital — the begging bowl has to be taken around to all its member countries. One recalcitrant member such as the US can block the whole plan.
Second, the IMF has a huge credibility problem. It is seen as mostly taking orders from the US. The voting structure gives the US, which has a 17 per cent share, a veto over important decisions that require an 85 per cent super-majority. Meanwhile, even large emerging economies such as China and India have modest shares of 3.5 and 2 per cent respectively. But “governance” reforms to set right such imbalances have been fraught and painfully slow as redistribution of voting rights is a zero sum game.
By BOB DAVIS, MARCUS WALKER and JOHN LYONS – WSJ 30 Oct
The International Monetary Fund will offer as much as $100 billion in a new kind of loan to countries that are battered by the financial crisis, making available new cash to help ease the world credit crisis.
The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, wouldn't require countries to make the often severe changes in their policies that the IMF has demanded for decades.
That makes it potentially easier for crisis-hammered countries such as Mexico, Brazil and Korea to shore up cash reserves, their currency, and their ability to help ailing companies as shaken foreign investors withdraw.
Those countries have shunned the IMF because of the strings attached to the loans, which often force sharp budget cuts or interest-rate increases. The conditions are designed to help governments save money and pay for necessary imports, but they also often deepen an economic downturn, making the IMF deeply unpopular around the world.
Now it essentially is dividing developing countries into an A-list of nations that qualify for loans without strings, and a B-list of everyone else.
Late Tuesday, the IMF unveiled a $25 billion package of loans organized for Hungary. That package and a $16.5 billion loan for Ukraine require painful belt-tightening in exchange for help. Hungary must cut its budget deficit further, plans to cut bonus payments to retirees and public-sector workers, and predicted on Tuesday that the economy would shrink by as much as 1% next year.
The new program, which will use up to about half the IMF's resources, represents a big break
The Fed also took new steps to flood dollars into markets outside the U.S., where banks' unwillingness to lend has left foreign firms without dollars they need. In recent weeks, the Fed has created arrangements with central banks in Europe, Australia, Canada and other developed economies to make dollars available overseas. On Wednesday, it extended those lines, for up to $30 billion each, to Brazil, Mexico, Korea and Singapore.
The two moves underscore deepening problems in developing nations, which have sent currencies plunging and blown holes in the balance sheets of healthy companies. In recent days, Brazil's financial capital of São Paulo has been awash in speculation that the plunging currency and lack of dollar financing could spur a wave of corporate defaults that might even bring down key parts of the financial system.
The IMF said it won't disclose the names of countries that it rejects for condition-free loans to try to make sure its decision doesn't worsen the applicant's problems. But Mr. Strauss-Kahn said in a news conference that Argentina wouldn't qualify because it hasn't had an IMF review of its finances for more than a year. Argentina is also on the outs with many lenders because it defaulted on its loans in 2001 and offered only partial repayment, which many borrowers considered inadequate.
The program would offer three-month loans of as much as five times a country's so-called quota, meaning its financial stake in the IMF. Mexico, for instance, has a quota of $4.75 billion, so it could borrow as much as $23.6 billion. Borrowers can renew their loans twice during a year.
The IMF is funded by contributions from its members and its large holdings of gold, among other sources. By itself, IMF money might be enough for the needs of Mexico or other countries. IMF funding also can often unlock other lending. The World Bank, for instance, chipped in $1.3 billion for the Hungary package. The World Bank has said it may double its lending to countries that might be affected by the financial crisis to $27 billion from $13.5 billion in 2007.
In many ways, the new plan is a reprise of a proposal by President Bill Clinton in late 1998 to have the IMF lend to pre-approved countries. That was in response to criticism of the IMF by countries caught up in the Asia financial crisis in 1997 and 1998 in which IMF pushed them to make deep economic changes. Tough IMF requirements in Indonesia, for instance, played a role in violent riots that led to President Suharto's resignation. Korea, however, still may have little interest in the new arrangements. Koreans view the fact they needed IMF help a decade ago as a national humiliation.
