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Throwing a Bone To A Starving Dog

There sure has been a lot of nonsensical gibberish flying around the financial infomercial media, and in the world of blogs and message boards since Friday. So let’s try to separate fact from fantasy.

We’ll start with something I agree with. I do believe that the Fed’s action had everything to do with Countrywide’s bank arm, the well publicized run by their customers, and the fact that they were forced to borrow apparently all of their $11 billion bank credit facility. This is a dangerous and volatile mix in the arena of the public confidence game that fiat money systems depend on. The Fed had to do “something” to give the world the impression that they were actually “doing” something.

Liquidity moves markets!

Follow the money. Find the profits! 

What did they actually do? Not much.

Countrywide Securities Corporation is one of the Fed’s 21 primary dealers. They are a direct participant in the Fed’s daily open market operation repo auctions. If the Fed was going to prop up anyone, this group would be first in line. And given that the vast majority of Countrywide’s assets are residential MBS, clearly they would stand to be the first of the first in this situation. The Fed’s actions on Friday were designed to soothe the fears of the biggest financial actors, the market, and the public in regard to the apparently sudden meltdown of this one particular bad actor.

But the Fed did not lower rates. It didn’t even increase the monetary base. It just put on a show designed to keep the public con going.

Any depositary institution can borrow at the discount window, but it is essentially only an emergency facility for banks that do not have access to the Fed Funds market for whatever reason. The rate at the discount window has been set at a premium of 1% above the Fed Funds rate since the Fed changed the policy on use of the discount window in January 2003. All Friday’s move effectively did was to lower the premium for these emergency loans to problem children by 1/2%. And right now Countrywide is the Fed’s seriously delinquent teenager in big trouble with the law.

So is the Fed’s action as a big deal as the market’s subsequent action and the punditic (yeah, I just made up that word) euphoria would have you believe?


The Fed does not buy securities at the discount window. It makes emergency loans there, and since the rate is at a premium to the market, no one would use the Window if they weren’t in deep squat and were locked out of the Fed Funds market. How much lending is done at that Window? As of Wednesday of last week the total outstanding was $294 million. Not billion, million! Compare this with the total size of the Fed’s asset base of over $800 billion, and you get some idea of how truly insignificant the Fed’s symbolic ploy was.

But the market took the bait, hook, line, and sinker. The flipping and flopping will be something to see when the fish have their oxygen cut off.

I’ve seen a lot of misinformed discussion that the Fed is signaling that it is or will be buying the bad MBS securities. Not only does the Fed not buy bad securities, the Fed does not buy MBS securities. At least they haven’t yet. They hold no such securities in the System Open Market Account. In fact, as this accounting shows, they reduced the SOMA by over a billion in the week ended 8/15, and cut another $6 billion on Friday. In a move that I missed during the week, the Fed took the rare action of not rolling over about a billion of its maturing Treasury notes. They virtually always roll over 100% of the maturing paper they hold in the SOMA. The action of allowing paper to expire unannounced is a stealthy way of cutting the monetary base without anyone noticing. So, while the Fed Funds rate had traded well below the Fed’s target of 5.25% throughout the week, by Friday’s Open
Market Operations they had gotten the rate back to 5.35%.

This is not a sign of a Fed that has eased policy. Maybe that will change next week, but all we have so far is a few skillfully placed words designed to keep the con going. It’s a bit of a chess game. The Fed made its move, and now they will wait to see how the market reacts. If the boyz on Liberty Street and Wall Street are now patting themselves on the back at the moment, I suspect their self congratulations will be short lived, because there really is a liquidity crisis out there. There’s simply too much bad paper not paying the claims against it, and not being worth what the mark to model fairy tale said it was worth.

The market’s recovery was based in part on the expectation that the Fed may buy some of the bad MBS paper and magically transform bad to good. That expectation is likely to be one of those false assumptions that George Soros talked about. He said something to the effect that it is the speculator’s job to recognize the false trend, ride it, and exit before the crowd wakes up. I haven’t done the charts yet this weekend, but I suspect that the trend driven by this false premise may last all of a day and a half. We’ll see.

