FED tapped out (???) (!!!) - Hutchinson

[Spartacus]

I think I followed a link from dollarcollapse.com to get to this

The Fed is doing everything it can to stave off disaster, but frankly, it is not rich enough. With assets of about $800 billion, having instituted $400 billion of rescue programs in the last week plus unspecified intervention with Bear Stearns, it is pretty nearly tapped out. It does of course have available a further source of liquidity, the Federal printing press. With inflation already moving at a brisk trot, use of that source will replace an incipient recession with a deeper and highly inflationary recession.

Martin Hutchinson
Sorry, I wasn’t pessimistic enough!

http://www.prudentbear.com/index.php/BearsLairHome

[qwerty]

The Mission: Prevent a Global Banking Collapse

The thing that makes sense to me as an explanation of the Fed's actions is that it cannot afford a bank or major player to go bankrupt because (as Hutchinson portrays) the enormous amount of Credit Default Swap exposure may collapse if a single player defaults.

Now, if the Fed fails to save all of the candidates from bankruptcy, Hutchinson suggests a possible global banking collapse.

Qn #1: (a) What do people think of that inference (Fed fails implies collapse of the banking system) and (b) What would that entail, practically?

But if the Fed succeeds in curing what is essentially a solvency crisis by making the key players solvent, before running out of ammo as it were ...

Qn #2 What would be the outcome then? Hyperinflation?


It's that first scenario I can't get to grips with picturing. What actions would take place?

[Spartacus]

Bloomberg article making the same point

followed a link off Mish's blog to this

http://www.bloomberg.com/apps/news?p...d=a8JhRTZjidh8

[Finster]

Re: The Mission: Prevent a Global Banking Collapse

The thing that makes sense to me as an explanation of the Fed's actions is that it cannot afford a bank or major player to go bankrupt because (as Hutchinson portrays) the enormous amount of Credit Default Swap exposure may collapse if a single player defaults.

Now, if the Fed fails to save all of the candidates from bankruptcy, Hutchinson suggests a possible global banking collapse.

Qn #1: (a) What do people think of that inference (Fed fails implies collapse of the banking system) and (b) What would that entail, practically?

But if the Fed succeeds in curing what is essentially a solvency crisis by making the key players solvent, before running out of ammo as it were ...

Qn #2 What would be the outcome then? Hyperinflation?


It's that first scenario I can't get to grips with picturing. What actions would take place?

I don't see how the Fed can "run out of ammo" as a result of the amount of UST (United States Treasuries) on its balance sheet. Okay, assuming the Fed recently had $800 B of UST, how did it acquire that in the first place? And why can't it do it again?

A simplified answer is that gets UST by issuing FRN's (Federal Reserve Notes). Trades FRNs for USTs. The notes are in turn backed by its holdings of UST. Folks, with the spendthrift government we have, there is simply no shortage of UST out there! And nothing to stand in the Fed's way of getting more of them the same way it got the ones it has now.

What am I missing here?

[Spartacus]

Re: The Mission: Prevent a Global Banking Collapse

"obvious spillover"
and
"admission of the severity of the problem"

When the FED cannot hide its activities and has to take the next logical step, all the "Weimar can't happen here" arguments evaporate like fog under a harsh sun.

The work the FED's done so far is still mostly secretive, with amounts and specific dispositions subject to debate -
how much?
in what form(s) ?
to whom?
for what purposes (we know some, but I bet GATA has a few guesses of what some of that money is for)?
And what restrictions are involved - on the funds and the institutions?

We don't know.

If the FED has to inflate its balance sheet a lot crisis management will become quantum levels more difficult.

People are going to be asking those questions with a new urgency. "Mr. Transparency" will have to do a LOT of fancy tap dancing.

I don't see how the Fed can "run out of ammo" as a result of the amount of UST (United States Treasuries) on its balance sheet. Okay, assuming the Fed recently had $800 B of UST, how did it acquire that in the first place? And why can't it do it again?

A simplified answer is that gets UST by issuing FRN's (Federal Reserve Notes). Trades FRNs for USTs. The notes are in turn backed by its holdings of UST. Folks, with the spendthrift government we have, there is simply no shortage of UST out there! And nothing to stand in the Fed's way of getting more of them the same way it got the ones it has now.

What am I missing here?

perception management is more important than actually solving problems (see also: "Open Mouth Committee")

[qwerty]

Ammo limited - the banking system or the Treasury

Surely there could come a point in time when someone tells the president that he couldn't keep both the US Treasury and the banking system as going concerns, and that he has to chose which one to keep. Well, they wouldn't give him that choice, they'd have to let the banks go under.

What are the numbers needed here? How many Treasury bonds or Fed IOUs might be needed to cover losses to major US CDS players? And how does that stack up against the ability of the market to absorb that amount of new US Treasury securities?

So it's whether they can inject enough paper into the system before the outside starts down-grading that government paper faster than they can issue it - the tipping point for hyperinflation.

Also, what about the operational difficulties of saving more than one Bear Stearns at a time? Say a German bank defaults on some large CD positions, no one can predict where all the leaks are going to springing on Wall St.

A week-long bank holiday, while the Fed and JPM go into the back-offices?

What would that look like for the economy? No ATMs, no credit card terminals I'm supposing. It would look very much like Argentina, wouldn't it?

[tree]

Re: FED tapped out (???) (!!!) - Hutchinson

How does any of this affect all the delinquent loans -- home, car, credit, etc. -- about to go bad permanently? Is there any hoping this stuff away? And the global securities that go with them? Does slashing interest rates have any effect on real humans' ability to pay their debts, other than perhaps keeping a few more of them employed? Dummy-pluses want to know!

