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InvestmentMoney & Banking
« Previous 1 2 Next » » Normxxx - Nope, That’s Not Money Nope, That's Not Money [¹]
Prudent Bear's Doug Noland has for years been pointing out that one of the drivers of the credit bubble has been the ever-broadening definition of money. As the global economy expanded without a hiccup, more and more [[credit: normxxx]] instruments came to be used as a 'store of value' or 'medium of exchange' or even a standard against which to value other things-- in other words, as 'money.'
Thus mortgage-backed bonds (MBBs) and even more exotic things [[known by the generic rubric, asset-backed securities: normxxx]] came to be seen as nearly risk-free and infinitely liquid.
In Noland's terms, credit gained "moneyness," which sent the effective global money supply through the roof.
This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually [[appeared to make: normxxx]] the world richer, because both the cash received and the debt created functioned as money. With a few months of hindsight, it's now clear that debt-as-money was not one of humanity's better ideas.
When the U.S. housing market-- the source of almost all of that asset-backed pseudo money-- began to tank, hedge funds found out that an asset-backed bond wasn't exactly the same thing as a stack of hundred dollar bills [[surprise!: normxxx]]. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that's not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me? No longer able to function as money, these instruments are being "repriced" (a slick little euphemism for "dumped for whatever anyone will pay"), which is causing a cascading failure of the many models that had assumed infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade's growth. Now here's where it gets really interesting. The reaction of the world's central banks to the 'freezing-up' of the market for these many exotic securities has, predictably, been to create massive amounts of new fiat currency and hand it to the banking system.
They're not dropping twenties out of helicopters yet, but functionally it's [[almost, but not quite: normxxx]] the same thing. By swapping dollars, euros and yen for the no-longer-money bonds that are plunging in price [[so far it's not a direct swap-- only a 30 day loan to the most trustworthy of banks-- to give some time for the market in ABS' to recover: normxxx]], creating some paper profits where there once were catastrophic losses, the Bankers hope to revive the animal spirits of the leveraged speculators. Specifically, they hope to stop the financial community from going further down the moneyness checklist and lopping off any more instruments.
But you don't forget a brush with death that easily. The process of debt reclassification has a momentum that a few hundred billion new dollars won't stop. And once corporate bonds and agency bonds and emerging market bonds have been crossed off the list, the system will start eyeing the dollar. Is it really such a store of value after falling by half against oil and gold in the past five years? Didn't the Fed just create a tidal wave of new dollars and promise to create infinitely more if needed? Isn't the U.S. economy hobbled by the implosion in housing and mortgage finance and hedge funds and (soon) derivatives? Don't Americans owe more per capita than any people in human history? And a realization will begin to dawn: Maybe the paper currency of a hopelessly indebted country isn't money either... Normxxx The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice. -- posted by Normxxx » Normxxx - Nope, That’s Not Money In response to Nope, That's Not Money posted by Normxxx:Actually, derivatives are used as the risk portion of the debt instruments and, presumably, are sold to those who understand such things and, like insurance companies, are capitalized to absorb the occasional debt failure. Unfortunately, few are able to withstand a 'run on the bank' or a "10,000-year" event! (Gee; the first "10,000-year" event came in less than a dozen years.) Anyone seen a flock of black swans lately?
-- posted by Normxxx » Normxxx - Talks the Dove, Acts the Hawk Bernanke: Talks the Dove, Acts the Hawk [¹]
On the Goldman Sachs client call last week, we heard ex-Fed governor Larry Meyer intone that the Fed intended to stop the credit bubble collapse using the discount window in new and creative ways, providing liquidity selectively without lowering the Fed funds rate and flushing the whole system with money, Greenspan-style. We have long wondered how the Bernanke Fed planned to fight an asset price deflation. As expressed in No Deflation. Disinflation followed by lots of inflation, we heard the Fed saying it planned to fight asset price deflation using every trick in the book, and then a few that aren't in the book. Now we appear to have our answer, or at least a good part of it. What the Bernanke Fed has for the past few weeks been trying to do is prevent a runaway asset price deflation, keep the banking system whole, and at the same time not create a moral hazard by bailing out speculators who should be allowed to fail, all without producing excess liquidity that will lead to another set of asset bubbles. Here's the Fed's program.
James T. E. Chapman and Antoine Martin This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. What it says is that there will be no Fed Funds rate cut in response to the credit bubble collapse. The easy money Greenspan Fed put is gone. Welcome to the Open Market Operations Fed or OMOF. It's motto: Liquidity Without Asset Price Inflation. Mechanically, here's how it works. The Fed will only do business directly with banks that maintained good loan practices and are the most credit-worthy. Lenders of various flavors such as investment banks and hedge funds that took on a lot of bad loans can only deal with the banks that deal directly with the Fed. They do not have access to the new and improved discount window on their own. However, the credit-worthy banks can use the weak creditors' assets as collateral to borrow from the Fed.