My guess is that the Fed will allow the worst of the crap credit and the crappy players to disappear from the firmament, but will save its firepower to save the biggest players in the banking system when the time comes. And that time is coming.

I was away from the trading screens Friday afternoon, and I was listening to Gloomboomberg in the car. (I like Gloomboomberg Radio by the way. They tend to do real reportage and be pretty even handed.) One of the pundits (I think McCulley of Pimco) made the point that the real reason for the rally was the Fed’s statement in the morning, because the Fed suddenly woke up and found that the downside risk to the economy had ”increased appreciably,” which was a big change from their more muted statement regarding downside risks at the Fed meeting last week.

Well, Surprise, surprise surprise! Can you imagine that?

Here’s what they said.

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

The players took this as a signal that the Fed will cut the Fed Funds rate imminently and that that is wildly bullish.

It sounds to me that the Fed was saying that the Wall Street Journal’s ”Best Economy in World History” may just be on the verge of collapse. The market’s knee jerk reaction was to judge that as bullish.

We’ll just have to see about that. As to the market’s apparent judgment that this was a policy loosening, the Fed stopped using the discount rate to set policy in 400 BC. Friday’s move was not a policy move. The Fed just cut the premium at Benny’s Pawn and Discount Drive Up Window for Problem Children — a mean, futile, and stupid gesture.

So far in this crisis, the Fed has NOT injected one cent of liquidity into the system except for that two day bulge on Thursday and Friday August 9-10, which they completely removed by Monday and Tuesday 8/13-14. The Fed remains tight in terms of the SOMA, and making matters worse, foreign central banks are dumping Treasuries to raise cash for injection into their own system in order to try and fix the extreme dollar squeeze in European credit markets. Last week they reduced their custodial holdings at the Fed by a record $17 billion. They actually sold $22 billion of Treasuries, but apparently the Asian central banks are still propping the GSE market as they bought $5 billion in Agencies.

We’ll just have to see if the world’s central banks have the firepower to stop a worldwide credit crunch and liquidity squeeze when some major players are essentially insolvent because dey ain’t no assets backing those ASSet backed securities. Rather than taking decisive action, it looks to me like the Fed is frozen in place like a deer staring into the headlights of an 80 mile per hour downhill runaway tractor trailer, while the ECB is fighting its crisis the only way it can, by selling Treasuries and injecting the cash into their system.

The fact is that the Fed remains shockingly tight in terms of the monetary base, which they have maintained at ZERO growth for the past 8 months, and LESS THAN ZERO in the past week when the sheet was hitting the fan. Sure that can all change next week, but you wouldn’t know it from the actions they took on Friday.

At this point, the cut at the discount window looks like nothing more than throwing a bone to a starving dog. Big freaking deal. Watch what they do, not what they say. It seems to me that they either don’t yet have a handle on the magnitude of the crisis, or they think that smoke and mirrors will fool everyone into thinking that happy days are here again and that the credit markets will “unfreeze” as a result. But so far, they haven’t “done” anything.

Finally, put this in your pipe and smoke it. This hasn’t been reported in the media but last week a $9 billion fund of hedge funds made a cash request of $500 million from the institutional money market fund where they hold their idle cash. For the first time ever, this fund of funds didn’t receive the cash immediately. As of Friday they had been waiting two days. They are still waiting, and there has been no word on how long it will take until they get their money. This is a fund that earlier took a $600 million hit on the Amaranth fiasco. And they are still waiting for the $165 million or so that they were supposed to receive from the liquidation.

This is just one fund folks. There are others in similar situations, perhaps hundreds, perhaps thousands of funds.

The run on the bank is only just beginning. Is the Fed’s Friday smoke and mirrors act going to change that?

I doubt it.

Lee Adler is the Editor and Publisher of the Wall Street Examiner and Wall Street Examiner Professional Edition. For daily updates on this ongoing saga get a risk free trial to the Wall Street Examiner Professional Edition Money, Liquidity and Real Estate service.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

  49 comments for “Throwing a Bone To A Starving Dog

  1. August 19, 2007 at 11:24 am

    To accentuate the insolvency point (the real systemic lurking issue here), the issue pops up in this MSM article:

    For Joe Mason, an economist and professor of finance at Drexel, the 30-day window is not long enough.

