August 5, 2008
JustQuotes: The Fed Holds At Two Percent, Withdrawal Yet To Come
"The Federal Reserve kept its benchmark interest rate at 2 percent and signaled that weak employment and financial instability will delay any increase in borrowing costs."
"The Standard & Poor's 500 Index gained 35.87 points, or 2.9 percent, to 1,284.88. Stocks were also pushed higher by a retreat in crude oil prices. The yield on the 10-year Treasury note rose 6 basis points to 4.02 percent as investors concluded that a crackdown on inflation isn't imminent."
"What we have now is artificially low interest rates,'' [Allen Sinai, chief economist at Decision Economics Inc.] said. "You overdose the patient to get them on their feet, and then you have to withdraw the overdose."
∙ Fed Keeps Rate at 2% as Economic Growth Stagnates [Bloomberg]
∙ Fed Shift Indicates Main Rate Will Stay at 2% to Revive Economy [Bloomberg]
First Published: August 5, 2008 4:00 PM
Comments from "Plugged In" Readers
Steady as she goes.... no problems here... (hehehe)
Q: does this look normal to anyone? (note the time scale)
Posted by: Satchel at August 5, 2008 4:56 PM
We'll just have to see how long this dead cat will bounce. It's a long drop from the top of that graph...
Posted by: unearthly at August 5, 2008 5:11 PM
Satchel - Is that graph for real ? It looks more like what one would expect when bad data got into the series and was blindly plotted. Historically the peak total borrowings was $10B in 1984. Now we're at 17X that amount. That's unprecedented by a long shot.
Posted by: The Milkshake of Despair at August 5, 2008 5:37 PM
That is one scary graph.
Posted by: satchelfan at August 5, 2008 5:38 PM
Oh, it's real all right...
Now for the relevance (sorry if this sounds pedantic, but I know that very few people think about or understand how the Fed "sets" interest rates - this ignorance is by design BTW - and apologies to those who totally understand this).
The Fed requires banks to hold a certain amount of reserves in the Fed system. Banks are allowed to lend against these reserves and other assets on the banks' balance sheet by the inverse of the reserve ratio - basically they hold x and they are allowed to lend 10x (with off balance sheet schemes, 100x). (These are all simplified ratios just for illustration.)
This is how the banking system manufactures money out of thin air. They take a cut, of course, and this is how they buy mansions in Greenwich, CT, yachts in Palm Beach, etc. Not a bad business at all, when you can simply press a button and scale up your business!
At the end of every reserve period, a bank tallies up its assets, and figures how much reserves it needs in order to meet the requirements that the Fed has set up. If it is short, then it needs to borrow. If it has excess funds, then it can lend. This borrowing and lending is the "fed funds" market. The rate of interest in this (private) market is the fed funds rate. The Fed can influence this rate by adding or subtracting cash into the system by buying treasuries (this adds cash, lowering the rate) or selling them (this subtracts cash - because the cash is used to buy the treasuries - thereby raising the rate).
The banks don't want to lend to each other because each thinks the other is insolvent. A good bet. Since every bank that would lend knows IT is insolvent, it makes it pretty certain that a potential borrowing bank is insolvent too. I mean, they all did the same stuff, didn't they? Monkey see, monkey do.
The chart represents the amount that the Fed has injected into the system, through direct lending to its member banks (remember, the Fed is private, after all, and is essentially the capo di tutti cappi of the bankster crime syndicate). I guess the fed thought it was necessary.
Is this all that bad? Who knows? Did the Fed REALLY have to lend so much to stabilize the market for Fed Funds? Who knows? Can any of these banks pay it back? Again, who knows? What happens when the Fed runs out of money (i.e., treasuries) to lend? I guess we'll all find out!
Posted by: Satchel at August 5, 2008 5:57 PM
It looks less scary plotted on a log chart : http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[id]=BORROW&s[transformation]=log though there's still a huge uptick at the end of the series.
I don't know enough about this particular data to know whether a log chart makes a better visualization.
Posted by: The Milkshake of Despair at August 5, 2008 5:58 PM
Wait a second Satchel. Does that include the Fed's term facility to the investment banks? If so, that's apples and oranges and is very misleading.
Like really, your panicky crap was interesting (and correct) a year ago but at this point I think everyone is aware there is a serious problem. We don't need more stuff piling on especially if it's misleading. The financial system will survive and making up new problems at this point while we are still dealing with old ones is really unnecessary.