Mr. Strauss-Kahn said the IMF is trying to learn the lessons from the Asia crisis and is limiting its demands for change even for its traditional loans. IMF economists should pick policy changes necessary "to make a program a success," he said, not to remake the economy
IMF's new liquidity facility in which countries can borrow up to 5 times their quota, with a three month duration, comes without specific conditions and is front-loaded rather than delivered in tranches. But other countries will receive packages to encourage a more significant policy adjustment given that past policies contributed to their vulnerabilities.
Strauss-Kahn: "We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position"
IMF: Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens (public and private sector) may qualify. Policies should have been assessed very positively by the IMF's most recent country assessment. with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period
FDIC – RGE Can FDIC handling the banking bust?
Nov 22: Seizure and sale of Downey Financial Corp. and two smaller lenders may cost the FDIC more than $2 billion--> federal deposit insurance fund declines from $45bn to $43bn.
On October 7, FDIC proposes to more than double premiums that banks pay to fund the deposit insurance fund: Starting January 1, 2009, banks would have to start paying from 12 cents to 50 cents per $100 of deposits. They now pay from 5 cents to 43 cents. Agency also expects bank failures will cost the FDIC's deposit insurance fund about $40 billion from 2008 to 2013, with almost $13 billion of that amount used this year.
In Q2 FDIC reports $4'462bn insured domestic deposits out of $7'036bn total domestic deposits--> only 63% of domestic deposits are insured. By law, the FDIC maintains a rainy-day fund (i.e. reserves) equal to 1.25 percent of the level of insured deposits. After IndyMac's failure and others in the past quarter, the federal deposit insurance fund declined from $53 billion to $45 billion. Fund is invested in ultra-safe Treasuries.
Sep 25: WaMu is the largest bank failure in the U.S. and the 13th FDIC takeover this year and the 15th since the crisis startet. JPMorgan assumes all deposits and with no additional costs to the FDIC.
FDIC troubled bank list increases to 117 in Q2 from 90. Total assets of troubled banks jumped from $26 billion to $78 billion in Q2 (incl. $36bn from IndyMac). On average, 13% of banks that make the list fail.
August 11: FDIC plans to increase premiums after IndyMac failure (no new fee established yet.), although this will hurt banks precisely at the wrong time--> premiums could rise to 10 to 15 cents per $100 of domestic deposits from the current 5 to 7 basis points premium for most institutions (American Banker). In comparison: all institutions had to pay 23 basis points in the wake of the savings and loan crisis.
If necessary, the agency can also tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.
Whalen (IRA via SF Gate): Our analysis puts roughly 8% of all FDIC insured institutions in the stressed category as of Q1 2008 and roughly that same number headed in that direction. That 8% of all US banks translates into over 700 institutions as of Q1 2008. At the end of March, the FDIC had 90 institutions on its troubled institution list.
Whalen (RGE FinanceMonitor): By July 2009, we estimate the number of US banks likely to fail at 110 and total assets of said failed banks at $800 billion.
RBC (via MarketWatch), May 27: If U.S. slips into recession on the scale of those from the 1980s and early 1990's, the number of failures will be probably as high as 300.
Jones/Oshinsky (FDIC): The insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the ten largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of the banking insurance fund insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.
Slate: The FDIC was created, over the vociferous opposition of its beneficiaries—the banking industry—in the dark spring of 1933, when 4,000 banks had closed. In 75 years, no insured deposit—the current limit for a regular account is $100,000—has been lost, even in the lean years between 1986 and 1992, when 2,304 institutions went bust.
19 - Federal Deposit Insurance Corporation
Chairman: Sheila C. Bair
In 1983, the Federal Deposit Insurance Corporation celebrated its 50th anniversary by issuing a history that began with this passage:
" 'On March 3 banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation.'
"As President Franklin D. Roosevelt spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history.
"Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President, the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan.