    “[Lenders] are going to have to roll that over in 30 days, max,” he said. “The problems will take a lot more than 30 days to work out.”

    Mason also cited Bagehot’s rule, a basic banking principle which he explained as the need to distinguish between illiquid and insolvent organizations. “You want to lend to illiquid but not insolvent institutions,” he said. Lending to insolvent institutions just enables them to dig themselves an even deeper hole.

    To him, that’s what seems to be happening.

    “I would argue that Countrywide is insolvent. Their only asset is their pricing platform, their business algorithm, and that’s not working. The next biggest asset they have is the toner for their copiers.”

  2. Joe
    August 19, 2007 at 12:10 pm

    so with all of this regarding hedge funds, direvatives, too little fed money, etc. where does all of this leave all of us little people who have some cash and equity in our homes? No one has addressed what the total impact and ramifications will be if the credit markets and the stock markets here and around the world crash.

  3. FranSix
    August 19, 2007 at 12:18 pm

    A wilderness of evangelism before the reality sets in, more like. The beauty of it all is that there isn’t any maudlin reporting in the press, aside from the goldilocks theme.

    Nothing less than a keen awareness on the part of central bankers everywhere, that their particular currency may risk collapse. Only give out what’s necessary.

    Its not JUST mortgages, but massive long/short currency bets.

  4. August 19, 2007 at 12:22 pm

    I suspect that everyone will have a lot less equity in their homes, if any, and a lot less cash.

    But if you still have family and friends, what difference does that make? Everything is relative, and when times are bad relatives are everything. Stay close to your loved ones. That’s where I find my solace in all this. I just hope that things don’t get as bad as I suspect they might.

    As for the excess cash that people have, I hope they have it in a safe place, like T-bills, for now. If under $100,000, FDIC insured accounts in the largest national banking institutions are ok for now.

  5. idoc
    August 19, 2007 at 1:52 pm

    Lee, why would anyone ever use the discount window at 5.75 when they could just keep turning over Fed repos at 5.25 or less? is it the increased hassle of turning it over every 1-3 days? also, if the banks do use the discount window and are using cdo’s, subprime mbs as collateral that is decreasing in value daily, isn’t the Fed in effect bailing them out?

  6. August 19, 2007 at 2:36 pm

    Why indeed?

    In fact, it is hardly ever used as the current balance of a couple hundred million shows.

    It’s strictly an emergency facility for bad actors who find the regular fed funds market closed to them.

    My point was exactly that, that the Fed isn’t bailing anybody out. Whether they will or not remains to be seen. As I said in the article, my hunch (strictly a hunch) is that they will save their firepower for rescuing only the ones that are too big to fail, the biggest of the big.

  7. Don
    August 19, 2007 at 2:40 pm

    I’m a mortgage consultant and have recently begun advising my clients with large equity reserves to consider harvesting that equity while it still exists. Assuming all other variables are in line (cash flow to support higher debt liability, etc.)is this sound advice?

  8. August 19, 2007 at 3:03 pm

    I’m the wrong guy to ask what to recommend to homeowners. I sold my home in Florida in June 2005 and built a home in central Quebec for all cash. We just rent in Florida now.

    Harvesting equity? Sounds like “increasing debt.” How is that a good thing if the value of the collateral is declining? The poor bastard still has to pay it back. Where’s he going to invest the cash to make the kind of return he’d need to cover the increased debt service? He’s better off if he does nothing. Get the mortgage paid off as fast as he can, and start saving money. That’s my view.

    In your current position, you have a conflict of interest. You’re still trying to make a living, but the best advice is either to sell now if you are willing, or if you love your home, to stay put and keep making the payments. While your house is getting cheaper, so are all the others. So you’re not really losing anything. If I could sell, invest the proceeds for income, and rent something nice, that’s what I would do.