"Can this economy be saved?"

[Spartacus]

Re: The Mission: Prevent a Global Banking Collapse

good questions, and I'd go further.

After writing that if the FED expands its balance sheet the FED will be in a world of hurt, I did a double take and realized we should also look in this arena for more of the "innovation" that Mr. Bernanke (aka Mr. Transparency) is becoming famous for.

What's to prevent the FED & USTreasury from cooking up a new system to get t-bills to the FED without taking FRN's for the UST's, but accepting electronic entries instead?

What's to prevent the UST from helicopter dropping tons of UST's to the St Louis or NY FED, the same way the FED dropped some megatonnage of US bonars/d0llars on Iraq?

I don't see how the Fed can "run out of ammo" as a result of the amount of UST (United States Treasuries) on its balance sheet. Okay, assuming the Fed recently had $800 B of UST, how did it acquire that in the first place? And why can't it do it again?

A simplified answer is that gets UST by issuing FRN's (Federal Reserve Notes). Trades FRNs for USTs. The notes are in turn backed by its holdings of UST. Folks, with the spendthrift government we have, there is simply no shortage of UST out there! And nothing to stand in the Fed's way of getting more of them the same way it got the ones it has now.

What am I missing here?

[Spartacus]

Re: FED tapped out (???) (!!!) - Hutchinson

it's creating inflation, with promises of more (more bail outs and therefore more inflation)

How does any of this affect all the delinquent loans -- home, car, credit, etc. -- about to go bad permanently? Is there any hoping this stuff away? And the global securities that go with them? Does slashing interest rates have any effect on real humans' ability to pay their debts, other than perhaps keeping a few more of them employed? Dummy-pluses want to know!

"Can this economy be saved?"

Not hope, inflation.
Pay the loan off in 10 years with highly inflated money (if you have and can keep a job whose pay keeps up with inflation - otherwise, kiss your keester bye-bye).

[Finster]

Re: The Mission: Prevent a Global Banking Collapse

... What's to prevent the FED & USTreasury from cooking up a new system to get t-bills to the FED without taking FRN's for the UST's, but accepting electronic entries instead? ...

I believe they're already doing that. Most money and credit these days is electronic. Production of actual paper is incidental based on practical demand for pocketable dollars.

[tree]

Re: FED tapped out (???) (!!!) - Hutchinson

Yes, debt inflation. But many are these loans are already delinquent. What happens?

[FRED]

Re: FED tapped out (???) (!!!) - Hutchinson

Yes, debt inflation. But many are these loans are already delinquent. What happens?

Consider the 100% inflation scenario, several years old but getting younger every day.

Inflation is Dead! Long Live Inflation!

[qwerty]

But what quantities and complexities are involved?

Notional derivatives outstanding >$500Tn.
US National Debt (non-accrual basis) ~ $9Tn

Ok all those notional numbers are netted out, plus J P Morgan has been running counter-party default risk stress tests for decades.

And their models factor in correlations. (Counter-parties don't always default one at a time!)

But I'm guessing that this correlation modeling might be similar to the type they used to produce AAA-rated MBS Tranches out of a pool of sub-prime mortgages.

However, I suppose if X National Bank came to work one morning and found that the Y Landesbank bankruptcy of the day before had a knock on effect such that five German counterparties were going to default on $200Bn worth of X's interest rate swap book, it would not be as bad as it looked.

Tomorrow's quarterly cash settlement that has gone missing from X's expected incoming cash-flow might only be, what, $50m? (quarter of a 2% differential on $10bn notional).

But it would be unlikely that X National is the only one to have a problem that morning. What if there are dozens of banks short of cash?

I guess it's not so operationally daunting and all of that loose change can be dished out of the discount window.

But, if it's Credit Default Swaps instead of interest rate swaps that X's counterparties are defaulting on, the cash settlement could be huge. What if the CDS are underwriting Y Landesbank ?!

Those CDS look to me like they have become self-referential and self-reinforcing in a fast-breeder reactor sort of way.

There's no way the Treasury can wire the Fed a TRILLION or so UST's to plug gaps in X and the half-dozen other US banks that had CDS imploding on their books.

What do you think of that argument?

[Spartacus]

Re: But what quantities and complexities are involved?

Sounds more like one possible scenario,

in fact the iTulip standard scenario (to wit, "the FED will not allow a self-reinforcing debt deflation")

It raises questions for me, though - the rating agencies had incentive to inflate the ratings, but were there not quants at each of the big houses who should have known what S&P and Fitch were doing, and mapped out their own, more accurate projections?

Or is Wall St much more of an echo chamber than we realise?

However, I suppose if X National Bank came to work one morning and found that the Y Landesbank bankruptcy of the day before had a knock on effect such that five German counterparties were going to default on $200Bn worth of X's interest rate swap book, it would not be as bad as it looked.

There's no way the Treasury can wire the Fed a TRILLION or so UST's to plug gaps in X and the half-dozen other US banks that had CDS imploding on their books.

What do you think of that argument?

sounds like a proposition/proposal/scenario, not an argument

IMHO the precedent that solves this scenario was already set during 9/11, when the FED told institutions (I paraphrase) to pretend all cheques had cleared (or some such) until proper clearing could be re-established.

[Spartacus]

Re: FED tapped out (???) (!!!) - Hutchinson

big institutions get rescued, little people walk away from underwater loans and suffer bad credit for several years.

Depending on the type of loan, some people suffer greatly (there was lots of discussion here on the new US bankruptcy laws couple of years back that did not allow people to erase some types of loans in bankruptcy)

Yes, debt inflation. But many are these loans are already delinquent. What happens?