"By any standard, deposit insurance was an immediate success in restoring stability to the system. The bank failure rate dropped precipitously, with only nine insured banks failing during 1934. During the 30-year period beginning with World War II,the workings of the economy and the conservative behavior of bank regulators and the banking industry created a situation that posed few risks to the financial system, and the importance of deposit insurance in maintaining stability declined. Indeed, Wright Patman, the then-Chairman of the House banking committee, argued in a speech in 1963 that there were too few bank failures - that we had moved too far in the direction of bank safety. ''
In 1997, a follow up volume had a very different focus -- "the extraordinary number of bank failures in the 1980s and early 1990s.'' The wave of failures that came to be know as the savings and loan crisis and led to a reshaping of the F.D.I.C. and new attention to the importance of tight regulation of banks holding federally insured deposits.
Changes in the marketplace and in the legal landscape kept banking in turmoil, but few banks were failing. The collapse of the housing market and the credit crunch that followed in 2007 raised new worries, however, and by the spring of 2008 the F.D.I.C. was warning that the banking sector was facing alarming new strains. In July 2008 Indymac, a California-based bank, was seized by the agency as its mortgage-related losses mounted. Suddenly, the notices posted in financial institutions that they are "F.D.I.C. insured'' -- meaning that deposits are covered up to $100,000 -- were of interest again. – nytimes.com
FDIC was set up mainly to manage commercial bank failures. Deposit insurance legislation itself arose out of the bank failures of the early 1930s.
Why Sheila Bair wants to bail out consumers
The FDIC chief is the consistent voice of reason in her focus on homeowners as the key to saving the economy
By Betsy Morris, senior DECEMBER 12
For months, her agenda was a non-starter. Her proposals to try to turn distressed mortgages into performing loans through a loan modification program were getting absolutely no traction with either Federal Reserve chairman Ben Bernanke or Treasury Secretary Hank Paulson
As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that.
Congress has introduced proposed legislation to launch a loan-modification program, similar to her proposal, to be paid for with money from Hank Paulson's Troubled Asset Relief Program (TARP).
This wasn't the only recent show of support for Bair. In a speech last week to a Fed conference on housing and mortgage markets, Bernanke vindicated her position when he called for more aggressive action to stop foreclosures. One of his recommendations: the very loan-refinancing program instituted by Bair at IndyMac, the failed California bank, in which government will share some risk if a lender refinances to reduce monthly payments and keep the loan performing.
1.6 million mortgages are more than 60 days delinquent and the FDIC expects an additional 3.8 million of those next year. Home prices have fallen nationally by an average of 21% since peaking in the first quarter of 2006, according to the S&P/Case Schiller Home Price Index.
She's a pragmatist, aiming to prevent a deflationary spiral in housing prices that, along with accelerating job losses, will further devastate consumers, who are just as critical to a healthy economy as strong banks. Ironically, she's a Republican who has taken on the role of populist to restore confidence in the system. "I'm a capitalist. I believe in markets," she told an American Banker awards gathering last week.
The key difference to Fed Treasury
From the beginning of the crisis, she has been more focused on consumers than have Paulson, Bernanke or Geithner.
When Citi required a capital infusion last month, she stood firm about limiting the FDIC's exposure, according to a person knowledgeable with the negotiations, and attached some conditions, for example requiring Citi to modify troubled mortgages along the lines of IndyMac's program.
Her vigilance is less about ego than it is about protecting the FDIC and all that it stands for. Created by Congress in 1933 to restore public confidence in the nation's banking system, the agency is funded not by the government but by fees from the bank whose deposits it insures. So it's not a bottomless pit.
As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that.
In 1983, the Federal Deposit Insurance Corporation celebrated its 50th anniversary by issuing a history that began with this passage:
" 'On March 3 banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation.'
"As President Franklin D. Roosevelt spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history.
"Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President, the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan.
