Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

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[bart]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

It's what's worth watching as you pointed out.
If the 12 discount windows are properly administered, advances would only be made to meet emergency outflows of funds from the applicant banks. Advances by the reserve banks would be closely monitored to prevent the use of these funds for profit, that is, to finance an expansion of thee applicant bank’s earning assets. If legal reserves acquired through advances are used to finance bank credit expansion, then the fed is allowing the depository institutions to usurp a power that should be the exclusive province of the central bank.

Under the old rule discounting was a privilege, not a right. Banks should not borrow from the central bank except in an emergency. And an emergency does not extend to helping a banker meet obligations under lines of credit. Under this system bankers know they have to hold sufficient liquid assets to meet such contingencies, or meet their obligations through their “managed liabilities.” As it is bankers can borrow to meet “seasonal needs.” Furthermore discount administration and law is so lax, that borrowed funds are allowed to be sold in the federal fund’s market. By providing virtually free access to the discount window, the Fed has chosen to relinquish its power to control money creation.

It should be emphasized that one dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances have to be repaid in one month or less is immaterial. A new advance can be obtained, or an old advance extended, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves is indicated by an excessive volume of free legal reserves/discounting.

Under proper conditions and surveillance, the increased volume of discounting can be easily offset by concurrent open market sales or through a smaller volume of purchases than would otherwise have been made. Discount window administration is necessarily concerned with the emergency needs of specific banks. In this way the problem banks will receive relief instead of opening up the spigots carte blanche for healthy opportunistic banks.

In contrast, the FRBNY’s “trading desk” deals with a network of established primary dealers which participate in the Fed’s open market operations as well as trade using the automated Treasury auction system. These banks and security brokerages aren’t encountering liquidity problems (primary dealers must be in compliance with Tier I and Tier II capital standards under the Basel Capital Accord, with at least $100 million of Tier I capital).

Yes, I suppose occasionally it can be worthwhile to watch for trading or economic tips but I believe there are better indicators.

As far as the rest of your points, true enough... and that's the way it's supposed to work... but the sizes of the TOMO and TIO pools and their oscillations are growing hugely faster than the economy over the last few years.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

by James Sinclair http://www.jsmineset.com/
"What fueled both the post 2002 bull market to its heights and provided the fuel for all the bubbles we have experienced was the Bernanke Helicopter Drop of Liquidity, made in Japan.
The technique provided the largest liquidity injection in the shortest period of time. The mechanism was Japan’s intervention in the yen by selling yen and therefore acquiring dollars. The dollars acquired were bank wired to the New York Federal Reserve Bank multiple times a day for deposit in the Japanese Float Account. The manager of the Japanese Float Account is the New York Federal Reserve Bank. The New York Federal Reserve Manager of the Japanese Float Account invested these funds as many times as received, each day, by buying US Treasury instruments across all maturities in the international markets. Since the Japanese intervention at that time was so large, the result was a tremendous (by previous comparisons) growth in international liquidity and a bull market in US treasury instruments resulting in constantly lower interest rates. That bulled the stock market and all the bubbles we have witnessed. There is no practical way to drain that liquidity, but that is another essay in itself. Believe me, I am totally correct in that.
To put Thursday and Friday in proper perspective, consider that the total stimulus provided by this liquidity injection was an average of 70 billion per month. The source of that is past TIC reports covering that period of time. Yes, that was month after month.
If you add to the publicly given figures of both the Federal Reserve and European Central Bank concerning their injection of liquidity on two days, Thursday and Friday of this week, your number will reach approximately 200 billion dollars. That figure does not take into consideration that both the Fed and ECB says they will buy collateralized bonds and instruments thereon (derivatives) in an unlimited amount. We will never know what that numbers is so add whatever it is to the total. It could double or triple that number in a heartbeat. This also provides no practical way to drain the liquidity as reversing the transaction is impossible for the foreseeable future. Both central banks showing a willingness to buy all and every offering of these market-less mortgage collateralized instruments and derivatives have, by definition, no market into which the Fed can sell. This is why there is no practical method of draining this now largest amount of liquidity ever injected into the international monetary system in the shortest amount of time.
On Thursday and Friday of this past week you have witnessed the largest injection of liquidity in the history of man in only two days.
This is as close as you will get in an alarm-less financial world (no crisis is a crisis because you cannot see it) to absolute proof that the financial system has a major challenge. That challenge may have been sparked by sub prime madness, but is now firing all across the interest sensitive credit derivative market that is absolutely ENORMOUS in terms of replacement value. Should this paper giant implode as a weapon of financial mass destruction, then replacement value is a true value. This brand of un-financed, unregulated, paper garbage special performance contracts dependent on the balance sheet of the loser for viability, without standards and therefore without markets, valued as cartoons by mark to model is larger that the entire National Debt of the US (Source: IMF monthly report on derivative numbers).
Injection of massive liquidity on an unprecedented level may calm emotions, however it also may not. One thing is for sure: the problems are not going away and it is the Big Kahuna that the Fed and the ECB are trying to stave off.
There are conclusions evident from the events and reactions to events of Thursday and Friday:

1. Anything and everything at an unlimited amount will be done in terms of creating more paper money in order to keep the financial system liquid to hopefully prevent a meltdown in Over the Counter Derivatives on debt.
2. That puts the last nail in the dollar coffin, most certainly when you know earnings are not going to keep up and less taxes will be paid. The Federal budget will balloon and we will have a negative TIC report.
3. Since it is axiomatic that the dollar rules gold and logical that the Formula rules the dollar, gold will go to and through all the Angels.
4. The US dollar, for starters, is headed to .7200.
5. The equity markets are anyone’s guess as liquidity historically is the grease of the wheels of stocks. Give the perma-bulls liquidity and guess where it goes. In the Weimar Republic as there currency went to zero their stock market went to infinity.

History is being made yesterday and today. It may well not be over even in this time span. The actions of Thursday and Friday are greater even than the Bernanke Helicopter Drop in the two day time period. This event will reverberate through the world financial market for years to come. This is only an indication of what will happen as all this economic sin, instant gratification, profit at any cost economy begins to unwind in the form of the Over The Counter Derivative implosion. Be careful here."

Some people get a little hyped.

[Guest]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Please pardon a post from a rank layman - on a thread that's covering last week's developments with some depth.

I'm a layman, but I will say Mr. Sinclair's summary above seems to me to sufficiently communicate an overview of last weeks CB actions which might be described as authoritative. "Competent" may be an understatement.

Whoever may suggest Mr. Sinclair is "best ignored" much of the rest of the time may wish to review his coverage of last weeks events carefully. At times such as this, perhaps it is advantageous to take Mr. Sinclair more seriously?

[Jim Nickerson]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Please pardon a post from a rank layman - on a thread that's covering last week's developments with some depth.

I'm a layman, but I will say Mr. Sinclair's summary above seems to me to sufficiently communicate an overview of last weeks CB actions which might be described as authoritative. "Competent" may be an understatement.

Whoever may suggest Mr. Sinclair is "best ignored" much of the rest of the time may wish to review his coverage of last weeks events carefully. At times such as this, perhaps it is advantageous to take Mr. Sinclair more seriously?

Pukester,

It appears to me you write contradictions. By your admission of not only being a "layman" and a "rank" one at that, you then deem Jim Sinclair as "authorative" and something more than "competent." It seems clear those assessments are yours, a "rank layman."

You then seemingly appear to have forgotten who it was that suggested that Sinclair be "best ignored." Surely it must stick in your craw, I mean your mind, that is was Finster who made the suggesting of mostly ignoring Sinclair.

Based on all Finster has written, and all you, a rank layman, have written, I still would much prefer to go with Finster. Finster to my recollection has been wrong once on these fora. He thought once he had made an error, and it turned out that he had not.

Personally, I found Sinclair's article like most others: one man's speculation of the future. I found his advice, "Be careful here" to be self-evident when it comes to playing in the markets.

[Guest]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Thank you for your input Jim -

It would be helpful if you get my name right in future, as the low mannered bit of sport you are engaging in lowers the quality of discussion on these pages.

Everyone is entitled to their opinion here, and I'm certainly 100% entitled to mine.

What you seem curiously oblivious to is that all I've posted here was to extend my compliments to the quality of Mr. Jim Sinclair's analysis. This does not evidence much frivolity on my part, as he clearly has a long and distinguished record going back for 30 years. Surely you do not suggest he is a novice?

Now for mercy's sake, take your gutter address elsewhere, but do not continually shove it in my face. I'm left with dwindling respect you for as your ability to debate with arguments rather than epithets seems to have vanished. It's a bit astonishing.

