Tweet
Brought to you by that shining beacon of in-depth journalism - NEWSMAX:
Whitmore: The Fed Is Breaking All The Old Shackles!
(picture of BOOBUS MAXIMUS)
I am reminded of the Super Bowl as I read and research for this week’s column. That huge, media-driven football spectacle has been with us from the early 1960s and gets bigger and more elaborate every year.
That three-and-a-half hour gladiator contest is eagerly awaited and then seen and forgotten until the next year by most fans. But, what the fans usually forget is that the intervening 364 days are filled with hard work, player trading, and a huge basket of unseen efforts by players, coaches, and owners to be winners. And most of all, it occurs well below the major media focus.
Story continues below . . .
In the financial world, we too have our big Super Bowl event, only ours occurs every eight weeks. It is called the Federal Open Market Committee (FOMC) meeting. And like the Super Bowl, the electronic and printed word build-up is gigantic.
Endless TV shows, newspaper, and internet columns make all sorts of observations and predictions. Then, at exactly 2:15 PM on announcement day, the crowd goes nuts! Well, at least the traders do. It usually takes an hour or so for the dust to settle and, for most, the FOMC event is over just that quickly, until the next FOMC meeting in eight weeks.
However, it is truly amazing what really meaningful events occur at the Fed during that eight-week interval, again just beneath the major media focus. Take the events that have occurred just since the last quarter-point drop in rates on Dec. 11.
The next day, the Fed announced a huge insertion of funds — $40 billion into the banking system — that, if you understand what it means, was a colossal announcement. It signaled a full scale attack by the Fed, with the clear support of other world banks, on the potential problems that surfaced in what we now call the “subprime mess.”
But, truth be told, the “subprime mess” is really just the media-selected sideshow in all this churning of the banking systems activities. The real show is all about valuation of securities. It's that simple.
How does one value a mortgage that has been broken into four pieces or 10 pieces or even more? What is each part really worth? And what does any one part represent? Is there true ownership of the basic security attached? The courts are, even now, addressing that one, and the investors are losing so far.
In the beginning of the creation of the SIV and the all the other alphabet soup paper, it was easy to be an investor when a broker called and offered AA or AAA paper. You thought that your investment was nearly risk free.
Then, lo and behold, you tried to sell it one day and there were no buyers at the face value of the paper. In fact, you found out that maybe you were about to take a big loss if you really “had” to sell that paper. The potential buyer you called said he couldn’t offer more than maybe 90 percent of the face value (if that much) because he just wasn’t sure what the paper you owned was really worth.
Now, multiply your predicament by tens of thousands of holders and you begin to get the severity of the valuation problem. Also, understand this. In many cases, your paper is likely worth what you paid for it or very close to that figure. But, since your buyer is not confident of that, he or she will only pay a much lower price to relieve you of your paper.
The problem, they say, is that they just don’t have confidence in the paper to risk paying you more. The essence of the valuation problem, therefore, is confidence.
Dr. Ben Bernanke, the Fed chairman, is extremely familiar with the concept of confidence. In his book of essays on the Great Depression of the 1930s, he explores how lack of confidence both froze investment activity and then nearly destroyed the world’s financial structure. One by one, banks and other financial institutions failed until only a skeleton of the former structure remained.
Then, after describing these events in vivid detail, Dr. Bernanke states in no uncertain terms that the world’s greatest modern financial failure never needed to happen. Had the steps to restore confidence been take early on, the depression would have been averted. But, fear on the part of a still fledgling Fed (only 15 years old at that point), fear by the bankers, and more importantly, fear by investors crumbled precious confidence everywhere and resulted in the Great Depression.
I have said a number of times in this column over the last three to four months that I believe that Dr. Ben is exactly the right man for today’s Fed job. I have said over and over that the tools the Fed has at its disposal are so much more far reaching than anyone in the financial markets realizes. And I have said that I expect that we will see Dr. Ben operate as no one has done at the Fed since it was organized in 1913 (save Paul Volcker, possibly).
Witness the following:
As I have already said, the day after the rate decrease, the Fed injected a huge $40 billion lump sum in new funds into the banking system — the first, I believe, of what will be a number of such auctions of funds and a very different activity from the repo activity at the Fed.
These auctions will, I believe, provide the banking system funds to substantially reduce some of the headaches they now have. You see, it is not interest rates, but money supply that is important — read his book! These auctions address that truism.
And as an additional kick to the world’s banking system, the Fed also made available to foreign banks an additional $24 billion to relieve the pressure on their financial systems.
That is a total of $64 billon, with a B! How appropriate when you recall that a French bank’s refusal to accept as collateral some "subprime” AAA paper because it felt it could not properly value it, started the entire “subprime” domino effect in the world’s banking system in the first place.
A side note: The foreign banks reciprocated the Fed move by buying huge quantities of U.S. dollars and bringing a solid rally to the dollar market. Granted, the rally will not reverse the dollar slide, but it was a clear vote of confidence for Dr. Ben’s action.
Dr. Ben is, clearly, out to bring back hard-nosed regulation of how and to whom banks can make loans and how, basically, banks will be allowed to operate in the future. [ :eek: :eek: :eek: ] And the banking system is obviously in little position to argue with him. Just look at this first collection of banking reforms announced yesterday by the Fed, ones that I expect will be expanded greatly over the next three to four years.
The Fed announced regulations that force banks to restrict loans only to “able to pay” customers and freeze the bank’s ability to raise rates on a loan under certain conditions, as well as to collect certain fees normally associated with the loan process.