"By any standard, deposit insurance was an immediate success in restoring stability to the system. The bank failure rate dropped precipitously, with only nine insured banks failing during 1934. During the 30-year period beginning with World War II,the workings of the economy and the conservative behavior of bank regulators and the banking industry created a situation that posed few risks to the financial system, and the importance of deposit insurance in maintaining stability declined. Indeed, Wright Patman, the then-Chairman of the House banking committee, argued in a speech in 1963 that there were too few bank failures - that we had moved too far in the direction of bank safety. ''
In 1997, a follow up volume had a very different focus -- "the extraordinary number of bank failures in the 1980s and early 1990s.'' The wave of failures that came to be know as the savings and loan crisis and led to a reshaping of the F.D.I.C. and new attention to the importance of tight regulation of banks holding federally insured deposits.
Changes in the marketplace and in the legal landscape kept banking in turmoil, but few banks were failing. The collapse of the housing market and the credit crunch that followed in 2007 raised new worries, however, and by the spring of 2008 the F.D.I.C. was warning that the banking sector was facing alarming new strains. In July 2008 Indymac, a California-based bank, was seized by the agency as its mortgage-related losses mounted. Suddenly, the notices posted in financial institutions that they are "F.D.I.C. insured'' -- meaning that deposits are covered up to $100,000 -- were of interest again. – nytimes.com
FDIC was set up mainly to manage commercial bank failures. Deposit insurance legislation itself arose out of the bank failures of the early 1930s.
Why Sheila Bair wants to bail out consumers
The FDIC chief is the consistent voice of reason in her focus on homeowners as the key to saving the economy
By Betsy Morris, senior DECEMBER 12
For months, her agenda was a non-starter. Her proposals to try to turn distressed mortgages into performing loans through a loan modification program were getting absolutely no traction with either Federal Reserve chairman Ben Bernanke or Treasury Secretary Hank Paulson
As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that.
Congress has introduced proposed legislation to launch a loan-modification program, similar to her proposal, to be paid for with money from Hank Paulson's Troubled Asset Relief Program (TARP).
This wasn't the only recent show of support for Bair. In a speech last week to a Fed conference on housing and mortgage markets, Bernanke vindicated her position when he called for more aggressive action to stop foreclosures. One of his recommendations: the very loan-refinancing program instituted by Bair at IndyMac, the failed California bank, in which government will share some risk if a lender refinances to reduce monthly payments and keep the loan performing.
1.6 million mortgages are more than 60 days delinquent and the FDIC expects an additional 3.8 million of those next year. Home prices have fallen nationally by an average of 21% since peaking in the first quarter of 2006, according to the S&P/Case Schiller Home Price Index.
She's a pragmatist, aiming to prevent a deflationary spiral in housing prices that, along with accelerating job losses, will further devastate consumers, who are just as critical to a healthy economy as strong banks. Ironically, she's a Republican who has taken on the role of populist to restore confidence in the system. "I'm a capitalist. I believe in markets," she told an American Banker awards gathering last week.
The key difference to Fed Treasury
From the beginning of the crisis, she has been more focused on consumers than have Paulson, Bernanke or Geithner.
When Citi required a capital infusion last month, she stood firm about limiting the FDIC's exposure, according to a person knowledgeable with the negotiations, and attached some conditions, for example requiring Citi to modify troubled mortgages along the lines of IndyMac's program.
Her vigilance is less about ego than it is about protecting the FDIC and all that it stands for. Created by Congress in 1933 to restore public confidence in the nation's banking system, the agency is funded not by the government but by fees from the bank whose deposits it insures. So it's not a bottomless pit.
As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that.
18 - The US Treasury Department
Run by: Henry Paulson (2006-2009); succeeded by: Timothy F. Geithner
The Treasury Department traces its history back to the tumult of the opening days of the Revolutionary War, when a cash-strapped Continental Congress decided in 1775 to issue paper money backed by nothing more than the promise of eventual repayment in coin, and enlisted residents of Philadelphia to number and count the bills. The department was formally created by Congress in 1789. The first Secretary of the Treasury was Alexander Hamilton, who shortly after being appointed took the bold move of proposing that the federal government assume the wartime debt of the states and pay them off in full.
