M1 Money Multiplier tanking

[junkacc]

Re: M1 Money Multiplier tanking

No, the situation is different. There is no real printing and almost everything the Fed has done was in fact reserve neutral (so much for "helping" the credit crunch").

As I've said before all this reserve and back lending is an illusion or hypothetical printing. If the Fed lends the banks a gazzilion and the banks deposit that gazzilion back to the Fed, one may argue that no money has been created and in fact it is all a neutral operation to provide governmental guarantees in disguise.

The money will be created when the banks will start taking those borrowed excess reserves and use them for loans. That may not happen, because the banks may simply repay their loans back to the Fed.

Here is a blog entry offering a good picture on how this works:

http://jengafinance.blogspot.com/200...e-of-lies.html

A question symbols.

1. The banks borrow $1M from the fed at 1% interest
2. The bank deposits the $1M at the fed for 2% interest
3. Banks pocket the difference. Thus, the banks see no incentive to pay back the loan
4. The deposits provide a cushion to banks for more credit crunch action in the future when the banks will use the magic of fractional reserve to print like mad.

Doesn't this scenario lay the groundwork for poom?

[bart]

Re: M1 Money Multiplier tanking

I thought the collapse in securitization markets diminished available consumer credit by 40%. At least that's what Geithner said -- is that false?

Thanks MUCH for the thoughtful reply, btw.

The key is the spin involved with the concept of "available consumer credit" - all it really means in plain English is that the growth rate is lower.
Last September it was growing at about 6% annually, and the most recent data shows a growth rate of about 2%.


Here's the raw data direct from the Fed's FRED database:

[Chomsky]

Re: M1 Money Multiplier tanking

Thanks Bart. From that chart, it appears that the last actual credit shrinkage was in the early 1990s. In your opinion, will we see such a leveling off (or contraction) this time around?

[bart]

Re: M1 Money Multiplier tanking

Thanks Bart. From that chart, it appears that the last actual credit shrinkage was in the early 1990s. In your opinion, will we see such a leveling off (or contraction) this time around?

Yes, an actual contraction is likely -- starting within 3 months or so. Its already contracting, and has been for quite a while, if even a partial CPI correction is applied.

[Chomsky]

Re: M1 Money Multiplier tanking

Thanks Bart.

[Starving Steve]

Re: M1 Money Multiplier tanking

OK, Bart, thank you for speaking in plain English. Now I can follow more of what you are saying.

"Could you please tell the Congress, are the efforts of the Federal Reserve in injecting funds into the banking system going to generate inflation throughout the economy? And if so, tell the Congress why in plain English."

[bart]

Re: M1 Money Multiplier tanking

OK, Bart, thank you for speaking in plain English. Now I can follow more of what you are saying.

"Could you please tell the Congress, are the efforts of the Federal Reserve in injecting funds into the banking system going to generate inflation throughout the economy? And if so, tell the Congress why in plain English."

If I only had a dollar for every time I've faxed or written or called...

Mostly, they're lawyers and power/control freaks and don't or won't get it -- but I keep it up anyhow since I'm a masochist... :rolleyes:

[Supercilious]

Re: M1 Money Multiplier tanking

Mostly it's the other way around. It gives the Fed more power to control the Fed Funds Rate, and prevent it from going lower. Before the Fed could pay interest on reserves, the overnight rate for reserves was significantly lower then the FFR and actually pulled the FFR down in an actual market driven move... and the Fed wants as close to absolute control of the FFR that it can get.

So as long as the reserves interest rate is above the FFR, it provides a floor for the FFR itself, and also gets their control fingers much more deeply into banks.

I agree with that. Now there is a solid floor under the FFR, and offers an absolute control over the overnight lending, but I suspect there is much more to it.

Right now it seems we are in an initialization moment. The IOR, FFR and discount window are all basically zero (~0.25% ). This can't stay like this for long. The question is how the game will be played in the future.

Right now a 35bp spread between FFR and IOR, basically has killed interbank lending.
Why would a bank take any risk in lending to a bank for only 35bps when it can all be deposited safely with the FED? Since the discount rate is also 0.25% and only 35bp above the IOR, if you are on the Fed's list of good boys you can get money through the alphabet soup or discount lending, if not you can't get money from other players unless at some obscene (Warren Buffet deals) rates. Therefore everybody rushes to hoard excess reserves.
By playing all these three rates and selectively choosing who gets access to various forms of discount borrowing, the Fed effectively decides which bank lives and which one dies.