I appeal to the moderators on these web pages to formally suggest to you, in line with guidelines they'd find wise to apply to all other posters on these pages - that you refrain from the repeated use of offensive misspelling of other forum member's names even if you find it very difficult to restrain yourself.

I'm thick skinned, and I could put up with it endlessly if need be - but you are also making an ass of yourself in the process.

Do the moderators here, if they can separate themselves from partisan sentiment, really choose to cast a blind eye permanently on this, when I've never addressed foul terminology at anyone here? If I disapprove of you (which I still don't, but I'm weakening on that score), I will always try to find a coherent argument with which to present it.

For goodness sake give it a rest Jim.

[Jim Nickerson]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Thank you for your input Jim -

It would be helpful if you get my name right in future, as the low mannered bit of sport you are engaging in lowers the quality of discussion on these pages.

Everyone is entitled to their opinion here, and I'm certainly 100% entitled to mine.

What you seem curiously oblivious to is that all I've posted here was to extend my compliments to the quality of Mr. Jim Sinclair's analysis. This does not evidence much frivolity on my part, as he clearly has a long and distinguished record going back for 30 years. Surely you do not suggest he is a novice?

Now for mercy's sake, take your gutter address elsewhere, but do not continually shove it in my face. I'm left with dwindling respect you for as your ability to debate with arguments rather than epithets seems to have vanished. It's a bit astonishing.

I appeal to the moderators on these web pages to formally suggest to you, in line with guidelines they'd find wise to apply to all other posters on these pages - that you refrain from the repeated use of offensive misspelling of other forum member's names even if you find it very difficult to restrain yourself.

I'm thick skinned, and I could put up with it endlessly if need be - but you are also making an ass of yourself in the process.

Do the moderators here, if they can separate themselves from partisan sentiment, really choose to cast a blind eye permanently on this, when I've never addressed foul terminology at anyone here? If I disapprove of you (which I still don't, but I'm weakening on that score), I will always try to find a coherent argument with which to present it.

For goodness sake give it a rest Jim.

Pukester,

What you are speaks so loudly that I cannot hear you say what you think you are.

Do you see that little triangle just to the right of the post #? It has a bar in it, and a red border. Click it and complain to the management about my demeanor or misdemeanor. Perhaps they'll throw me off.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Educational
Federal Reserve policy actions in August 2007: frequently asked questions