Posted by: Cooper at August 5, 2008 8:16 PM
Oh and stop saying the Fed is private for god's sakes. How many times have you got to be educated?
The chairman is appointed by the President and approved by congress. It's a hybrid of public and private and a lot more public than private given they can mint our national currency out of thin air by buying treasury bonds.
The FDIC insures private deposits through insurance but that doesn't make it a private agency.
Posted by: Cooper at August 5, 2008 8:19 PM
Ok so I checked. That # on the graph includes 75 billion in the new term facility and the money available to investment banks. I Banks have previously not had the option of fed borrowing.
Satchel is talking all about lending to "member banks". Investment banks are not member banks and never have been and this lending to them is a brand new development. Showing that # on a chart and claiming banks are drawing all this lending down because they won't lend to each other is misleading. That facility was extended to Ibanks and is a brand new type of lending to stabilize the balance sheet of investment banks and stop speculative runs on these banks. It was not put in place to keep the discount rate at 2%.
REALLY MISLEADING CHART TO PANIC PEOPLE SATCHEL.
Posted by: cooper at August 5, 2008 8:30 PM
We've had this disussion before. You know my position. The banks are firmly in control of the politicians. Do you really think that the members of Congress can exercise any effective control over what the Fed (owned by its member banks) does? Do you think the population understands any of this? So, who can rein in the Congress and/or President when those institutions fail to exercise their "control" over the Fed? The Treasury Secretary? Which one - the one that was chairman of Goldman Sachs and then went on to head Citibank, or the other head of GS (let's see where he winds up after 1/09....)
The Fed is more properly viewed as a cartel that has "cozied up" to the USG, which long ago relinquished control over the money supply (like in 1913). You should read "The Creature from Jekyll Island", which I guess is the definitive scholarly treatment of the role of the Fed in the US.
And, no, the chart does not include borrwings under the PDCF (loans direct to investment banks, arguably in violation of the Federal Reserve Act). There is another series that encaptures that - I think it is fed series "TOTBORROW" but it's not worth looking up. Your mind is made up, as is mine :)
That chart is only of borrowings to DEPOSITORY institutions - you know, the ones eligible to participate in the fed funds market (and the only ones that have the need, of course, since the IBs don't have to hold reserves in the fed system. If you add in PDCF, I guess it would be scarier!
@ Milkshake -
It's hard for me to get the intution about the compounded rate of change analysis that is embedded in a log chart. For me, I like to think of the Fed as the godfather and the member banks as the captains. The monetary base of the United States is sort of like the "territory" of the gang. In this sense, I sort of visualize direct borrowings of required reserves to the depositories as a sort of devolving of responsibility unto the captains. Or, a concentration of the real "money" of the US - which of course are the treasuries being lent - outside the godfather.
Maybe it's a bad analogy, but that helps me with my thinking/trading!
Noodling around, perhaps the better way to get a chart that expresses this intuition is to compare the rate of growth of the base (because the "business" is always growing in an inflationary money supply universe) with the amount of borrowing in absolute terms (using % change for the borrowing gets into scale problems because the recent increase is something like 200,000%!!).
I can't get the link to work, but you can see that graph by adding the series "AMBNS" as the second series in the link you provided, and selecting the "Percent Change From Year Ago" as the unit of measurement (and change series 1 from log to nominal billions).
Posted by: Satchel at August 5, 2008 8:47 PM
Satchel I already looked it up. It's right on the Feds balance sheet. I think you are trying to make an argument that the Fed is de facto being controlled by the banks not really congress. I am just interested in what the law says rather than conspiracy theories. That's just silliness. If you can change the CEO of a organization you control an organization, as any Venture Captialist.
You are wrong on your chart. I bet it includes money for the Bear Stearns deal for example.
This is like all this panicky crap you write about how debt is like 9000% to GDP but and at 6% interest it will never be paid off.
But you forget one big thing....
All the debt that is being written down to 5 cents on the dollar. Merrill Lynch just wrote down a few hundred billion to that. A few trillion here, a few trillion there at 5 cents and you get out of debt pretty damn fast.
One year ago, I was there with you on all the problems. But right now people have gone to far. I'd much rather keep my head than panic others with misleading charts, exaggeration and hair on fire panic.
A year ago I agreed with you but now is the time for cooler heads to prevail.
