Fed Injects $41 Billion in Liquidity

[FRED]

Fed Injects $41 Billion in Liquidity
By EMILY BARRETT
November 1, 2007 11:55 a.m.

NEW YORK -- The Federal Reserve pumped a total $41 billion to the U.S. financial system in three separate operations Thursday, amounting to the largest injection of funds since the liquidity crisis took hold this summer.

The size of the injection may come as a surprise, coming just a day after the central bank delivered its second consecutive rate cut. Wednesday's 25 basis point cut -- which brings the target rate to 4.5% -- follows a half percentage-point drop in September, which was intended in part to help ease stubbornly high lending rates in the interbank market.

Thank goodness the credit crunch and liquidity issues are behind us. Explains the stock market tanking Thu.

[Uncle Jack]

Re: Fed Injects $41 Billion in Liquidity

If they're truly "pumping" liquidity into the system, and I have my doubts after reading Dr. John Hussman's work, imagine how much they'll "pump" in when the marine really hits the fan.

[Jim Nickerson]

Re: Fed Injects $41 Billion in Liquidity

If they're truly "pumping" liquidity into the system, and I have my doubts after reading Dr. John Hussman's work, imagine how much they'll "pump" in when the marine really hits the fan.

For those of us who are non-financial, non-banking, non-macroeconomic sorts, it would be great if someone would attempt to rectify what Hussman writes about the "illusion" of the Fed "pumping liquidity" into the system and the almost constant reference to "pumping" sometimes here on iTulip and certainly in the MSEM--"E" = economic.

to read Hussman's most recent comment and for link to original article by Hussman.

What Hussman seemed to explain, at least to my perception, was to refute the notion that was posted by Fred in reference to this thread's title: Hussman wrote, "the next batch of rollovers will be on Thursday, and they will represent exactly that--rollovers of existing repurchase agreements, not "new injections of liquidity."

If one goes back and reads the last three or four articles in Hussman's archive he continually browbeats this notion of Fed's "injection of liquidity."

[FRED]

Re: Fed Injects $41 Billion in Liquidity

For those of us who are non-financial, non-banking, non-macroeconomic sorts, it would be great if someone would attempt to rectify what Hussman writes about the "illusion" of the Fed "pumping liquidity" into the system and the almost constant reference to "pumping" sometimes here on iTulip and certainly in the MSEM--"E" = economic.



What Hussman seemed to explain, at least to my perception, was to refute the notion that was posted by Fred in reference to this thread's title: Hussman wrote, "the next batch of rollovers will be on Thursday, and they will represent exactly that--rollovers of existing repurchase agreements, not "new injections of liquidity."

If one goes back and reads the last three or four articles in Hussman's archive he continually browbeats this notion of Fed's "injection of liquidity."

Also curious to know the relevance of the distinction.

[Jim Nickerson]

Re: Fed Injects $41 Billion in Liquidity

Also curious to know the relevance of the distinction.

Well, Fred 1,2,3,or 4, if the Fed isn't actually "injecting liquidity" which I think means putting money into someone's hand to invest in things, then to keep saying that if it isn't correct, I believe approaches stupidity.

[Uncle Jack]

Re: Fed Injects $41 Billion in Liquidity

Why the Fed is irrelevant - http://www.hussmanfunds.com/html/fedirrel.htm

That should just about cover it.

[EJ]

Re: Fed Injects $41 Billion in Liquidity

Well, Fred 1,2,3,or 4, if the Fed isn't actually "injecting liquidity" which I think means putting money into someone's hand to invest in things, then to keep saying that if it isn't correct, I believe approaches stupidity.

Is Hussman saying that if there is no net increase in aggregate debt as a result of a transaction with the Fed that no liquidity has been created? If so, that is a novel definition of liquidity.

Liquidity: "The ability of an asset to be converted into cash quickly and without any price discount."

That's what the Fed enables when there's no one else willing to pay cash. Show up at the discount window with a liability, leave with an asset.

[quigleydoor]

Re: Fed Injects $41 Billion in Liquidity

Is Hussman saying that if there is no net increase in aggregate debt as a result of a transaction with the Fed that no liquidity has been created? If so, that is a novel definition of liquidity.

Liquidity: "The ability of an asset to be converted into cash quickly and without any price discount."

That's what the Fed enables when there's no one else willing to pay cash. Show up at the discount window with a liability, leave with an asset.

I think Hussman would say that the Fed is maintaining a volume of liquidity, and continues to keep that volume in play, every time it rolls over these repos. It is not injecting new liquidity—only re-injecting recycled liquidity.

[EJ]

Re: Fed Injects $41 Billion in Liquidity

I think Hussman would say that the Fed is maintaining a volume of liquidity, and continues to keep that volume in play, every time it rolls over these repos. It is not injecting new liquidity—only re-injecting recycled liquidity.

I understand but I still don't understand relevance. It certainly doesn't make the case that the Fed is not creating liquidity.