    If I were an honest mortgage broker, I’d probably quit my job and get trained as an appraiser. There’s going to be a mountain of foreclosure related appraisal work for years.

    Hey, come to think of it, that’s EXACTLY what I DID in the late 80s.

    Well not quite. As the mortgage market was collapsing in the fall of 87, they canned my ass. I was in the 3rd or 4th round of layoffs that began in May 87.

    Best thing that ever happened to me. It was a relief to get out and go in a completely different direction. Some of the guys I worked with at GMAC Mortgage either went to jail or ended up in a very bad place because of problems with cocaine and alcohol. Definitely not my style.

  9. August 19, 2007 at 3:04 pm

    I think Ben wants the market to fall and rid of the excesses too.

    But he wants orderly selling.

    Hence his move to slaughter the shorts on option expiries Friday to make a move. He wants selling to be done by long unwinding and not shorts add to position.

  10. August 19, 2007 at 3:07 pm

    A number of the guys on the message boards at had a similar opinion. They have a very good thread going there this weekend by the way.

  11. Don
    August 19, 2007 at 3:14 pm

    Thanks for your reply. I guess my point was that with money still relatively cheap in the conforming market, and with people depending on home equity to fund stuff like college, etc., it might make sense to convert that equity to cash now rather than later when the equity may have dried up, or the cost of accessing it becomes to high. BTW, excellent blog.

  12. Joe
    August 19, 2007 at 3:31 pm

    I remember my father telling that after the bank holiday (I think it was in 1929) he was given $10 for his $100 he had in the bank. So if this happens now, then Lee is probably right in that everything will adjust in the same manner including debt.

    Increasing debt to capture cash will put pressure on the homeowner. And putting the cash in t-bills can be risky as well. If international sellers come in, the market value of debt instruments will fall – it is an absolute indirect relationship. And that has already happened. What if China sells their debt investments, which is 1/3 of the US debt? Market value of the debt instruments will go down.

    I believe that being in cash and maintaining or reducing home mortgage debt is the answer. I liken it to the pioneers going West. When adversity struck they “farm-a-circle” the wagons. They protected their backsides, stuck together, pooled their resources, if you will, and fought the adversity together.

    I believe that most of this financial turmoil will most likely affect the big gamblers of the world and probably will have minor impact on most of us.

  13. August 19, 2007 at 3:39 pm

    While longer term Treasuries will be adversely affected pricewise by rising yields, that doesn’t apply to T-bills. You buy the 13 or 6 month week bill at a discount commensurate to the interest rate, and receive par (face value) at maturity.

    I see that as the least risky alternative at this time, although rates have been driven through the floor last week. I suspect that they will rise again in the not to distant future. If so, that would be a good thing for those with cash to invest. If not, well, at least your capital isn’t at risk.

  14. Joe
    August 19, 2007 at 3:41 pm

    It isn’t just the subprime or non-conventional mortgage market, which, by the way, isn’t totally investor and lender mistakes. Three other issues need to be recognized. 1) To what degree I do not know, but mortgage brokers and loan originators were submitting fraugilent documentation to the lenders. 2) Mortgage brokers and loan originators were stating income way over reasonable income and underwriters were either not catching it or overlooking it. 3) The borrowers themselves knew for the most part knew they were sticking their necks out on a limb. So they are responsible as well.

    And the same thought process applies to the derivatives. $415 trillion!!!! You got to be kidding!! Who’s kidding who here? And in an unregulated market? Gambling has moved from Las Vegas to Wall Street and now to derivatives! And a lot of it has to be borrowed money. Talk about a tsunami.

  15. August 19, 2007 at 3:42 pm


    The bank holiday was in 1933. I sure hope things never ever get that bad. Right now, if I were drawing an analogy to the 1929-33 period, I’d say that we were in August 1929, after the initial selloff in the stock market but before the crash.

    Can the Fed and the world’s central banks pull the right strings to avert another crash? I just don’t know. Perhaps they can at least cushion against the worst aspects of a violent credit contraction. We’ll just have to see.