Posted by: cooper at August 5, 2008 9:02 PM
I did some checking as well, and you're right, the series DOES include the PDCF since March. I didn't realize that! I was wrong. When you're right, you're right! I'll try to do a little work on that, and try to figure out what the distinction now is between the TOTBORR and BORROW series.
Anyway, though, I think you'll agree it's a little esoteric. The chart is just as scary if you look at it before the PDCF got put in place. The TAF, and the TSLF later, really replaced the discount window. The chart went straight up well before the lending to IBs got in there (and I;m not sure there is even that much right now - what, maybe $25-35B out of almost $175B??
Do you like my criminal enterprise analogy? And have you ever read that Jekyll book (it's been a while for me, I'll admit, and I did skim some parts....)
Posted by: Satchel at August 5, 2008 9:02 PM
Well i don;t know if I agree with the Fed being a racket. I do wonder though if at times it causes a lot of the problems its designed to solve.
I think Fannie and Freddie are much bigger rackets and your attention would be better directed there--they are huge boondoggles in my opinion and we are paying this boondoggle now. At some point privatitzing them completely would be desirable.
For all the problems of the Fed i have yet to see anyone come up with an actual plan for an alternative other than going back on the gold standard. And its not like the US didn't make a racket for 40 years with free printing of money because of it.
Posted by: Cooper at August 5, 2008 9:11 PM
Don't get me started on Fannie/Freddie! They are abominations, and the only appropriate action would be to put them in a hermetically sealed box - see through, preferably - so that we can all watch them struggle and gasp for air as they fade into their well deserved death.....
This whole Fed stuff is economic esoterica, but what else is there to talk about on this thread when the Fed "stands pat"?
You said that in posting that graph above in the first post, I was comparing apples and oranges because the series now included borrowings by investment banks and maybe the Bear Stearns loan.
Theoretically, the series could include the borrings by the IBs, but in fact their borrowings are only $3 billion now (and have only been relatively little anyway over the past months). You can see that here:
(Look under the line item "primary dealer credit facility" under "other loans")
The series does NOT include the Bear Stearns loan, as you can see in the link (look under "Net portfolio holdings of Maiden Lane LLC").
So, out of a total of about $170 billion in the graph, approximately $3 billion (less than 2%) has been extended to IBs. It's certainly an apples-to-apples graph as regards prior periods!
The "true" borrowings by the financial system are much larger than even that graph shows. In addition to the $30 billion extended in the Bear Stearns deal, the Fed has also swapped $100 billion of its balance sheet for toxic crap with hthe IBs. This swap doesn't show up as a borrowing. If anyone really wants to dig into this crazy alphabet soup that Bernanke has created, these descriptions are a very good start:
Note that no one at the Fed ever asked Cngress before doing all this, at least nothing that the population could examine. No hearings, no legislation, nothing (well, except for a little dog and pony show regarding the Bear Stearns debacle - after the fact). I don't have any faith that the Fed is controlled in any meaningful way, but out of deference to your vehemently expressed view, I'll refrain from calling them a "private bank" and instead use the term "quasi-public/private criminal enterprise" when I feel the need to vent :))
BTW, coop, I hope you're wrong about writing all the debt down to 5 cents on the dollar! That would be instant great depression II. We've written down, what?, maybe $400 billion? The debt overhang is at least 200% of GDP, or $30 trillion, or SIXTY times what has already been recognized.
It won't be like that IMO. Mild general price deflation for the next few years, significant money/credit destruction, a LOT of belt-tightening, and then when it gets all too painful and enough money/credit has been destroyed, a great inflation that will be very destructive to living standards in the US. The dollar should do just fine through the first part of this - that's why I'm hugely long treasuries - as host currencies always do in debt deflations. After the monetary spigots get turned on, though, all bets are off!
Posted by: Satchel at August 6, 2008 7:27 AM
I'm totally amazed, I like to quickly read through SocketSite -- aren't blogs supposed to be quick reads? But there are 14 VERY long comments...are you people working? Do you keep your money under a mattress? BTW, this could be the same comment for a blog on Paris Hilton....gawd...no wonder we are in a recession, nobody in the U.S. knows how to work anymore....
Posted by: AmazedinSF at August 6, 2008 8:12 AM
OK, here's a quick one, YOU HAVE TO SEE MEREDITH WHITNEY RANT WITH SOME GREAT FIGURES ON WHAT MAY BE TO COME!