When a non relatively free market based entity can successfully affect something as basic as interest rates and make them ignore real market reactions and reality, its a virtual guarantee that other long term negative problems will pop up and eventually blow up in their and our faces - that's the real message, and who knows what financial element will actually go *pow* next and "force" the Fed into more unusual & unprecedented actions.

Agree. And this move allows them to create *pow*s they couldn't do before.

As far as encouraging lending, the interest paid on reserves has little to no effect.

There is no direct effect, but I believe there is a lot of indirect effect. The whole game now is in between FFR, IOR and discount rate (in it's various incarnations).

And again -- the actual stats show that credit is still expanding on a year over year basis. Real estate loans at commercial banks for example are growing at around 5.5% as of last week, and were as low as 3.3% last September. The numbers are similar for commercial bank credit overall. Even credit card debt is growing at over 3%, although it has been continually trending down since about March 2008 when it was growing at 8%.

Yup, and here we go back to that famous 666 paper with the myths about the credit crunch.

They key is the word "apparently" - it seems like the consequences were unintended, but anyone who knows basic economics and human response could have predicted that interest being paid on reserves would have a huge effect on their ability to control the FFR.

You are correct. I missed the word "apparently". Mea culpa!

Amen on the Fed's obsession with the FFR - they've been wanting that level of control and more for decades, and all it takes is a crisis and short sighted severely under educated Congress critters.

"You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before." -Rahm Emmanuel

[Supercilious]

Re: M1 Money Multiplier tanking

A question symbols.

1. The banks borrow $1M from the fed at 1% interest
2. The bank deposits the $1M at the fed for 2% interest
3. Banks pocket the difference. Thus, the banks see no incentive to pay back the loan
4. The deposits provide a cushion to banks for more credit crunch action in the future when the banks will use the magic of fractional reserve to print like mad.

Doesn't this scenario lay the groundwork for poom?

It's not like this because the discount rate is not higher than the interest on reserves, otherwise the Fed becomes a charity. You have three rates: tow fixed and one is a target rate.

Banks borrow from the Fed at discount rate, which is currently 0.50%.primary (1% secondary), but in fact the alphabet soup can bring it down to FFR
The Feds funds rate (FFR) is at this special socialist moment 0.25% . The FFR is actually a target not a rigid rate because the Fed cannot impose directly at what rates banks were lending to each other overnight.
You have the IOR (interest paid by the Fed on reserves) which initially was FFR - 50bp and now is FFR - 35 bp ( it is basically equal to FFR)

This situation is abnormal but in the future let's examine the following scenario:

The discount rate (primary credit rate PCR) is 5%, the ROI is 2% and the target FFR is about 3%

A bank with excess reserves can lend them overnight to another bank at about 3% or can keep them with the Fed and gets a 2% interest. If there is a high risk perception and the spread between FFR and ROI is very small then ...why lend it to Lehman when you can keep the money safe with the Fed?

If a bank like Lehman is in need of reserves, it can borrow from another bank at about 3% FFR or it can go to the Fed begging for a loan at PCR which is 5% ( and if Geitner believes they deserve a loan). If Geitner doesn't want to give it money for some reason then the only other alternative is to go to Buffet for a 12.5% loan with all that convertible senior debt style of deal, everybody loves.

The interesting part is that the spread between ROI and FFR allows the FED to control precisely not only what is the effective (real) FFR but also it can control how much money is available for interbank lending, and in conjunction with PCR it can control how much money the banks are lending in the economy.

Before the New Great Socialist Revolution of October (TARP) banks that had to borrow at discount rate from the Fed were perceived as with major problems and CEO's avoided to use it. I suspect that some of the temporary alphabet soup facilities will become permanent and in the future borrowing from the Fed will become more common and acceptable.

[junkacc]

Re: M1 Money Multiplier tanking

Thanks symbols for the great explanation, it was very eluciating yet confused me more :eek:

If the discount rate > IOR, one begs the question, what is this whole circle jerk for? In essence, the banks seem to be hoarding the money just so they can pay the fed interest.

If the banks are not hoarding the reserves in anticipation of a future event, which btw means they know whats coming, it doesn't make much sense. And wouldn't this future event be the harbringer of POOM where they must create money based on the deposits at the fed?