Stephen Cecchetti 13 August 2007

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Here are the basic how's and why's of what the Fed has been doing to calm financial markets Let’s start with the facts: On Thursday 9 August 2007 the Federal Reserve’s Open Market Trading Desk (the “Desk”) injected $24 billion into the U.S. banking system. This was done in two equal size operations, one at 8:25am and a second 70 minutes later at 9:35am.1 On Friday 10 August 2007, the Desk was in the market three times (8:25am, 10:55am, and 1:50pm) putting in a total of $38 billion. The Fed’s operations came on the heels of two even larger injections by the ECB in Frankfurt. On Thursday morning the European Central Bank (ECB) in Frankfurt, Germany had put nearly €95 billion ($130 billion) into European financial institutions, followed by a somewhat smaller operation of €61 billion ($83.6 billion) on Friday. How is this actually done? What are the mechanics of the transactions? In all of these cases, the funds were put into the banking system using what are called “repurchase agreements” or “repos” for short. Here’s a dictionary-style description: A repurchase agreement is a short-term collateralised loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date at an agreed-upon price, as soon as the next day. For example, a bank that has a U.S. Treasury bill might need cash, while a pension fund might have cash that it doesn’t need overnight. Through a repurchase agreement, the bank would give the T-bill to the pension fund in exchange for cash, agreeing to buy it back at the original price – repurchase it – with interest the next day. In short, the bank gets an overnight loan and the pension fund gets some extra interest. The details are shown in the figure below. The mechanics of an Overnight Repurchase Agreement Source: Cecchetti, Money, Banking, and Financial Markets 2nd Edition, New York: McGraw-Hill Irwin, 2009, pg. 278 The easiest way to think about a repo is as an overnight mortgage. In the same way that you pledge your house to the bank in exchange for a loan, a financial institution pledges a bond to the Fed in exchange for funds. The Federal Reserve Bank of New York’s Open Market Desk engages in repurchase agreements every morning (the exact time varies). The quantities normally range from $2 billion to $20 billion.2 Most of them are overnight, but it is standard to engage in repos that are as long as 14 days. The $35 billion on Friday 10 August 2007 was the largest since those in the aftermath of the 9/11 terrorist attacks. (The record is $81.25 billion on 14 September 2001.) What happens if the bonds used in the repo fall in value overnight? When the Fed engages in a repo, the bank (or securities dealer) on the other side – what is called the “counterparty” – agrees to repurchase the security at a fixed price regardless of what happens in the markets.3 It is these banks who benefit from the gains and suffer the losses when the prices move. The only risk the Fed faces is that the counterparty in a repo goes bankrupt and can’t make good on the promise. Given that these are very large banks, and that the repos are very short term, this is an incredibly unlikely event. Does this have any impact on the government’s budget deficit? No. Central bank operations have nothing to do with fiscal policy -- federal government tax, expenditure and debt management policies – they are all about the interest rate and the quantity of reserves in the banking system. The Federal Reserve is the Federal Government's banker – accepting and making payments, issuing debt when they want, etc. – but they are not connected in any material way. (I'm simplifying slightly here, as there is a very slight and esoteric connection.) If the Fed has $35 billion to help the financial system, why can’t they use some of their money to help the poor? The Fed isn’t spending the money on bailing out banks, hedge funds, or helping rich people. It is making fully-collateralised loans that will be repaid the next day (or week). So, while it’s putting the funds in today, it’s taking them out almost immediately. If, instead, the Fed were to take $35 billion in $20 bills and go hand them out to the needy, this would be a permanent increase in the quantity of money in circulation. More money in the long run means higher prices – and that’s inflation. What is liquidity and why is it so important? The publicly stated rationale for these large interventions is that liquidity dried up. Unfortunately, liquidity is one of those terms that means different things to different people. In the glossary to my Money and Banking textbook, I define liquidity as “the ease with which an asset can be turned into a means of payment such as money.” That is, when an asset is liquid it is easy to sell large quantities without moving market prices. When something is illiquid, it is hard to sell People don’t want to buy things that they can’t sell easily. If they are worried that a bond they are considering buying may be difficult or expensive to sell, they will lower the price they are willing to pay, assuming they are still willing to buy it at all. For financial markets to function well, it must be cheap and easy to both buy and sell securities. When market liquidity dries up, the financial markets stop functioning This form of liquidity might be better labeled “market liquidity” as distinct from what I would call “lending liquidity.” Lending liquidity is the term I attach to the concept that was in the news until recently. You may recall reading or hearing about “enormous amounts of liquidity sloshing around the system.” When people said this, what they meant (I think) is that loan supply was plentiful so it was easy to borrow at favourable rates. Put differently (and using technical jargon), it meant that risk spreads were low and insensitive to a borrower’s balance sheet position – that the risk premium a borrower paid was small and did not increase with additional borrowing, which should be riskier. Fall 1998 was the last time market liquidity dried up to a greater extent than we observe today. Then it was difficult even to trade US Treasury securities – usually the most liquid financial market there is.4 So far, things are nowhere near that bad. In fact, with few exceptions, markets still seem to be operating normally. $35 billion seems like quite a bit of money. Is it? To put the number into perspective, we have to understand what these funds are used for. When the Fed injects “money” into the financial system, what it does is create balances in something called “reserve accounts”. That’s where the money goes. Commercial banks have deposit accounts at the Fed (you and I can’t have one). Those are the bank’s checking accounts, with the exception that they don’t pay interest. Because there is no interest paid on reserve balances, banks try to economise on the quantities. Banks hold reserves at the Fed for three primary reasons: (1) They are required to hold them. (2) They need it to do business, so they can meet customer demands for withdrawals and they can make payments to other banks. (3) It is prudent to do so; reserves act as the bank’s emergency fund – they are always ready just in case disaster strikes. So, is $35 billion a big number or not? Here are three numbers we could use to get some sense: Total reserves in the US banking system for the two weeks ending 1 August 2007 averaged $45 billion, of which roughly $12 billion was held as deposits in reserve accounts at the Federal Reserve. The remainder is held in cash in banks’ vaults – that