  16. August 19, 2007 at 3:46 pm

    Joe- With regard to your second comment, I had a couple of observations that I posted on the message boards in this post and the following one.

  17. Joe
    August 19, 2007 at 3:47 pm

    I do agree with the concept of short term debt instruments. Note that cd’s and money markets are safter and the yield really isn’t that much less given the risk we may be facing in the very immediate future.

    One of the principles of investing that I learned a long time ago as a stockbroker was this: He who loses the least wins! So there may be opportunity loses being in cash. However, I sleep very well at night being in cash. I liquidated all equity investments 3 weeks ago when the market was 13,900 and went immediately to cash. There is too much uncertainty out there. I will be the first to tell anyone I don’t know the answers. I do know that protecting what I have is an action I know and can take.

    By the way I did the same thing 4 weeks before the 1987 correction and the .com correction.

  18. Pete
    August 19, 2007 at 3:49 pm

    So how much time do you give Countrywide before it goes bankrupt?

  19. Joe
    August 19, 2007 at 3:52 pm

    Not to preach to the choir, but it will be a while before the dust settles just as you stated with regard to 1929 and 1933. Believe me, I am probably one of the most optimistic people there is. But this doesn’t feel good and doesn’t look good. There are too many variables for me to not be in cash for a while.

    J P Morgan saved the banking world then. I hope that there are the “powers that be” who will respond to our financial issues to day as Mr. Morgan so unselfishly did then.

  20. Joe
    August 19, 2007 at 3:55 pm

    Good question. Note that the 11.5 billion with 40 banks has tapped them out. Note that the real estate market is down. Note that builders are not selling new construction and that new permits are way down. Note that the founder of Countrywide systematically liquidated $348 million of Countrywide stock over the past 13 months. Hmmmm!

    I suspect that if Countrywide goes into bankruptcy, he could buy it back for pennies on the dollar.

  21. CCG
    August 19, 2007 at 3:58 pm

    “Lee, why would anyone ever use the discount window at 5.75 when they could just keep turning over Fed repos at 5.25 or less?”

    Also, the past few years have been the first time the discount rate has been kept above the fed funds rate. Even during Volcker’s supposed tightening campaign, he “left the back door open,” as Rob Landis put it.

  22. idoc
    August 19, 2007 at 3:59 pm

    Lee-do you consider CFC “too big” to fail by the Feds definition?

  23. August 19, 2007 at 4:18 pm


    I don’t know. But I look at it this way. I suspect that CFC has a lot of bad sheet on its books that may have gotten there because of, shall we say, a “slight bending of the rules.” Would the Fed want to bail out a player that is infused with that smell?

    And what would a bailout entail? Certainly not a rescue of the stockholders. Normally a bailout means that the depositors are made whole, the bondholders are left to fight over the carcass, and the stockholders can go pound sand.

  24. August 19, 2007 at 4:21 pm

    Oh, and by the way, I doubt that the Fed has a definition of too big to fail.

    The Fed will respond on an ad hoc basis, cobbling together a strategy as events dictate. I think that they are already way behind the curve, and that the curve may be such that the Fed is blind to what may lie ahead and what to do about it.

    My main concern right now is just exactly how far this market rally will go. I’ve closed all but 3 of the shorts I had on our Chart Pick list over the past few days, and I want to see which way the wind blows before adding any longs or getting short again. I suspect the process will take a couple of weeks.

  25. Joe
    August 19, 2007 at 4:26 pm

    What are your thoughts about the founder’s $348m?

  26. August 19, 2007 at 4:34 pm

    Actually, I think it was something like $546 million.

    I’m looking forward to seeing the perpwalk.

    If they can find him. He’s probably already on the beach with his sun reflector in a South Pacific island nation without an extradition treaty.


  27. CCG
    August 19, 2007 at 5:06 pm

    I forgot to add – a magnificent analysis as always Lee. Thank you for putting this out for everyone.