In the more than 200 years since, Hamilton's heirs have at times been among the most powerful figures in government, for better or worse. During the Civil War, Salmon P. Chase created the "greenback" paper currency that fueled the North's victory; Andrew W. Mellon helped bring on the Great Depression by his advice to President Hebert Hoover to cut spending and raise taxes during an economic downturn; after World War II, Henry Morgenthau, Jr., helped create a new system of international finance by leading the conference that created the International Monetary Fund and the World Bank.
President Clinton relied heavily on the advice of Robert E. Rubin, setting aside his desire for an economic stimulus package in favor of a mix of spending cuts and tax increases in 1993. Neither of President Bush's first two secretaries of the treasury, Paul O'Neill and John W. Snow, played much of a role in shaping administration policy, and both were pushed from office. Their successor, Henry M. Paulson Jr., saw his role increase along with the severity of the ills facing Wall Street after the mortgage market collapsed beginning in 2007. – nytimes.com
Fed vs Treasury
Tt's official: the Fed is monetizing government debt, Rebecca Wilder | Nov 27, 2008
The time has come to officially monetize government debt. Yesterday the Fed announced that it would purchase $100 billion in debt obligations from Fannie Mae, Freddie Mac and the Federal Home Loan Bank next week. And furthermore, it will purchase $500 billion in mortgage-backed securities (MBS) – I like to call this FARP (Fed Asset Relief Program).
The purchase of GSE debt is a direct attempt to reduce the spread on government agency (GSE) debt over comparable Treasury debt, the relative borrowing costs. Basically, the Fed is targeting a lower interest rate on GSE debt. Sound familiar? Yup, that’s monetizing government debt
The chart illustrates the difference between newly issued Fannie Mae debt and a comparable U.S. Treasury through 11/24/08. This spread has widened from an average of 29 bps (0.29%) spanning 2006-2007 to 90 bps spanning 2007-2008. Fannie Mae must pay more in order to finance its mortgage obligations, which limits its ability to roll over current obligations, and tightens the terms on new mortgage loans.
By driving down the spreads on GSE debt now, and later on mortgage-backed securities, the Fed gives the GSEs more flexibility in the mortgage market, and they can offer lower rates and better terms for potential homebuyers. That’s the theory.
Expect the Fed’s balance sheet to rise by another $100 billion (at least) in two weeks. It is official: the Fed is monetizing government debt.
Comment know, this is just step one. "Monetizing the Gov'ts debt" is just the same as buying outstanding obligations. Flooding the public with CASH.
Apparently this (monetizing) was necessary because of a "liquidity crunch". However, given a slight change in termiinology: This could also be seen as a "LOSS OF CONFIDENCE" in the "Government's" (Quasi) Debt (in the first place)!...Oh My God!
In this loss of confidence, step 2 is the loss in confidence of the dollar itself. Then we're all toast, except for our country's stockpiles of weapons and ammo!
The Treasury Department traces its history back to the tumult of the opening days of the Revolutionary War, when a cash-strapped Continental Congress decided in 1775 to issue paper money backed by nothing more than the promise of eventual repayment in coin, and enlisted residents of Philadelphia to number and count the bills. The department was formally created by Congress in 1789. The first Secretary of the Treasury was Alexander Hamilton, who shortly after being appointed took the bold move of proposing that the federal government assume the wartime debt of the states and pay them off in full.
In the more than 200 years since, Hamilton's heirs have at times been among the most powerful figures in government, for better or worse. During the Civil War, Salmon P. Chase created the "greenback" paper currency that fueled the North's victory; Andrew W. Mellon helped bring on the Great Depression by his advice to President Hebert Hoover to cut spending and raise taxes during an economic downturn; after World War II, Henry Morgenthau, Jr., helped create a new system of international finance by leading the conference that created the International Monetary Fund and the World Bank.