counts, too. Excess reserves, those above what the Fed requires banks to hold, usually total less than $2 billion. On an average day, the gross quantity of interbank transfers is $4 trillion (that’s with a “t”). This includes $1.6 trillion in funds that are transferred for the purpose of settling purchases and sales of various bonds (primarily US Treasury securities).5 Looking at these numbers, we see that first, the increase in reserves on Friday increased banking system reserves by more than 75%. More importantly, it increased the size of reserve accounts by a factor of 4. Second, the increase was more than 10 times the normal level of excess reserves (although for complex reasons it is hard to know today exactly how much it will add to average excess reserves). Finally, note the rather amazing fact that during normal times the banking system uses $12 billion to engage in $4 trillion in daily transactions. That is, on average a dollar in a reserve account is used more than 300 times PER DAY. Because reserves do not pay interest, banks have a big incentive to economise on their use – this is pretty efficient. (This is also the reason that excess reserves are so low.) That banks do this every day suggests that they know how to do it; but the fact that they use the funds so many times means that if anyone starts hoarding reserves, there is the potential to disrupt the system. The conclusion is that the $35 billion is a very big number – it is three times the normal level of reserves that banks hold. Why did they need it? Why did the banks need this money? It is easy to explain why the Fed used open market operations to add $81.25 billion on 14 September 2001 in the aftermath of the 9/11 terrorist attacks. People’s inability to reach their offices in downtown New York had closed some very large banks. Though those banks could still receive payments from other banks, they couldn’t make any payments to anyone else. Funds were flowing into a few huge reserve accounts, but nothing was coming out. Some banks were sucking up the lifeblood of the financial system. Last week the trigger seems to have been the continued fall in the value of certain mortgage-backed securities. Mortgage backed securities bundle a large number of mortgages together into a pool in which shares are then sold. The owners of these securities receive a share of the payments made by the homeowners who borrowed the funds. The pools create a form of insurance. In the same way that automobile insurance companies know what fraction of the insured will have collisions (but not exactly which individuals), pools of mortgages mean investors can predict the quantity of defaults and the repayment rates. There are numerous types of mortgage-backed securities, but the ones that have run into difficulty are in what is called the “subprime” segment of the market. Subprime borrowers are basically people with poor credit who cannot qualify for a standard mortgage. Making loans to these people is known to be risky. And when things are risky, sometimes they don’t work out. That’s what happened. But up to now, the problems in the subprime mortgage market are relatively small. Currently, losses are estimated to be at most $35 billion – equivalent to a stock market decline of about 0.2%. (Last week the value of stocks traded in US markets were down a not terribly unusual 1.5%, or 7 times the total expected decline in the value of these mortgages). What’s happened is that problems in this one, relatively small part of the financial system been seeping into the rest of the market. When people see that they have underestimated the risks in one place, they start to question their ability to accurately evaluate risks everywhere else. Then two things happen. First, the prices of risky financial assets fall. Risk requires compensation, and the more risk there is, the more compensation. Second, people flee risky stuff that they find it hard to evaluate and put their money in safe assets – what’s called a “flight to quality.” The flight to quality is reflected in an increase in prices of U.S. Treasury securities and an influx of funds into the banking system. So, the first reason the banks need the reserves is to serve the customers that have brought money into their deposit accounts. But individuals are not the only ones who have reduced their tolerance for risk. Bankers have, too. Bankers’ reduced risk tolerance shows up in two important ways, both of which result in higher demand for reserve balances. The first is that they simply want a bigger cushion against the possibility of losses. That’s pretty simple. The second reason bankers need more reserves is that they have become less willing to lend their reserves to other banks. There is a huge daily interbank market for overnight loans. It’s called the “federal funds market” and the interest rate charged on those overnight loans is the “federal funds rate.” The federal funds rate is the rate targeted by the Federal Reserve.6 On a normal day (which Thursday and Friday of last week were not) banks are willing to make loans early in the day even if it means temporarily overdrawing their accounts. (Yes, they are allowed to do that.) Banks that are overdrawn in the morning figure that if they don’t receive payments to bring their reserve accounts back into positive territory by the end of the day, they can always go out and borrow it back. Well, it appears that last week banks were not willing to behave this way and the result was that it was very difficult to borrow late in the day. The bottom line of this very long-winded explanation is that the banks wanted to hold substantially higher level of reserves. Keeping the federal funds rate at its target level of 5.25% – that’s what the Open Market Desk at the Federal Reserve Bank of New York is supposed to do every day – meant engaging in huge operations. I’ve heard that the Fed’s operation had something to do with mortgages. Did it? Yes it did. On Friday 10 August the Fed accepted mortgage-backed securities as collateral for the entirety of the $35 billion in repos it engaged in that day. Importantly, though, they did not accept just any mortgage-backed securities. They only allowed dealers to pledge mortgage-backed securities issued or fully guaranteed by federal agencies. Two comments are important here. First, this is not new. The willingness to accept mortgage-backed securities as collateral in repos goes back to changes made in advance of Y2K. At the time there were concerns about being able to get funds into the financial system quickly, and this is one of the changes made. Since then, the Fed has taken mortgage-backed securities at nearly the same rate they have taken agency securities. Nevertheless, the way in which the Fed chose to do this is notable. Normally, when the Fed sends out a message, they tell dealers exactly what they want in collateral. Each of the three categories is treated separately. So, it is common for the Desk to send out a message that they are willing to accept only Treasury securities. Alternatively, they might send out a message that they will accept all three types – Treasury, agency and mortgage-backed – in three separate operations. What the Desk did on Friday is send out a message that said they would take whatever the dealers wanted to deliver. Since mortgage-backed securities are the cheapest to deliver (they have the lowest price in the market), that’s what came in. My speculation is that the Fed did this to demonstrate to the markets that they believe mortgage-backed securities are good as collateral. They