  28. August 19, 2007 at 5:17 pm

    You’re welcome CCG. When I can write articles that don’t impinge too much on the rights of subscribers to the exclusive proprietary material that they are paying for, I will do so. They’re paying the bills that enable me to be here, so naturally I will reserve the more detailed analysis, conclusions, and forecasts for them, but I’m looking forward to doing a few more generalized postings here on the free side of the site. It’s a lot of fun doing it, and a lot of fun seeing and responding to the feedback!

  29. ttime
    August 19, 2007 at 5:35 pm

    Regarding the derivative volume of $415 trillion!!!!(according to Joe) isn’t it a ‘zero sum’ game? How would it impact the market as a whole? (I am no economist) 😉

  30. August 19, 2007 at 7:01 pm

    I guess that’s the $64 trillion question, but definitely not a zero sum game. Somebody is holding the risk, and that’s the grist for a systemic meltdown.

  31. rapier
    August 19, 2007 at 7:13 pm

    Derivatives (the over the counter kind which is the subject at hand) will be proven to be a zero sum game for many. Those who get zero back from their so called investments in so called hedge funds, and myriad little mountains of assets across all classes.

    I suppose there is some academic theory which might prove derivatives in total are a zero sum game, if fraud didn’t permeate the system. Then too it is impossible to actually match up the pluses with the minuses in an orderly manner.

    Nobody knows who has what. The record keeping is abysmal. The Fed and the big boys had a few meetings on this over the last year or so. There are not enough accountants in the world to actually figure it out. Look at Fannie and Freddie. Thousand of green eye shade guys have been toiling away there for three years and they still don’t know what the hell the score is.

    In a certain way derivatives are the market as a whole or at least such a big part of it that separation is impossible.

  32. PS
    August 19, 2007 at 7:21 pm

    From what I can tell, the Fed’s SOMA account ( shows only government securities in it. However, in the trading detail the provide, they seem to show the fed buying mortgage backed securities (see:

    What exactly is happening?


  33. August 19, 2007 at 8:10 pm

    Those are repurchase agreements aka repos. They are little more than very short term loans.

    I have read that the MBS securities in question are typically backed by either Ginnie Mae or one of the GSEs, although I suppose the Fed can take anything as collateral.

    These items show up on the Fed’s balance sheet under “Repurchase Agreements”.

    Here’s what the Fed says about Repos:

    The balance sheet notes that the value of Repurchase Agreements represents:

    Cash value of agreements, which are collateralized by U.S. Treasury and federal agency securities

    So again, I would assume that the only MBS collateral they are taken are those issued by Fannie, Freddie, and Ginnie. Not that that’s a good thing, just that they don’t “appear” to have lent against any of the crappier subprime and alt A except to the extent that a small portion of Fannie and Freddie MBS are backed by that stuff.

  34. August 19, 2007 at 8:12 pm

    I regret that I will be unable to respond to any more questions or comments this evening. Hopefully others with some knowledge can contribute to the discussion.

    Thanks to all for your comments. Have a great evening!

  35. Wolf
    August 19, 2007 at 8:18 pm

    How can fed bail out any bank. They owe 8 trillion to lenders. All they can do is print money and really do a serious damage to the green back.

    May be my comment is stupid, can you expalin Lee?

  36. gbow
    August 19, 2007 at 9:16 pm

    CDs safe? I was shocked when I went to the FDIC website and found that they only had funds amounting to ~1.2% of the nations insured deposits in reserve to come to the rescue with. So if this thing really goes south isn’t it going to take a vote of congress to bail out the FDIC? I suppose that vote might not be too hard to get given it will put Grandma on the streets if they don’t give it. Or am I missing something?

  37. PS
    August 19, 2007 at 9:52 pm

    I just went to the website and could not find the page that shows the funds on hand for insurance. Could you post the appropriate link?

  38. gbow
    August 19, 2007 at 10:19 pm

    Letter to Stakeholders. First spreadsheet towards the bottom.