It's wrong to think that the Fed is irrelevant. The Fed's role changed in the early 1990s. Since then non-bank entities create most of the credit. The Fed's role is to jump in and buy certain bonds and debt securities at prices which, in its estimation, maintain an orderly market for them.

[Spartacus]

Re: Fed Injects $41 Billion in Liquidity

You could read it 2 ways -

first way, the article says the new repos are actually less than what is maturing - BUT the subtext seems to be that what is maturing was written over some period of time, while these new repos are all being written in one day.

Sounds like there is some new liquidity, just not $41 Billion in new funds,

Second way, if they FED had done nothing actively (no new RPs), there would be $41 billion less liquidity today.

Well, Fred 1,2,3,or 4, if the Fed isn't actually "injecting liquidity" which I think means putting money into someone's hand to invest in things, then to keep saying that if it isn't correct, I believe approaches stupidity.

From the "new liquidity" article

It slightly undershoots the $42.5 billion in funds maturing Thursday. But the size of the operation suggests that the Fed isn't yet prepared to allow its additional li

[EJ]

Re: Fed Injects $41 Billion in Liquidity

You could read it 2 ways -

first way, the article says the new repos are actually less than what is maturing - BUT the subtext seems to be that what is maturing was written over some period of time, while these new repos are all being written in one day.

Sounds like there is some new liquidity, just not $41 Billion in new funds,

Second way, if they FED had done nothing actively (no new RPs), there would be $41 billion less liquidity today.



From the "new liquidity" article

It slightly undershoots the $42.5 billion in funds maturing Thursday. But the size of the operation suggests that the Fed isn't yet prepared to allow its additional li

Complicating any measure is dollar depreciation. The purchasing power of global credit is declining along with new issuance. Aggregate bank and non-bank debt (the result of aggregate bank and non-bank credit transactions) appears to have been declining globally for over a year. But this is always reported in dollars.

[Jim Nickerson]

Re: Fed Injects $41 Billion in Liquidity

I think it was Bart who made me aware of Mark Twain's comment which I doubt I'm quoting perfectly, "If you don't read the newspaper, you are uninformed; if you do, you are misinformed." The same can be said for all the mainstream media I believe.

From John Hussman's Weekly Market Comment 11/5/07 http://hussmanfunds.com/wmc/wmc071105.htm

Pump It Up.

Last week, the Associated Press reported: “The Federal Reserve pumped $41 billion into the U.S. financial system Thursday, the largest cash infusion since September 2001, to help companies get through a credit crunch… it was the largest single day of operations since $50.35 billion was pumped into the system on Sept. 19, 2001, following the terror strikes on New York and Washington. Since August, the Fed has been pumping cash into the financial system to help ease strains from the credit crunch.”

Wow. You can almost hear the pumps. That sounds like an impressive and calculated example of the Fed moving to intervene in order to ensure the solvency of our markets. Various reports said the injection was intended “to help stem the deepening crisis in the mortgage markets.” Some even suggested it was a “Citigroup bailout.”

The truth is that the entire $41 billion was nothing more than a predictable rollover of existing repurchases to maintain a stagnant $40-$45 billion pool of bank reserves – a pool that experiences almost no variation over time and has no material relationship with the volume of bank lending.

If you examine the NY Fed's releases on open market operations, you'll find that in fact, the Fed drained $1.5 billion in reserves on Thursday. Specifically, a total of $42.5 billion of temporary repurchase agreements came due on November 1, only $41 billion which were rolled over. The expiring repos were: a $5.5 billion 1-day repo from October 31, a $12 billion 2-day repo from October 30, a $19 billion 7-day repo from October 25, and a $6 billion 14-day repo from October 18. Those repos, in turn, were rollovers of prior repos, and so on.

Fed Open Market Operations: http://www.ny.frb.org/markets/openmarket.html
Total Discount Window Borrowings: http://research.stlouisfed.org/fred2/data/TOTBORR.txt
Total Bank Reserves: http://research.stlouisfed.org/fred2/data/TRARR.txt

The Fed has injected no “liquidity” at all into the banking system for months. As of Friday, there were a total of $41.25 billion in repurchase agreements outstanding, $3.5 billion less than at the end of September, though $2.75 billion more than at the end of August. That's the range of variation that the Fed has been managing. The total amount of outstanding repurchases has ranged between $40-$45 billion in recent months, only modestly above the average for the year as a whole. Meanwhile, the total amount that the Fed has lent to banks through the discount window fell again last week, to $283 million. Contrast that with $6 trillion in total bank loans outstanding, and you get the point.

If you tie out the repos currently outstanding, you'll find that $27 billion will come due again this Thursday, November 8. Depending on what the Fed does with 1-3 day repos between now and then, we could see another huge apparent “intervention” on Thursday. Some investors will be happy to imagine that the Fed has their back. Some will be frightened to think that the Fed must be very concerned to make such large “injections of liquidity” two weeks in a row. The truth is that we'll be observing a meaningless, automatic, predictable rollover of existing repos.