were trying get financial market participants to value mortgage pools sensibly. Who decides to do this? A number of people are involved in deciding the quantity of a daily open market operation. On a normal day there isn’t much to decide. The Desk staff makes a recommendation in a conference call and the participants agree. (Having listened in on these calls, I can attest to the fact that they are normally not very interesting.) Last week was obviously not normal. While I doubt that the entire Federal Open Market Committee decided on the action, they may have been consulted through a conference call. My guess is that Chairman Bernanke and New York Fed President Geithner had a say. What I can be sure of is that the decision was made by the Federal Reserve, not by the Secretary of the Treasury or the President of the United States. Why is this happening now? It is natural to ask whether there is some specific reason for these events to occur right now. Can we identify a specific trigger? While we can see something that has happened, as I suggested earlier there has been no fundamental deterioration in economic conditions. In fact, in the United States there was no economic data released on Thursday 9 August 2007. So, it isn’t that people suddenly changed their view of the future. Instead, what happened was analogous to a bank run. Bank runs can be the result of either real or imagined problems. Here’s how it works. Most people, even fairly sophisticated investors, are not in a position to assess the quality of the assets on a financial institution’s balance sheet. In fact, most people don’t even know what those assets are. So when we learn that one bank is in trouble, investors begin to worry about all financial institutions and investors start to flee. The inability to accurately value assets leads to a strong shift toward high-quality securities like Treasury bonds. Thinking about it this way, there are two events that may have precipitated this. The first was the announcement on 2 August that the German bank, IKB Deutsche Industriebank AG, was in trouble because of investment in US subprime loans. And then, on Wednesday, that one of Europe’s largest banks, BNP Paribas, had three funds with similar problems. Financial market participants’ response was to reduce their exposure to risky investments under the assumption that they could not properly assess the risks. That’s exactly analogous to a bank run. It is impossible to predict the exact timing of something like that. Does this have anything to do with discount lending? For those of you who have seen (and heard) Jim Cramer’s diatribe on CNBC on Monday 3 August,7 you may be wondering about discount lending. Here’s the deal. The Fed has a standing offer to lend to banks (so long as they have collateral to pledge for the loan) at a rate that is 1 percentage point above the federal funds rate target of 5.25%. So, today a bank can borrow from the Fed at 6.25%. Banks, not the Fed, decide when to request a discount loan. The borrowed funds are deposited into the bank’s reserve account and can be loaned out to other banks. While we do not know for sure, it seems unlikely that discount lending increased much last week. The reason is that banks always have the option of borrowing from other banks at the federal funds rate, and the Federal Reserve Bank of New York reports that the highest rate charged for an overnight interbank loan late last week was 6%.8 I seriously doubt that a bank would borrow from the Fed at 6.25% when they can borrow more cheaply from another bank. I would guess that Cramer was really arguing for an interest rate cut. It’s hard to see why that’s necessary at the moment. If you can’t buy and sell the securities you own, you probably don’t care if the cost of funds is 5.25% or 4.25%, or whatever. The European Central Bank’s operation was much larger than the Fed’s. Is there a reason? The details of the European Central Bank’s (ECB) operating procedures are very different from those of the Fed, and I won’t go into the details here. Nevertheless, I can provide the simplest explanation for the size the ECB’s operation. When the ECB announced its intention to provide funds on Thursday 9 August 2007 (a day they would not normally operate at all) they said that they would accept all bids at or above their 4% target. The result was that banks asked for and received €95 billion ($130 billion). Unlike the US, where banks are not paid any interest on their excess reserves holdings, in Europe a bank that has excess can redeposit it at the ECB at a 3% interest rate. That makes it far cheaper for European banks to err on the holding of too high a level of reserve balances. Now, put yourself in the position of a European bank. Maybe you know something about what’s going on, maybe you don’t. In either case, when the ECB says that they are going to give you as much as you want on a day when they normally do nothing, you have to wonder what they know that you don’t. Footnotes 1 You can find all of the details by looking at the historical data on the Federal Reserve Bank of New York’s website starting at http://www.newyorkfed.org/markets/omo/dmm/temp.cfm. Every transaction is posted shortly after it is completed. 2 The Desk puts out a call for bids, usually stating the term of the repo and the type of collateral that they will accept. Banks and securities dealers submit their offers – quantities and prices – and then the Manager at the New York Fed decides how much to accept. There are three types of collateral: US Treasury Securities, US Agency Securities (issued by people like Fannie Mae and the Small Business Administration), and Mortgage-backed Securities. Offers average roughly 5 times what’s accepted for Treasury securities, 10 times for Agency securities, and 15 times for Mortgage-backed. 3 The Fed only engages in transactions with 21 “primary dealers.” Primary dealers agree to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to actively participate in US Treasury securities auctions when the bonds, notes, and bills are initially sold. 4 We can get some sense of the operation of a market by looking at the behavior of securities dealers who both buy and sell. When a market operates normally, the difference between the price they are bidding to buy and the one they are asking to sell – the bid/ask spread – is very small and they are willing to quote a single price for a large quantity. In the fall of 1998 there was a brief period when the bid/ask spread for US Treasury bonds was 10 times normal and the quantity for which dealers were willing to hold the price was one-tenth normal. 5 If you want to know more, start at www.federalreserve.gov/paymentsystems/fedwire/default.htm. 6 When the Federal Open Market Committee “sets the interest rate” they are really instructing the Open Market Desk to try and keep the federal funds rate determined by banks in the market for overnight loans near a specific target. The Desk does this by supplying the quantity of reserves they believe the banking system will want at that target rate. For somewhat complex reasons, the Fed does not actually determine the rate.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Just while William Poole President of the "maverick" Federal Reserve Bank of St. Louis announced that inflation is still the overriding consideration, commercial paper fell 91b as of the week 8/15. This volume is lower than the figure reported previously on 6/20. (2 years ago that figure was 158b) The commercial paper segment of the money supply is all of the sudden headed south.