[Supercilious]

Re: M1 Money Multiplier tanking

Thanks symbols for the great explanation, it was very eluciating yet confused me more :eek:

Sorry junkacc for confusing you more. I have problems myself of understanding exactly what are all the "apparently unintended consequences" of this new toy the Fed just got from a distracted congress. That's why I'm still trying to get more thoughts from bart and any other people which have a better picture and understanding than me. I feel this apparently minor ROI provision is a major game changer and now we are also going through a painful adjustment to the new system.

If the discount rate > IOR, one begs the question, what is this whole circle jerk for? In essence, the banks seem to be hoarding the money just so they can pay the fed interest.

To me it seems that the FED has just grabbed the interbank lending with an iron fist in a velvet glove. Yes, banks are hoarding excess reserves, and the dynamic of those hoarded reserves is stunning. Look at this chart for example:



And if you read the latest joint statement released released by FED, FDIC and rest they say:

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated.

And they are right. At least on a cumulative level the banks in the Fed system have never been better capitalized. (of course there are still some goners struggling to survive and this is the reason of these stress tests).

Basically the Fed has creates the environment that compels banks to hoard reserves because the perception of risk reward is modified artificially. When all the markets are going down why should one bank lend to another bank at FFR when they can get FFR-35 bp from the FED? Plus, since nobody else lends money each bank increases it's safety cushion in case things further deteriorate.

Some moths ago when we were talking about the Fed's Hammer Drill theory there was this discussion about the chance of the distribution in the liquidity pyramid, respectively the collapse of derivatives (and all the leveraged shadow banking system) creates a backdraft effect for high power money. The inflation/deflation trend depends on how fast the high power money (such as the money sitting in excess reserves) replaces the volume of frozen derivatives. Surprise! PIMPCO's Bill Gross is saying the same thing today with his hairy lips:
http://www.pimco.com/LeftNav/Feature...Sink+Ships.htm

Trillions of dollars of credit have been sucked out of the financial system over the past 12 months. Banks may be lending but the larger shadow banking system is not. All of those SIVs and credit default swaps that once generated credit are now contracting and pulling the real economy down with them. Think of it this way: If you had three or four pints of blood drained from your body you’d be on life support, very quickly. Same thing now. The solution is for government spending to simulate a transfusion of whole blood, plasma, or whatever’s available.
[...]
If the government cannot substitute credit to the same extent that it is disappearing from the private system, then the U.S. and global economies will retreat. If the economy is viewed as a bathtub filled with water (credit) at two different times with two different levels, then draining it back down to the lower first level might reduce economic activity proportionately. Liquidate debt (credit) to 2003 totals and you just might reduce economic activity (GDP) to 2003 numbers as well. Whoops! That would mean a 10%+ contraction in the economy with unemployment approaching the teens. Keep that bathtub full!

So far the Fed seems preoccupied only to provide ammo for the banks without givving any firing orders. I believe that in this environment banks will start lending only if the FFR is increased :eek: the discount rate is increased and the IOR is kept to the floor at near 0.

In that environment only the Fed's minions will have gazzilions in hoarded reserves and they'll be able to lend when everybody is starved for credit. Plus if some of the alphabet soup facilities are maintained, after the lending restarts, if the FED lowers the discount window, many of the minion banks will become in fact loan servicers for the FED. ;) It can't get better than this.

If the banks are not hoarding the reserves in anticipation of a future event, which btw means they know whats coming, it doesn't make much sense. And wouldn't this future event be the harbringer of POOM where they must create money based on the deposits at the fed?

The big question is what will be that future event. A major fall, or a clean slate reset of leding in a much more profitable conditions for the friendly banks?

As I've said before, I don't think a real Poom will happen in the US because that would entail smart money losing big. ... and smart money never loses ...

[Supercilious]

Re: M1 Money Multiplier tanking

Duplicate. Please disregard.

[sishya]

Re: M1 Money Multiplier tanking

So far the Fed seems preoccupied only to provide ammo for the banks without givving any firing orders. I believe that in this environment banks will start lending only if the FFR is increased :eek: the discount rate is increased and the IOR is kept to the floor at near 0.