(Hey, great Freddie Mac numbers today, huh?)
Posted by: Good_dimsum at August 6, 2008 8:24 AM
@Amazed. I am amazed at you thinking that comments on Socketsite are too long. I guess you want one-liners that don't reflect thoughtful discussion. I find that I can come on hear and find useful information about subjects I know little enough about and reflections from many sides from which I can draw my own conclusions. If you want a blabbing blog go back to Paris Hilton, if you want to learn something about the real estate market and the economy stay here.
[Editor's Note: You beat us too it (and cheers).]
Posted by: Oceangoer at August 6, 2008 9:00 AM
You should read "The Creature from Jekyll Island", which I guess is the definitive scholarly treatment of the role of the Fed in the US.
Wow, a few minutes on the internets researching the author of this book, G. Edward Griffin, is a interesting trip into a conspiracy-laden fever swamp. This is a guy who wrote a book about how B17 cures cancer but corrupt pharmaceutical companies are hiding the evidence to make more money; how the UN is taking over the world, etc. Think NWO and black helicopters. Not someone I would take as an authority on anything...
Posted by: anon at August 6, 2008 9:02 AM
oops ... for hear read here. Maybe a Freudian slip.
Posted by: Oceangoer at August 6, 2008 9:03 AM
Look at the footnotes in the link you put up.
here. Note "includes primary dealer facility, term auction facility" and "other credit extensions".
Please note breaks in data: Data prior to 2003-01-01 include adjustment, extended, and seasonal credit. Data from 2003-01-01 to 2007-11-01 include primary, secondary, and seasonal credit. Data from 2007-12-01 to 2008-02-01 include primary, secondary, seasonal, and term auction credit. Data from 2008-03-01 forward include primary, secondary, seasonal credit, primary dealer credit facility, other credit extensions, and term auction credit.
Posted by: cooper at August 6, 2008 9:16 AM
On the debt write downs. Remember those charts you put up with total debt to GDP. Rememember where most of the increase in debt was? it was all housing stuff which is an asset.
Since the asset themsevles are being written down, the liabilities naturally are too. Think about it this way it was relatively painless writing them up the past few years, its possible writing them down will just be "belt tightening" for a few years and general lack of credit.
Frankly I've been amazed consumer spending has held up as well as it has. I would have guessed -2% or something despite the rebate.
I too am long the dollar at the moment mostly by being short Euros. However what do you mean you will stay this way until the spigots get turned on. How are the spigots not turned on now?
Posted by: cooper at August 6, 2008 9:32 AM
With all respect, you're wrong on this question about the chart I originally posted, and the footnote at 9:16 am, is not really relevant.
You've been kind of snippy ("I'll educate you [Satchel]") or something like that earlier, but let's keep it civil. We both understand FAR LESS than we think we do about what the Fed is doing - IMO, this is by design. It's just that you understand FAR LESS than I do :)
Take a close look at the chart and the H.4 factors and you'll see. The chart shows about $170B extended to depositories and IBs (through the footnoted language - the Primary Dealer Credit Facility). Let's break this number down with the Fed's own release:
(look carefully through the line items - the Fed does like to obfuscate!)
Here are the primary components (week ending 8/1/08 - latest data):
"primary credit" - $17B. This is discount window borrowings ONLY to depositories (member banks in the fed system, NOT investment banks).
"primary dealer credit facility" - ONLY $3B! This is the sum total of "borrowings" by the IBs. This is the PDCF.
"term auction facilities" - 150 BILLION! this is term lending to BANKS ONLY, NOT IBs (sorry to shout). See here from the horse's mouth:
"...the TAF provides term funding secured by the same collateral that is accepted at the discount window to the SAME DEPOSITORY INSTITUTIONS that are eligible for the primary credit program [i.e., the discount window]." (emphasis added)
Add those 3 components up, and you get $170B, which is what the chart shows. The IB borrowings are less than 2%, which is why the chart is NOT misleading. Will you agree now that I am right here (not looking to beat you up, just want to get past this and get accurate info out!)
I think where you are going wrong is (1) the Bear Stearns deal ($30B) and (2) the term securities lending facility (TSLF) to the IBs, which is NOT included in the chart.
The Bear Stearns deal shows up in that H.4 release as the "Maiden Lane L.L.C." line - LOL, I used to work on Maiden Lane 100 years ago!