http://www.federalreserve.gov/releases/cp/outstandings.htm

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Percent change at seasonally adjusted annual rates:

M1 M2
3 Months from Apr. 2007 TO July 2007 -3.0 3.5
6 Months from Jan. 2007 TO July 2007 -0.5 5.5
12 Months from July 2006 TO July 2007 -0.3 6.1
SO NOW YOU SEE THE PROBLEM: THE FED REMOVED 0.75%( 3% ANNUALLY) OF THE MONEY OVER THE LAST THREE MONTHS : JULY VS APR..( ANNUALIZED)... WE NEED AN AVERAGE OF 3.5% POSITIVE TO KEEP THE ECONOMY ON AN EVAN KEEL.... THE SHIP IS LISTING...

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Reserves of depository institutions
---------------------------------------
Date total(2) nonborrowed required(3) Monetary base(4)
----------------------------------------------------------------------------------
Month(5)
2006-July 44963 44613 43523 804665
Aug. 42793 42424 41408 802718
Sep. 42711 42308 41083 803140

Oct. 41879 41650 40256 802349
Nov. 42370 42211 40679 808594
Dec. 43361 43170 41557 818395

2007-Jan. 44629 44418 43119 816800
Feb. 42693 42663 41190 812908
Mar. 40810 40756 39170 813937

Apr. 42598 42518 41070 815950
May 44092 43989 42652 818594
June 43735 43548 42026 820027

July 42827 42565 41149 822074
2 weeks ending(6)
2007-June 20 41905 41691 40398 819133

July 4 46041 45854 44017 820643
18 39595 39296 37919 822928

Aug. 1 45319 45074 43745 821594
15p 46909 46648 37562 827703

AUGUST 15TH EXCESS LEGAL RESERVES ARE 7b

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Increased purchases of mortgage securities by the FRBNY's "trading desk" has pushed down the FED FUNDS RATE to under 5% for the last 4 days of the previous legal reserve maintenance period.