President Clinton relied heavily on the advice of Robert E. Rubin, setting aside his desire for an economic stimulus package in favor of a mix of spending cuts and tax increases in 1993. Neither of President Bush's first two secretaries of the treasury, Paul O'Neill and John W. Snow, played much of a role in shaping administration policy, and both were pushed from office. Their successor, Henry M. Paulson Jr., saw his role increase along with the severity of the ills facing Wall Street after the mortgage market collapsed beginning in 2007. – nytimes.com
Fed vs Treasury
Tt's official: the Fed is monetizing government debt, Rebecca Wilder | Nov 27, 2008
The time has come to officially monetize government debt. Yesterday the Fed announced that it would purchase $100 billion in debt obligations from Fannie Mae, Freddie Mac and the Federal Home Loan Bank next week. And furthermore, it will purchase $500 billion in mortgage-backed securities (MBS) – I like to call this FARP (Fed Asset Relief Program).
The purchase of GSE debt is a direct attempt to reduce the spread on government agency (GSE) debt over comparable Treasury debt, the relative borrowing costs. Basically, the Fed is targeting a lower interest rate on GSE debt. Sound familiar? Yup, that’s monetizing government debt
The chart illustrates the difference between newly issued Fannie Mae debt and a comparable U.S. Treasury through 11/24/08. This spread has widened from an average of 29 bps (0.29%) spanning 2006-2007 to 90 bps spanning 2007-2008. Fannie Mae must pay more in order to finance its mortgage obligations, which limits its ability to roll over current obligations, and tightens the terms on new mortgage loans.
By driving down the spreads on GSE debt now, and later on mortgage-backed securities, the Fed gives the GSEs more flexibility in the mortgage market, and they can offer lower rates and better terms for potential homebuyers. That’s the theory.
Expect the Fed’s balance sheet to rise by another $100 billion (at least) in two weeks. It is official: the Fed is monetizing government debt.
Comment know, this is just step one. "Monetizing the Gov'ts debt" is just the same as buying outstanding obligations. Flooding the public with CASH.
Apparently this (monetizing) was necessary because of a "liquidity crunch". However, given a slight change in termiinology: This could also be seen as a "LOSS OF CONFIDENCE" in the "Government's" (Quasi) Debt (in the first place)!...Oh My God!
In this loss of confidence, step 2 is the loss in confidence of the dollar itself. Then we're all toast, except for our country's stockpiles of weapons and ammo!
17 - The US Federal Reserve
If the world is a stage, these are key settings on the stage.
Read More...
President Woodrow Wilson signed the Federal Reserve Act on Dec. 23, 1913, creating a seven-member board of governors, including the Fed chairman, and 12 regional banks — a structure collectively known as the Federal Reserve System. The governors are appointed by the president and approved by Congress; the regional bank presidents are selected by leaders of their communities, particularly bankers.
Private banks controlled the flow of credit and thus interest rates in the late 19th and early 20th centuries, and farmers, the backbone of the populist movement, complained that the big Eastern banks often starved them of credit at critical moments. Populists called for direct access to credit, without the banks as intermediaries. That did not happen.
The Federal Reserve System was a compromise. The banks would remain the lenders to the public, but the Fed would control the supply of funds on which the banks depended to make loans. Injecting more money into the banking system put downward pressure on interest rates, while its opposite, restricting the supply of potential credit, pushed up rates. The regional banks were intended to help make the flow of credit even across the country.
Through various refinements over the years, this “open market” operation, as it was called, has been at the heart of the Fed’s power. The interest rate that results is called the federal funds rate. In turn, the interest that banks and other lenders charge for mortgages and for various forms of commercial and consumer credit fluctuate with the federal funds rate. As a supplement, to assure an even flow of available credit, commercial banks in various parts of the country can borrow directly from the Fed at the nearest regional bank, using the so-called discount window. The discount rate is linked to the federal funds rate.
The federal funds rate is set by the Fed’s Open Market Committee, composed of the chairman, currently Ben S. Bernanke, the six other governors, and five of the 12 regional bank presidents, on a rotating basis. The committee meets at Fed headquarters in Washington every six weeks or so.