For example, a distressed hedge fund can't access the Fed directly but can take the mortgage-backed securities they hold and bring them to a credit-worthy bank that does have access to the Fed. That bank uses the paper as collateral for a one month loan. That's why Bank of America, Wachovia , Citigroup, and JP Morgan all hit up the discount window at the same time yesterday, to let hedge funds and others know where to go to put up their asset backed securities and CDOs and other paper as collateral for loans. The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market. The Fed can turn the discount window knob as need to control the rate of failure, averting the dreaded "break in the chain of payments." While its too early to call an all-clear on the debt deflation at the top of the debt pyramid, evidence is that this new system is working-- so far. Even the secondary market in CDOs is opening up, as we heard from a company that structures them that contacted us yesterday. While these events are not definitive, we will use the occasion to invite our respected friends Mish and Rick Ackerman, who were expecting an uncontrolled deflation at this point in the process, to come over to the dark side, the one that acknowledges that central banks have a big bag of tricks to fight asset price deflation. C'mon down, boys! Of course, there are still plenty of signs that the debt default danger is far from over, even at the top where cures can be targeted and it is thus more readily managed. iTuliper Charles Mackay posted this note today from Justin Oliver at Canaccord Adams:
For now the new OMOF approach appears to be working, but it is far too early to say whether this approach, while very clever, will ultimately allow $13 trillion in fictitious value in the housing market to dissipate [[disappear: normxxx]] without causing significant damage to either the credit markets or economy. There remain millions of homeowners underwater on their mortgages. Today iTulip's recently appointed new ShadowFed Chairman discusses Bill Gross's appeal to the Bush administration to bail out said strapped homeowners. Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money
Aug. 23 (Bloomberg)-- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., urged the Bush administration, rather than the Federal Reserve, to bail out U.S. homeowners to avoid ``destructive housing deflation.' Let's dig into this a little bit.
No, Bill. Bush doesn't have that kind of money.
Oh ... I see. You want Bush to use MY money. How generous of you. more... If Gross is asking, clearly at the street level a bailout is needed that the OMOF system will not address. What are the implications of OMOF for the equity markets? Short term negative, and long term negative. Short term, markets have priced in at least one rate cut. If it's needed, that's because the U.S. economy has fallen into recession; the drop in primary demand that is now pushing down oil prices has created self-reinforcing recessionary processes in the economy. Long term, markets have already priced in a Next Bubble, as if Greenspan were still in charge. Markets are still digesting the evidence that the new Fed chair who rode in on a helicopter full of money may yet turn out to be the first asset inflation fighter we've seen in over 20 years. He talks dove and acts the hawk. What does this mean? We don't know yet. But, as usual, you heard it here first. Normxxx The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice. -- posted by Normxxx » Normxxx - The Bear’s Lair: Level 3 Decimation? The Bear's Lair: Level 3 Decimation? http://normxxxruminates.blogspot.com/200...
-- posted by Normxxx » Jas_Jain - FWC: “Top bankers 'leaving US for Asia'” -- FWC: "Top bankers 'leaving US for Asia'" I had predicted that years ago. No, it wasn't an original insight, but just from studying the master - Adam Smith. After financially raping and pillaging the American People, with the help of the Fed and the USG, the biggest facilitators of Pushing Debt on a population, Bankrupters and Fraudsters of New York City (BFNYC), and their brethren in other Western finance capitals, will move their global financial capital to Shanghai and Honk Kong. Leaving American People high-and-dry with tens of trillions of dollars of debt, both public and private. If there is a group of bigger born-and-bred dopes in the world, today, than the American People I would like to know. I have an open mind and would be willing to investigate. No evidence can disabuse Americans of the belief that they have the best econo-political system. It sure has been the best system for BFNYC! Democracy IS the political system of Domination of Money. Demos are given vote so that they will fight the wars for the moneybags. What a system! Jas Top bankers 'leaving US for Asia' The number of high-flying investment bankers moving from the US to Asia is set to increase, experts have said, as a result of the credit crunch. -- posted by Jas_Jain » permabear - FWC: “Top bankers 'leaving US for Asia'” In response to FWC: “Top bankers 'leaving US for Asia'” posted by Jas_Jain:
-- posted by permabear « Previous 1 2 Next » Please follow the guidelines set forth in the Suite101 Posting Etiquette when adding to the discussion. |
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