I thought FFR cannot be increased. If there are no credit worth borrowers, why would any bank borrow reserves(high powered money) from one another at this high rate. Also Savings are increasing and people are paying down debt and I am not seeing any change in this direction. So why would banks borrow at higher FFR from one another. Only if there are signs of inflation, will borrowers emerge from their shell and start taking risks and banks can lend. Assets price inflation + tax_advantage have be greater than FFR+bank_profit

In that environment only the Fed's minions will have gazzilions in hoarded reserves and they'll be able to lend when everybody is starved for credit. Plus if some of the alphabet soup facilities are maintained, after the lending restarts, if the FED lowers the discount window, many of the minion banks will become in fact loan servicers for the FED. ;) It can't get better than this.

All I see is deflation getting stronger. No one wants to borrow to buy any house or start business. Banks have stored all that ammo but cannot use them since there are no good targets. How can the FED frighten people to take more risk ? The only way I see it is by causing HIGH inflation. It will force people with money stashed, to start investing. But then the elites(creditors) who have wealth will be destroyed. Only after the rich have moved to inflation hedges can this threatening happen.

The big question is what will be that future event. A major fall, or a clean slate reset of leding in a much more profitable conditions for the friendly banks?

As I've said before, I don't think a real Poom will happen in the US because that would entail smart money losing big. ... and smart money never loses ...

I agree, high inflation is bad for creditors unless they climb to inflation hedges first. Likely inflation hedges are stocks, Gold, commodities. Definitely away from Bonds. But if bonds start loosing, then interest rates rise and borrowing becomes costly. I don't see a way out of this mess unless we start asset bubbles again, where assets rise faster than inflation.

Symbols keep posting so that novices like me can understand what is happening.

[Kcim67]

Re: M1 Money Multiplier tanking

$#*, can you please clarify this?

Do you mean the real Poom is linked to something else or that Poom is a myth?

:rolleyes: The upshot here is are they in control or not? I would suggest that within the US sphere of influence this are to a degree proceeding as planned. the unpredictables are Europe, Asia and the Ruskies, China at least temporarily has conceded that symbiotic survival is preferable to mutual destruction.
If they're in control we're on a slow burner for the foreseeable future, if not...............get the tin hats out!!!!!!!

[c1ue]

Re: M1 Money Multiplier tanking

As I've said before, I don't think a real Poom will happen in the US because that would entail smart money losing big. ... and smart money never loses ...

And who would this smart money be?

Alwaleed?

http://whereiszemoola.blogspot.com/2...ng-suffer.html

The Saudi investment company that bet big on now-ailing Citigroup and other major global companies said Tuesday it lost more than $8 billion in the last three months of 2008.

Prince Alwaleed bin Talal's Kingdom Holding Co. attributed the drop to losses stemming from the company's investments in capital markets, according to a statement posted on the Saudi Tadawul exchange's Web site.

Kingdom Holding said it lost 30.98 billion riyals ($8.26 billion) in the fourth quarter of 2008. That compares with a gain of 255.6 million riyals ($68.2 million) in the same period a year earlier.

"It's significant," said John Sfakianakis, chief economist at SABB, the HSBC Holdings PLC affiliate formerly known as Saudi British Bank. "I don't think that we have seen such a loss in the recent corporate history of Saudi Arabia."

How about T. Boone Pickens?

http://www.businesspundit.com/t-boon...ses-2-billion/

In the latest sign of how the [COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif][COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif]financial [/FONT][COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif]crisis[/FONT][/COLOR][/FONT][/COLOR][/COLOR] and steep drop in commodity prices since July have blindsided some of the most prominent investors, energy crusader T. Boone Pickens said he and his BP Capital investment firm have lost some $2 billion since oil and natural-gas prices started tumbling in July.
The information, released on “60 Minutes,” is sharply higher than the most recent estimates of Mr. Pickens’ losses. His [COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif][COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif]funds[/FONT][/FONT][/COLOR][/COLOR]

were previously thought to be down over $1 billion in 2008, with his personal losses pegged at more than $300 million.

In the “60 Minutes” profile, which says the value of Mr. Pickens’ [COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif][COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif]hedge [/FONT][COLOR=#04656e! important][FONT='Lucida Grande', Verdana, sans-serif]fund[/FONT][/COLOR][/FONT][/COLOR][/COLOR] has been cut in half since July, Mr. Pickens said he’ll get the $2 billion back

Or maybe Warren Buffet?

He lost $13.6B late last year - that link has been whacked by CNBC