The Fed’s chairman, currently Ben S. Bernanke and before him Alan Greenspan and Paul A. Volcker, dominates Open Market operations. Their main thrust has been to limit inflation, even at the risk of a recession — although they have cut rates when the nation seemed in danger of one, as the Bernanke Fed has recently done.
— Louis Uchitelle Oct. 12, 2007
Created 1913 after the big depression.
Fed Takes a $3 Trillion Gamble to Spur Lending: John M. Berry, Bloomberg 5 dec.2008
So far this year, the Fed has aggressively reduced its overnight lending rate target to only 1 percent, and it probably will trim it by another 50 basis points at a Dec. 15-16 Federal Open Market Committee meeting.
Balance Sheet
It has also pumped unprecedented amounts of liquidity into the banking system using loans and new auction techniques. And recently the central bank began providing credit directly to businesses and financial institutions by buying commercial paper and other assets.
As a result, the Fed's balance sheet has ballooned to $2.1 trillion from less than $900 billion a year ago. On Nov. 25, it said it would buy another $800 billion worth of asset-backed securities, expanding the balance sheet to almost $3 trillion.
purpose of central banking is to ensure sound money and safe banking
federal deposit insurance
Key function: the lender of last resort, provides cash to temporarily illiquid banks.
Walter Bagehot, warned us that there would be times when a central bank couldn't effectively distinguish between illiquidity and insolvency.
Federal Reserve
Committed
Spent up to Nov 08
Commercial Paper Funding Facility LLC
CPFF
1,800,000,000,000
270,879,000,000
Term Auction Facility
TAF
900,000,000,000
415,302,000,000
Other Assets MBS??? TALF partII?
601,963,000,000
601,963,000,000
Money Market Investor Funding Facility
MMIFF
540,000,000,000
0
Term Securities Lending Facility
TSLF
250,000,000,000
190,200,000,000
Term Asset Backed Securities Loan Facility
TALF
200,000,000,000
0
Other Credit Extensions (AIG)
122,800,000,000
122,800,000,000
Primary Credit Discount
92,600,000,000
92,600,000,000
ABCP Money Market Fund Liquidity Facility
AMLF
61,900,000,000
61,900,000,000
Primary Dealer and Others
PDCF
46,611,000,000
46,611,000,000
Net Portfolio Maiden Lane LLC(Bear Sterns)
28,800,000,000
26,900,000,000
Securities Lending Overnight
10,300,000,000
10,300,000,000
Secondary Credit
118,000,000
118,000,000
Total
4,655,092,000,000
1,839,573,000,000
percentage to grand total
59.00%
A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
The Manipulation of Gold Prices. James Conrad 4 Dec Seekingalpha.com
By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
Federal Reserve
The Federal Reserve, through its power to raise and lower interest rates, exercises more influence over economic growth and the level of employment than any other government entity. That unusual role dates from the 1970s, when the executive branch and Congress pulled back from the use of fiscal tools — vast New Deal spending and targeted tax cuts — as a means of regulating prosperity.
The Federal Reserve, through its power to raise and lower interest rates, exercises more influence over economic growth and the level of employment than any other government entity. That unusual role dates from the 1970s, when the executive branch and Congress pulled back from the use of fiscal tools — vast New Deal spending and targeted tax cuts — as a means of regulating prosperity.
Read More...
President Woodrow Wilson signed the Federal Reserve Act on Dec. 23, 1913, creating a seven-member board of governors, including the Fed chairman, and 12 regional banks — a structure collectively known as the Federal Reserve System. The governors are appointed by the president and approved by Congress; the regional bank presidents are selected by leaders of their communities, particularly bankers.
Private banks controlled the flow of credit and thus interest rates in the late 19th and early 20th centuries, and farmers, the backbone of the populist movement, complained that the big Eastern banks often starved them of credit at critical moments. Populists called for direct access to credit, without the banks as intermediaries. That did not happen.