8/15 4.71*
8/14 4.54
8/13 4.81
8/10 4.68
8/09 5.41
8/08 5.27
8/07 .5.26
8/06 5.26
8/03 5.24
8/02 5.24
8/01…..5.30*
7/31 5.28
7/30 5.29
7/27 5.25
7/26 5.28
7/25 5.32
7/24 5.25
7/23 5.26
7/20 5.25
7/19 5.25

[Jim Nickerson]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Just while William Poole President of the "maverick" Federal Reserve Bank of St. Louis announced that inflation is still the overriding consideration, commercial paper fell 91b as of the week 8/15. This volume is lower than the figure reported previously on 6/20. (2 years ago that figure was 158b) The commercial paper segment of the money supply is all of the sudden headed south.


http://www.federalreserve.gov/releas...tstandings.htm

flow5,

You no doubt are really into this stuff--very indefinite choice of word by me. This "stuff" is of no value to those of us who do not know its significance and there is probably more than just I who don't understand.

What is the significance, as you see it, of what you posted? I hope you have the time to share what I presume is your insight. Thank you very much.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

FRBNY "trading desk"
TEMPORARY OPEN MARKET OPERATIONS 8/15/07
MORTGAGE-BACKED SECURITIES
8/16/07 Repo's "stop out" = 5.07% (the end of the legal reserve maintenance period)

8/15/07 Repo's "stop out" = 4.65% (the lowest rate/bid accepted this year)

Next lowest rate/bid accepted "stop out"; 2nd lowest was 5.10% on 8/10/07.

Next lowest rate/bid accepted "stop out" in 2007 = 5.20%

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Commercial Paper Outstanding Falls by Most Since 9/11 (Update1)

By Darrell Hassler
Aug. 16 (Bloomberg) -- The amount of U.S. commercial paper outstanding had its biggest weekly drop since the 2001 terrorist attacks as investors cut off the financing of some mortgages.
The amount dropped $91.1 billion, or 4.1 percent, to a seasonally adjusted $2.13 trillion as of yesterday from Aug. 8, according to the Federal Reserve. It's the biggest decline since the week ended Sept. 12, 2001, the day after the attacks in New York and Washington.
The decline was driven by a 4.3 percent fall in asset- backed commercial paper, which represents about half the commercial paper market and has been used to finance purchases of subprime mortgages.
The fall is ``validating the idea that issuers are being forced to make orderly exits from the commercial paper market and obtain financing elsewhere,'' New York-based Miller Tabak & Co. Chief Bond Market Strategist Tony Crescenzi said in an e- mailed note today.
Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, had to borrow the entire $11.5 billion available in a bank credit line after its short- term financing options dried up.
Rates for Countrywide's overnight corporate commercial paper were quoted yesterday at 6 percent and 6.5 percent for 30 days, according to Denise Latchford, director of money funds for American Century Investments in Mountain View, California.
Coventree Inc., Canada's biggest non-bank issuer of asset- backed commercial paper, is seeking C$790 million ($729 million) in emergency funds as its commercial paper programs are stalled because of subprime-mortgage holdings. The Toronto-based company said today that it was unable to sell notes yesterday.
Asset-Backed Paper
The yield on 30-day asset-backed commercial paper with an A1 credit rating, the second highest short-term rating by Standard & Poor's, has risen since Aug. 3 by 0.43 percentage point to 5.75 percent, the highest in six years.
The amount outstanding reached a record $2.22 trillion on July 25, driven by the increasing amounts of asset-backed paper.
Commercial paper, which has maximum maturity of 270 days, is bought by money market funds, mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables as well as car loans.
The loss of short-term funding through commercial paper and similar programs may result in the liquidation of $38 billion to $43 billion of securities backed mainly by mortgages, according to an Aug. 9 report by Bear Stearns Cos. analyst Gyan Sinha.
UBS AG analysts said difficulties in finding buyers for some types of maturing commercial paper may lead companies to ``dump'' $50 billion to $75 billion of assets on the market, and shift the financing or ownership of as much as $125 billion of debt to banks and other institutions.