  39. hans
    August 20, 2007 at 2:50 am

    to you dumb ass you who you you think people who want to buy a house want to be in bad position i dont think so. as of myself i wast mislead my this loan agent or loan officer to get a loan that i cannot afford i have limitid english only . i keep singning things that i dont have idea what i’m singing for if its for the benefits for me or not.they dont tell you what’s the pros or cons if you get those exotic loans like interest only,hybrid arms,alt-A jumbo loan or what ever they call it evendo people cannot afford they will find away so you will get that loan but they will not tell you the down side they just want fast commision money. you think alot of minorites who have limited english and they work to the bone they know what they been signing for? so in my situation right now i dont know nothing about real estate market and i’m just learning thing alittle bit if i could get back from the beggining if i iknow i was given aloan that i cannot afford i would should get it. but those con loan or broker agent will find away and do the smooth talking so you would make to beliieve that the loan that they give you is in your best interest. bullshit! if is not crime to kill those pigs loan agent or brokers i would not hesitate to kill them for fooling us now i’m shoot i keep paying ontime to my interest only loan for 2 years and it will reset to the point i cannot afford it. sometimes i ask myself what the point paying my monthly morgage on time when it it gona fail it anyways.

  40. FranSix
    August 20, 2007 at 1:36 pm

    hans, one thing to remember is nobody is holding a gun to anybody’s head.

    Consider if you will commentators, the following:

    The more short term rates are cut, the more gold comes into competition with short term treasuries.

    It requires leverage to build up a portfolio of currency bets, so those may be restrained in a credit crunch. Some of these currency trading accounts are offering 200x leverage. One wrong bet, and the money is gone.

    If you place cash in a currency account, then you are expecting a monthly return of very limited percentages. And if you were to place your money into a medium term bond with the least risk of decline in terms of yield and price fluctuation, then the money is put away for a long time.

    So what do you do if you have cash and want to place it in a liquid investment and have to weigh the risks?

  41. FranSix
    August 20, 2007 at 2:38 pm

    And on a more ironic note, the recent liquidity injections went over swimmingly well for Asian markets.

  42. Luis
    August 21, 2007 at 11:29 am

    The real news are that about 7 million people are lossing their home in america today, and there is no help from the goverment,the banks are tighting the way the do buisines with the public, no more creative lending, or sub prime loans for people with no such a good credit, the question is what is going to happen with our investments?, are there any mortgage securities in my 401K or retirement plan?, the truth is that if this situation keeps going on more people is bound to lose their homes interest rates are bound to go up and we could see the highest interest rates ever. the truth must be told and I think this is a hunt for the mid class people.Wellcome to the third world……

  43. flow5
    August 21, 2007 at 12:55 pm

    “Also, the past few years have been the first time the discount rate has been kept above the fed funds rate. Even during Volcker’s supposed tightening campaign, he “left the back door open,” as Rob Landis put it.”

    Yeah they made it a penalty rate – about 25 years too late (and now at the wrong time). And Paul Volcker executed the easiest monetary policy ever. And Bernanke is following the tightest monetary policy ever. If anyone in charge can get us out of this mess it’s Bernanke. He should be given a life-time post as Chairman.

  44. CCG
    August 21, 2007 at 2:31 pm

    “And Paul Volcker executed the easiest monetary policy ever.”

    ‘The Maestro, no slouch himself in the monetary reserve creation department, was a piker in comparison to post-Penn Square Volcker.’

    “the banks are tighting the way the do buisines with the public, no more creative lending, or sub prime loans for people with no such a good credit”

    ‘The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.’

    ‘[T]he inflationary policies of Hoover and [Federal Reserve Board Governor Eugene] Meyer proved to be counterproductive. American citizens lost confidence in the banks and demanded cash – Federal Reserve notes – for their deposits (currency in circulation rising by $122 million by the end of July), while foreigners lost confidence in the dollar and demanded gold (the gold stock in the United States falling by $380 million in this period). In addition, the banks, for the first time, did not fully lend out their new reserves, and accumulated excess reserves – these excess reserves rising to 10 percent of total reserves by mid-year. A common explanation claims that business, during a depression, lowered its demand for loans, so that pumping new reserves into the banks was only “pushing on a string.” But this popular view overlooks the fact that banks can always use their excess reserves to buy existing securities; they don’t have to wait for new loan requests. Why didn’t they do so? Because the banks were whipsawed between two forces. On the one hand, bank failures had increased dramatically during the depression. Whereas during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million, since the depression struck, 17,000 banks had been failing per year, with a total of $1.08 billion in deposits. This increase in bank failures could give any bank pause, especially since all the banks knew in their hearts that, as fractional reserve banks, none of them could withstand determined and massive runs upon them by their depositors. Second, just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks’ incentive to bear risk. Hence the piling up of excess reserves. The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of the banks, and the more deposits were redeemed for cash.’