The Federal Reserve System was a compromise. The banks would remain the lenders to the public, but the Fed would control the supply of funds on which the banks depended to make loans. Injecting more money into the banking system put downward pressure on interest rates, while its opposite, restricting the supply of potential credit, pushed up rates. The regional banks were intended to help make the flow of credit even across the country.
Through various refinements over the years, this “open market” operation, as it was called, has been at the heart of the Fed’s power. The interest rate that results is called the federal funds rate. In turn, the interest that banks and other lenders charge for mortgages and for various forms of commercial and consumer credit fluctuate with the federal funds rate. As a supplement, to assure an even flow of available credit, commercial banks in various parts of the country can borrow directly from the Fed at the nearest regional bank, using the so-called discount window. The discount rate is linked to the federal funds rate.
The federal funds rate is set by the Fed’s Open Market Committee, composed of the chairman, currently Ben S. Bernanke, the six other governors, and five of the 12 regional bank presidents, on a rotating basis. The committee meets at Fed headquarters in Washington every six weeks or so.
The Fed’s chairman, currently Ben S. Bernanke and before him Alan Greenspan and Paul A. Volcker, dominates Open Market operations. Their main thrust has been to limit inflation, even at the risk of a recession — although they have cut rates when the nation seemed in danger of one, as the Bernanke Fed has recently done.
— Louis Uchitelle Oct. 12, 2007
Created 1913 after the big depression.
Fed Takes a $3 Trillion Gamble to Spur Lending: John M. Berry, Bloomberg 5 dec.2008
So far this year, the Fed has aggressively reduced its overnight lending rate target to only 1 percent, and it probably will trim it by another 50 basis points at a Dec. 15-16 Federal Open Market Committee meeting.
Balance Sheet
It has also pumped unprecedented amounts of liquidity into the banking system using loans and new auction techniques. And recently the central bank began providing credit directly to businesses and financial institutions by buying commercial paper and other assets.
As a result, the Fed's balance sheet has ballooned to $2.1 trillion from less than $900 billion a year ago. On Nov. 25, it said it would buy another $800 billion worth of asset-backed securities, expanding the balance sheet to almost $3 trillion.
purpose of central banking is to ensure sound money and safe banking
federal deposit insurance
Key function: the lender of last resort, provides cash to temporarily illiquid banks.
Walter Bagehot, warned us that there would be times when a central bank couldn't effectively distinguish between illiquidity and insolvency.
Federal Reserve
Committed
Spent up to Nov 08
Commercial Paper Funding Facility LLC
CPFF
1,800,000,000,000
270,879,000,000
Term Auction Facility
TAF
900,000,000,000
415,302,000,000
Other Assets MBS??? TALF partII?
601,963,000,000
601,963,000,000
Money Market Investor Funding Facility
MMIFF
540,000,000,000
0
Term Securities Lending Facility
TSLF
250,000,000,000
190,200,000,000
Term Asset Backed Securities Loan Facility
TALF
200,000,000,000
0
Other Credit Extensions (AIG)
122,800,000,000
122,800,000,000
Primary Credit Discount
92,600,000,000
92,600,000,000
ABCP Money Market Fund Liquidity Facility
AMLF
61,900,000,000
61,900,000,000
Primary Dealer and Others
PDCF
46,611,000,000
46,611,000,000
Net Portfolio Maiden Lane LLC(Bear Sterns)
28,800,000,000
26,900,000,000
Securities Lending Overnight
10,300,000,000
10,300,000,000
Secondary Credit
118,000,000
118,000,000
Total
4,655,092,000,000
1,839,573,000,000
percentage to grand total
59.00%
A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
The Manipulation of Gold Prices. James Conrad 4 Dec Seekingalpha.com
By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
Friday, February 27, 2009
16 - Glen Stevens/Australia
From the hawkish “boy from OZ” to the pioneer of central banks rate cut.
Glenn Stevens (born 23 January 1958) Governor of the Reserve Bank of Australia since 18 September 2006. He is the first Central Bank Governor in the world to make a huge interest rate cut during the September – October turmoil. (i.e. the 100 point cuts on 2 October 2008.)
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