The Treasury will be hitting the market for $47 billion in net new money this week. Unless the Fed steps up big, and FCBs return to heavy buying of Treasuries, this should pressure the market. Click here to download complete report in pdf format (Professional Edition Subscribers).Try the Professional Edition risk free for thirty days. If, within that time you don’t find the information useful, I will give you a full refund. It’s that simple. Click here for more information.
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I don’t get it Lee. You say the Fed it tight, blah, blah, but from what I can tell Ben is a ten times more loose than Easy Al ever was. He is allowing ABCP to be used as collateral, he is allowing the primary dealers to gamble with FDIC-insured funds (see text below). He stood aside for years while all this lunacy occurred even though it was obvious to even the casual observer. Now he is risking the integrity of the banking system to save his sell-side boys, the very f**k-wads that created this mess to begin with.
Just because he has not cut the Fed Funds rate doesn’t mean he’s not clearly and decisively trying to destroy our country for the benefit of a chosen few (the same few that have benefited on the way up).
From CNN:
“The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup’s Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.”
“The regulations in question effectively limit a bank’s funding exposure to an affiliate to 10% of the bank’s capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, “that represents about 30% of Citibank’s total regulatory capital, which is no small exemption,” says Charlie Peabody, banks analyst at Portales Partners.
The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in “the most rapid and cost-effective manner possible.”
All of the data and charts are available in the daily Fed Report. I can say though that, sure, the Fed is giving lip service to following its mandate to supply liquidity in a crisis. What are they supposed to do, ignore it?
But this supposed policy change changes nothing since, as one of the 21 primary dealers, the brokerage arm has direct access to the Fed at its morning meeting with the Fed’s trading desk. The Fed will supply what it needs there. Or not. The primary dealer arm can invest those funds however it wants.
When you look at the numbers, nothing has changed. The Fed is giving with one hand and taking away with the other. Today’s repo only offsets the $10 billion in 4 week bills they are retiring. It doesn’t help at all with the other $37 billion that the Treasury will dump on the market this week.
No change in SOMA since the beginning of the year! ZERO is ZERO. This is the tightest I have seen the Fed in six years. I’ve never seen zero growth for 8 months, and ditto, in the last 4 weeks with the financial markets in crisis mode.
Seems to me that Bernanke is going to save his firepower to rescue the biggest players and save the system when the collapse reaches critical mass, but will let the chips fall where they may for the all the other riverboaters and gunslingers. So, yeah, maybe the biggest of the criminals will go free.
And maybe they won’t.
By the way, ABCP can only be used as collateral at the discount window. That’s not new.
ABCP cannot be used as collateral for open market operations. That’s not new either.
The idea that ABCP can be used as collateral for OMO has been bandied about the web by a number of people who have not taken the time, or have no interest in, understanding the facts.
There’s a lot of shrill nonsense out there. It’s my job to cut through the bull and analyze the facts, not people’s fantasies.
I’ll leave that to the shrinks.
Lee, your daily Fed report is one of the most helpful tools available to understand the markets. Another potentially helpful tool to ‘put it all together’ is to study what Bernanke has discussed, advocated, and concluded in the past.
Bernanke has developed and relied upon quantitative models his whole career, and there is no reason to believe that he will change now. They give him confidence to institute policies that may bewilder the markets where Greenspan may have been more uncertain.
I think you are absolutely ‘right on’ in conjecturing that Bernanke intentionally ‘pricked’ an asset bubble, or at least was willing to maintain a steady and slow growth in the SOMA and risk that might be the case.
He likely anticipated that as the asset prices declined and excesses were worked out of the system that the yield curve would regain an upward slope, and would likely find that bodes well for future economic activity.
According to the fed’s models, which Bernanke understands and uses, unexpected and unannounced changes in the yield curve provide some the the greatest impacts on the level of asset prices.
“In particular, when the FOMC chooses to set the target for the federal funds rate at a value different from that expected by the market, asset prices tend to react strongly.”
“For example, in a recent paper, Kenneth Kuttner and I [Bernanke] (2004) studied the effects on stock prices of unanticipated changes in monetary policy, as measured by settings of the federal funds rate target that differ from those implied by federal funds futures market. We found that a surprise increase of 25 basis points in the funds rate target typically results in a decline in broad equity indexes of about 1 percent, whereas a change in the funds rate that is expected by the market has essentially no effect on stock prices.17 Our work is just one example of a number of event-study analyses that may well shed light on the effects of monetary policy and the channels of monetary policy transmission.”
http://www.federalreserve.gov/BoardDocs/Speeches/2004/20040415/default.htm
It is also one of the least costly means, measured in terms of incomes and employment levels, of lowering inflation and inflation expectations and positively impacting the economy.
The absolute level of asset prices do not weigh heavily in Bernanke’s quantitative framework. But on the margin, he has given asset price bubbles a tremendous amount of attention during his career. See e.g. http://www.federalreserve.gov/BoardDocs/speeches/2002/20021015/default.htm
I’m not an academic or an intellectual, so I doubt I could understand that stuff even if I tried to read it. I agree with you that Bernanke is showing some independance based on his academic studies. But on the face of it, based on 45 years of observing markets fairly closely, I have no doubt that Bernanke’s conclusion about Fed Funds rate changes is dead wrong.
A surprise rate cut or jack has a “shelf life of about 36 hours in my view. I think that it’s the quantity of cash, not its cost, that drives markets. I’ve seen markets that went down on trends of rate increases, and markets that went up on trends of rate increases, and versa voosa. 🙂
Sometimes the market raises rates without constricting liquidity. Sometimes liquidity contracts even though rates may be falling. So I don’t think there’s any causality between the direction of rates, surprise or otherwise, and the direction of stock prices.