    Congrats, Lee, on this article being mentioned by Mike Shedlock.

  45. August 21, 2007 at 3:36 pm

    Indeed. Thanks to Mish and the dozens of other bloggers and message board posters who linked in to this article.

    Special thanks to Aaron Krowne who got the ball rolling over at and and sent us over 5,000 visitors with his link!

  46. flow5
    August 21, 2007 at 8:11 pm

    Fiat’s Reprieve: Saving the System, 1979-1987, by Bob Landis
    The Making of a Legend: Volcker the Monetarist: Chairman Volcker was no doubt many things, a monetarist he was not.

    That’s the first article I’ve read about Volcker that had the right idea. I enjoyed it.

    No Volcker didn’t try monetarism, but Ben Bernanke is (the first).

    The real problem lies with the bankers, their lobbyist, and the ABA (any discourse would end in libel)

    And there are technical problems: the monetary base is not a base for the expansion of the money supply. Monetarism involves targeting total reserves not non-borrowed reserves.
    Monetarism involves targeting monetary flows (MVt), not any particular monetary aggregate. The “price” of money is the inverse of the price level. The “supply of and demand for money” is Keynesian dogma & bogus.
    My take is that Mises lacks an adequate knowledge of money & central banking and that he would have likely performed worse than Volcker.

  47. CCG
    August 22, 2007 at 2:50 am

    Glad you enjoyed it flow5. Landis draws the material on Volcker from Richard Timberlake’s “Monetary Policy in the United States: An Intellectual and Institutional History”. As Timberlake put it, “monetarism as an official central-bank policy had neither failed nor succeeded. It simply had never been tried.”

    Supply of and demand for money make sense if you remember that money begins life as just another commodity. Rothbard’s “Man, Economy and State” says who pointed this out – I can’t remember the name, but the idea is older than Keynes.

    Mises would abolish central banking, so in one sense you’re right that he’d be a worse central banker than Volcker.

    If Bernanke really means to turn off the spigot, then he’s pulled a hell of a headfake over the years with his helicopter speeches and apologies to Milton Friedman (for the Fed supposedly not reflating enough after 1929). But I don’t think the credit belongs to him any more than it did to Volcker. I see the bubble as collapsing under the weight of lender and borrower exhaustion.

  48. flow5
    August 22, 2007 at 7:11 am

    Mises is a theorist. He has solid concepts but I don’t see how he applies them. So I can’t use – say the velocity concept that he describes even though I think he is on to something.

    “An increase in the demand for money is concomitantly associated with an equal and opposite decrease in the supply of money, and vice versa; and that an increase in the supply of money is concomitantly associated with an equal and opposite decrease in the demand for money & vice versa.”

    “The demand for money should not be confused with the demand for loan-funds. The demand for loan-funds is not a demand for money, per se, but a demand which reflects the advantages of spending borrowed money. Insofar as there is a relationship it may be said that an increase in the demand for loan-funds tends to be associated with a decrease in the demand for money.”

    The Fed is extremely “tight”. The rate of change in the proxy for inflation (MVt) has declined in 17 of the last 18 months. That’s a very tight monetary policy.

  49. flow5
    August 22, 2007 at 7:47 am

    the demand for money….

    That’s why a flight from the U.S. dollar will produce hyperinflation in terms of dollar denominated assets.

    “Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash. That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks — and therefore a smaller volume of cash balances. Money thus is truly a paradox – by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money – and reduce its velocity.”

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