I'm not exactly sure where the TSLF "borrowings" by the IBs show up on the Fed's balance sheet, and any insight anyone can provide would be welcomed by me here! But it's $100 BILLION ADDITIONAL! (so, $167B to the banks, $3B to the IBs, $30B in the Bear Stearns deal, and now $100B to the IBs through the TSLF - whew, where do these Fed guys get all this money? and who's paying the interest on it? hehehehe), for a grand total of something north of $300B, and that's just what we can glean!
For the Fed's description of the TSLF, and its (weak) rationale as to why it is not "borrowing" (no sterilixation required because it is a sort of "swap" I guess - oh, now it is crystal clear (hehehehe)), see here:
"Specifically, the TSLF allows dealers to offer relatively illiquid securities as collateral in exchange for a loan of Treasury securities.
In contrast to the Fed’s other liquidity facilities, the TSLF is reserve neutral because it lends Treasury securities against collateral. In other words, no OMO are needed to offset lending done through the TSLF [these OMO would be sterilization]."
Can we agree that I'm right here?
Posted by: Satchel at August 6, 2008 10:04 AM
Sorry I left out the link to the quoted Fed language on the TAF and TSLF. It's here:
As to when the monetary spigots get turned on, as I've been saying for MONTHS here on SS (and years to my investment colleagues/buddies - even my dog!) watch the adjusted monetary base, and wait for money supply growth in excess of 5-7% compounded for about 6 months or so:
I hope that helps, and let's see if I turn out to be right (my guess is 2-4 years).
Posted by: Satchel at August 6, 2008 10:09 AM
Man I don't see how the monetary base is at all growing. there are so many measures of money supply.
RAtes are throught the roof, corporate debts rates are higher, people can't borrow on their homes anymore, assets are deflating quicly, and we could very quickly move from worrying about CPI problems to large scale price deflation.
But that chart shows the spigot going up....
It sure doesnt feel like the spigot has been turned on to me.
Posted by: cooper at August 6, 2008 10:12 AM
If anyone wants to tell me why I should be watching the St. Louis Fed Adjusted Monetary Supply vs. the Monetary Base reported in the H.3 data, I'm certainly willing to listen. H.3 seems to show that Ben has been "holding the line" (see the historical data to note how much it usually grows.)
BTW, I nearly had a coronary last week when I first saw the Fed's press release. Luckily a closer reading made it clear the at TAF was not being expanded (terms just lenghtend... guess it will be around for a while :-). TSLF seems to be where the Fed action is these days.
Posted by: EBGuy at August 6, 2008 11:57 AM
"If anyone wants to tell me why I should be watching the St. Louis Fed Adjusted Monetary Supply vs. the Monetary Base reported in the H.3 data, I'm certainly willing to listen."
I like to look at it because I think it gives the best indication of what the Fed is actually doing because it is the aggregate that the Fed most closely controls.
A lot of fools (especially these days) rant on about the Fed "printing" money. When you press them on how exactly it is doing this - what are the mechanics - they just give you a blank stare. They've never thought about it.
If you want a quarter hour or so of fun (hehehehe), I suggest you read through the definitions of the monetary aggregates here:
You will see from the definitions that all the aggregates rely on some other entity than the Fed in order to expand or contract the "money supply" being described by that aggregate. Even the very narrowest traditional one, M1, includes things like demand deposits and travelers' checks which of course depend on the propensity of consumers to make such deposits or request such checks, and of course the willingness of the depository/institution involved to accommodate it. (Although M1 is in fact pretty tightly under the control of the Fed through reserve requirements - I wouldn't want to give the impression that M1 is a loose cannon like MZM; I just think the AMB is better.)
The adjusted monetary base consists (almost wholly) of currency in circulation and reserves required to be on deposit with the Fed. To the extent the rules on required reserves are changed, the series is adjusted to reflect the change.
I'm not exactly sure exactly what the Fed is up to (who is? - they don't give audited financials, and do not embrace GAAP; never has, and nveer will). But I am guessing that if it ever really starts "printing" (in effect, injecting additional reserves onto the banks' accounts at the Fed window, or printing actual currency without destroying corresponding currency or accepting assets in exchange for the new currency), that it will show up in the AMB first!
I hope that helps.
Posted by: Satchel at August 6, 2008 12:38 PM