ECB Offers Unlimited Cash as Bank Lending Costs Soar

[Jim Nickerson]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

This is big, folks. At least a 7.8 on the Richter Scale. When the CBs start to panic, maybe the rest of us ought to consider following suit ...

Having the genetic makings of a BEAR and being stymied for quite some while by the markets' relentless ascents, I feel as if I have been immunized to believing any story or comments that say something has really changed such that it would support the bearish case, and when, Finster, you as one whom I have never had any serious reason to doubt, say, "This is big" it really gets my attention. What do you see in your cloudy-crystal ball?

Sapiens, your link to Mish's article does provide some elucidation to what happened and why. Thanks for the link.

[Tet]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

Can someone explain to me what this infusion of cash indicates? Has credit contracted so much that they needed to inject some cash into the system to help the banks meet redemptions? Is this because they see some impending deflation and want to fight it before anything happens? Are they simply trying to help prop up their respective stock markets? What do you all think the significance of this event is?

Lot's and lot's of money/profits have been taken from the real estate bubble, the looting requires a cash infusion and the liquidity created is just the money that was already stolen, about $140 billion sounds about right.

[blazespinnaker]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

Bull's eye, Blaze. What we are seeing now is the result of the last great liquidity infusion ... the one the Greenspan Fed carried out in 2002-2006 in an attempt to rescue the stock market. That led to massive excesses in the housing and credit markets, which led to ... well ... the mess that is unravelling now.

Put succinctly, liquidity infusions just create instability. (... hmmm ... now where did we hear that before ...;-)

I'm not entirely sure Greenspan is completely to blame for the RE mess. He is after a gold bug / ex randite ... I think there is more to that story. I think we can lay some of the blame at the feet of currency manipulation out of China and petrodollars recyling back into the economy. We also have to accept the fact that 9/11 was no minor global event - some reprocussions have to be expected.

Perhaps if we could blame him for anything, it wasn't hiking the rate up high enough to slow down the RE bubble. This clean up afterwards mentality I believe is wrong headed.

However, the RE mess was a result of huge money supply growth, no doubt about that. And that's why it bubbled - whenever you see this huge increase in liquidity it will find a home and it will create instability.

What we need to happen right now is for a lot of rich people who invested with the crowd to become poor.

The Warren Buffets of the world need to be rewarded appropiately and global assets distributed into hands far more meritful. If there was a switch that Bernanke could flick to make that happen, I'd say, all the more power to him.

[metalman]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

This is big, folks. At least a 7.8 on the Richter Scale. When the CBs start to panic, maybe the rest of us ought to consider following suit ...

thought the panic warning was issued here already, last week.

[Jim Nickerson]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I'm not any good with serious understanding of banking, economics, calculus, etc., however, with the hullabaloo today about CB's putting all this cash into the hands of banks, what would have happened if they had not done this from Europe, US and then to Japan tonight? Would the markets have gone up? or would the average -2.12% loss in Europe, -2.63% in the Americas x-US, and tonight -2.19% in Asia have been doubled or tripled? These numbers are approximate.

Just what did the CB's accomplish today?

[Finster]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I'm not entirely sure Greenspan is completely to blame for the RE mess. He is after a gold bug / ex randite ... I think there is more to that story. I think we can lay some of the blame at the feet of currency manipulation out of China and petrodollars recyling back into the economy. We also have to accept the fact that 9/11 was no minor global event - some reprocussions have to be expected.

Perhaps if we could blame him for anything, it wasn't hiking the rate up high enough to slow down the RE bubble. This clean up afterwards mentality I believe is wrong headed.

However, the RE mess was a result of huge money supply growth, no doubt about that. And that's why it bubbled - whenever you see this huge increase in liquidity it will find a home and it will create instability.

What we need to happen right now is for a lot of rich people who invested with the crowd to become poor.

The Warren Buffets of the world need to be rewarded appropiately and global assets distributed into hands far more meritful. If there was a switch that Bernanke could flick to make that happen, I'd say, all the more power to him.

Greenspan's golden randian past means he should have known better. And his monetary hijinks didn't just start in 2002-2006; we can go at least as far back as the bailout after the Mexican peso crisis in 1994-1995, and the cutting of reserve requirements to virtually nothing. This was the gas that inflated the stock market bubble in the first place. When that bubble collapsed, it was his attempt to rescue his maestro legacy that resulted in the mess we have today.