In the coming months, it will be increasingly important not to confuse growth in aggregates like money market balances and M2 with Fed-induced liquidity. We continue to observe shrinkage in the commercial paper and asset backed debt markets. As these obligations come due, they must either go unfinanced, or they will have to be financed through other types of debt. As I've noted before, banks will most likely be the chosen intermediary, not only as a place for investors to deposit their savings as an alternative to holding riskier securities, but also as a place for borrowers to obtain alternative financing. As a result, the shrinkage in the commercial paper market will be matched by an expansion in bank financing. This will not be new “money creation” but replacement financing through an alternative intermediary. Moreover, the apparent “money on the sidelines” in banks and money market funds will not represent cash waiting to be deployed. It will represent claims on money that has already left the building and has long been spent. For a more complete discussion, see The "Money Flow" Myth and the "Liquidity" Trap .

The last reference in Hussman's quote is rather interesting too--much like some of the stuff Finster (remember the Finster) wrote making me aware of the same points Hussman makes about Money Flow.

I believe Hussman is one of the better market commentaries I read each week.

[Uncle Jack]

Re: Fed Injects $41 Billion in Liquidity

Jim,

That article, the money flow myth, is why I absolutely hate seeing or hearing anyone mention "cash on the sidelines." And Hussman is right on when he says, "I am increasingly losing confidence that Wall Street operates on a well-defined base of knowledge. Instead, I am struck by the number of platitudes and false constructs that seem to dominate the investment management industry."

great stuff, except that I would substitute "Wall Street" with "cheerleader financial media."

[bart]

Re: Fed Injects $41 Billion in Liquidity

I understand but I still don't understand relevance. It certainly doesn't make the case that the Fed is not creating liquidity.

It's wrong to think that the Fed is irrelevant. The Fed's role changed in the early 1990s. Since then non-bank entities create most of the credit. The Fed's role is to jump in and buy certain bonds and debt securities at prices which, in its estimation, maintain an orderly market for them.

I'm with you EJ - the Fed is far from irrelevant as I've noted in various posts and criticisms of Hussman's views. To believe that a Central Bank of the Fed's size and power is irrelevant is a very odd view to say the least.
At best, I'd say that they're just not using the power that they have.


Anyhow.... as almost always, the devil is in the details of liquidity etc. The basic truth in my opinion is in the following two charts.

Hussman is correct that no new liquidity is being created via TOMOs (repos). The difference between the blue and black lines is TOMOs and the total pool is about average or slightly above.






For those who haven't seen this chart of mine, a TIO is roughly a U.S. Treasury repo and that's why I show them combined in the blue line.
Also, the $41 billion figure noted in this thread was the total TOMO add for one day. but did not include what was expiring that day. There was actually a net drop in the outstanding TOMO pool of about a billion.






The second chart below attempts to show what the entire Fed is doing by totaling up all the different actions and injections and then showing it as an annual rate of change. The light red line is the key - the Fed itself has been flat... but at a fairly high rate of about 10.5%.
In plain English, they're "pumping" but at a level rate - they are being quite cautious.






The blue line adds in a very arcane and way off the beaten path item called GSDS, which tracks what the 22 big banks (the primary dealers of the Fed) are doing with MBS, bonds, etc... and the mess that started in June/July can easily be seen in the peak and large fall off.

[EJ]

Re: Fed Injects $41 Billion in Liquidity

Jim,

That article, the money flow myth, is why I absolutely hate seeing or hearing anyone mention "cash on the sidelines." And Hussman is right on when he says, "I am increasingly losing confidence that Wall Street operates on a well-defined base of knowledge. Instead, I am struck by the number of platitudes and false constructs that seem to dominate the investment management industry."

great stuff, except that I would substitute "Wall Street" with "cheerleader financial media."

There are a lot of hacks out there. I like Hussman. He's definitely one of the good guys and knows his stuff.

Still not convinced of the relevance of "new" versus "recycled" bank credit. The Fed does little more than try to maintain order in the non-bank credit system and otherwise contributes little in the way of what is used for "money" these days. They grease the credit machine but are no longer the machine.

As for the Wall Street platitudes, it's actually a lot worse than Hussman thinks. After spending more hours than I care to count talking to investment bankers, VCs, private equity fund managers, and money managers of all stripes, I can tell you with conviction that the old adage is true: At any one time only ever three current ideas on Wall Street. At the moment they are:

- Structured finance is dead
- The dollar is doomed
- Dollar priced commodities to the moon

To the extent that the majority on Wall Street believe The Three Ideas, they become self-fulfilling.

I'll add that most of the guys I talk to express more serious pessimism about the future of the financial industry than I have heard since 2001. Partly this is due to structural changes in the industry since the early 2000s. Hedge funds have been replacing investment banks. In response, investment banks have been turning into hedge funds, while trying to maintain the old, fixed cost heavy infrastructure. Long term, this is a loser. Small, light and nimble is the future.

Massive layoffs also aren't helping, but there's also an element if "Boy, we really overdid it this time."