These other factors you list are ancillary at best. China and OPEC wouldn't be sitting on trillions of USD if the Fed hadn't printed them up in the first place. And 9-11 per se was virtually insignificant financially speaking. Take a look at a long term chart of the stock market and it's hard to even pick out the plunge associated with 9-11. If anything, it was the Fed's reaction to it that mattered in that respect. Greenspan's remedy for virtually every ill - financial or otherwise - was easier money.

But we completely agree on the most damaging policy action of all. And that was the Greenspan Fed's having left policy too easy too long in 2003-2006. Not to mention its predictablity. A few half-point hikes randomly thrown in along the way would have both renormalized policy quicker and discouraged leveraged speculation as well. The current collapse would be far milder if only because there would be so much less to collapse to begin with.

[Sapiens]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I'm not any good with serious understanding of banking, economics, calculus, etc., however, with the hullabaloo today about CB's putting all this cash into the hands of banks, what would have happened if they had not done this from Europe, US and then to Japan tonight? Would the markets have gone up? or would the average -2.12% loss in Europe, -2.63% in the Americas x-US, and tonight -2.19% in Asia have been doubled or tripled? These numbers are approximate.

The markets would have crashed.

Just what did the CB's accomplish today?

The helped the overextended and bankrupt banks make good on their obligations (for now).

[unlucky]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I'm not any good with serious understanding of banking, economics, calculus, etc., however, with the hullabaloo today about CB's putting all this cash into the hands of banks, what would have happened if they had not done this from Europe, US and then to Japan tonight? Would the markets have gone up? or would the average -2.12% loss in Europe, -2.63% in the Americas x-US, and tonight -2.19% in Asia have been doubled or tripled? These numbers are approximate.

Just what did the CB's accomplish today?

I would guess that the intense demand for cash is coming mostly from investors trying to liquidate positions in ABS funds. The injection of cash from the CBs should make the value of these securities fall by less than would otherwise be the case. Most of the extra cash is probably sitting in deposits or other cash instruments - I doubt that investors would be in a hurry to run back into the markets in current conditions.

Hard to say about the decline in stocks, if the CBs had done nothing there would have been less fear - but potentially bigger problems down the line.

[Finster]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

Hard to say about the decline in stocks, if the CBs had done nothing there would have been less fear - but potentially bigger problems down the line.

The other way around. If the CB's had done nothing, there'd have been more fear now and a wholesale crash, but far less problems down the line.

[Andreuccio]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I see the fed just threw in $16 Billion. The Dow went back up to "only" off 80, and now appears to be going back down again. Between the Fed and the ECB the last couple of days, we're at close to $250 Billion, and the market's still sliding. If $250B doesn't do much more than slow things down, how huge will the central banks' reaction have to be in the end? Just how big will "Poom" be?

[Jim Nickerson]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I see the fed just threw in $16 Billion. The Dow went back up to "only" off 80, and now appears to be going back down again. Between the Fed and the ECB the last couple of days, we're at close to $250 Billion, and the market's still sliding. If $250B doesn't do much more than slow things down, how huge will the central banks' reaction have to be in the end? Just how big will "Poom" be?

Andreuccio,

Where did you see the Fed adding $16B to the banks reserves, if "reserves" is the correct word?

If anyone would care to explain to me and probably others, how what you described works. Fed gives money to banks, then what do the banks do that would account for the say DJI dropping its losses from ~ 150 down to ~80 down? If the banks bought DJI stocks, it would make sense to me, but I doubt that is what the banks did.

[Andreuccio]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

http://money.cnn.com/2007/08/10/mark...ion=2007081011

I have no idea how any of this works. My guess is the idea itself that the Fed is doing "something" calmed investors for a while. The actual infusion of the cash had no real immediate effect at all.

[Andreuccio]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

Wild. Now the Dow's up. I'm getting whiplash.

[Stretch002]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I just read that the FED is purchasing MBS's from the banks. To me this looks like a bailout. Instead of having billions of dollars vanish from the economy as these MBS's were devaluing, now that money is back in play. If the mortgages default the FED owns the houses now. I do not see this doing anything other than increasing inflation in the end...

Am I missing anything?

[friendly_jacek]

Re: ECB Offers Unlimited Cash as Bank Lending Costs Soar

I just read that the FED is purchasing MBS's from the banks. To me this looks like a bailout. Instead of having billions of dollars vanish from the economy as these MBS's were devaluing, now that money is back in play. If the mortgages default the FED owns the houses now. I do not see this doing anything other than increasing inflation in the end...

Am I missing anything?

It's a liquidity "crisis" a la 98'
Get ready for a wild ride up in international and emerging equities (don't know about US equities though). The real crash will happen when a new president goes to office.