Banks are now required to be sure the customer has received and acknowledged they have received a very full disclosure document explaining exactly who will charge what and who will get paid what amount for services provided to the customer by the bank, the mortgage broker, and anyone else involved in the making of the customers loan.
In addition, proof of the income of the borrower will be required before the bank will be allowed to make the loan. And note these regulations required only the stroke of a pen by Dr. Ben to put them in place. No Congressional hearings, no debates, and no long delays. And the impact on the wide world of borrowers is huge! That is the exercise of vast power! [ :eek: :eek: :eek: ].
There are other elements of these new rules, but you can see the direction these actions are taking. Banks and mortgage makers are being reined in. Why? Because customers need to have the confidence that they are not being “had” by the collection of folks involved in the loan process. Again, it is all about confidence. (By the way Dr. Ben, when will you address the obscene fees schedules the banks FORCE on customers for late payment receipt, overdrawn accounts, and the like – talk about out of control!)
I could go on a bit more, but I included only this portion of the changes since the Fed reduced interest rates eight days ago to spotlight what I have been saying for some time. The Fed is on the warpath. [ :eek: :eek: :eek: ]. Do not sell the power of the Fed short!
I clearly expect that if the going gets tough, the Fed could soon work directly with some large companies in need of cash by lending to them direct via a credit they can take to any bank. Sound crazy? It has been done before and if Bernanke sees the need, I believe it will be it done again.
My point this week is simple. There are leaders and there are bureaucrats. Dr. Bernanke is a leader. [ :rolleyes: :rolleyes: :rolleyes: ]. Leaders lead, most often, amid a lot of flack.
The reason for the flack, usually, is the “flacker” is reading the script by the old rules and sees no way out. But, new leaders, like Dr Ben, dig deep into history and their own resourcefulness and come up with answers that don’t fit the so-called “old” rules. I keep saying it over and over.
If you want to know where this Fed is going, read Bernanke’s book! The new rules are all there and they are like nothing before them. If I am right, these new rules will reign for the next 50 or more years, as they will meet the problems we face today — in spades! You need to read the new “rule book.” [ :p :p :p ]
Whitmore: The Fed Is Breaking All The Old Shackles!
 |
(picture of BOOBUS MAXIMUS)
I am reminded of the Super Bowl as I read and research for this week’s column. That huge, media-driven football spectacle has been with us from the early 1960s and gets bigger and more elaborate every year.
That three-and-a-half hour gladiator contest is eagerly awaited and then seen and forgotten until the next year by most fans. But, what the fans usually forget is that the intervening 364 days are filled with hard work, player trading, and a huge basket of unseen efforts by players, coaches, and owners to be winners. And most of all, it occurs well below the major media focus.
Story continues below . . .
In the financial world, we too have our big Super Bowl event, only ours occurs every eight weeks. It is called the Federal Open Market Committee (FOMC) meeting. And like the Super Bowl, the electronic and printed word build-up is gigantic.
Endless TV shows, newspaper, and internet columns make all sorts of observations and predictions. Then, at exactly 2:15 PM on announcement day, the crowd goes nuts! Well, at least the traders do. It usually takes an hour or so for the dust to settle and, for most, the FOMC event is over just that quickly, until the next FOMC meeting in eight weeks.
However, it is truly amazing what really meaningful events occur at the Fed during that eight-week interval, again just beneath the major media focus. Take the events that have occurred just since the last quarter-point drop in rates on Dec. 11.
The next day, the Fed announced a huge insertion of funds — $40 billion into the banking system — that, if you understand what it means, was a colossal announcement. It signaled a full scale attack by the Fed, with the clear support of other world banks, on the potential problems that surfaced in what we now call the “subprime mess.”
But, truth be told, the “subprime mess” is really just the media-selected sideshow in all this churning of the banking systems activities. The real show is all about valuation of securities. It's that simple.
How does one value a mortgage that has been broken into four pieces or 10 pieces or even more? What is each part really worth? And what does any one part represent? Is there true ownership of the basic security attached? The courts are, even now, addressing that one, and the investors are losing so far.
In the beginning of the creation of the SIV and the all the other alphabet soup paper, it was easy to be an investor when a broker called and offered AA or AAA paper. You thought that your investment was nearly risk free.
Then, lo and behold, you tried to sell it one day and there were no buyers at the face value of the paper. In fact, you found out that maybe you were about to take a big loss if you really “had” to sell that paper. The potential buyer you called said he couldn’t offer more than maybe 90 percent of the face value (if that much) because he just wasn’t sure what the paper you owned was really worth.
Now, multiply your predicament by tens of thousands of holders and you begin to get the severity of the valuation problem. Also, understand this. In many cases, your paper is likely worth what you paid for it or very close to that figure. But, since your buyer is not confident of that, he or she will only pay a much lower price to relieve you of your paper.
The problem, they say, is that they just don’t have confidence in the paper to risk paying you more. The essence of the valuation problem, therefore, is confidence.
Dr. Ben Bernanke, the Fed chairman, is extremely familiar with the concept of confidence. In his book of essays on the Great Depression of the 1930s, he explores how lack of confidence both froze investment activity and then nearly destroyed the world’s financial structure. One by one, banks and other financial institutions failed until only a skeleton of the former structure remained.
Then, after describing these events in vivid detail, Dr. Bernanke states in no uncertain terms that the world’s greatest modern financial failure never needed to happen. Had the steps to restore confidence been take early on, the depression would have been averted. But, fear on the part of a still fledgling Fed (only 15 years old at that point), fear by the bankers, and more importantly, fear by investors crumbled precious confidence everywhere and resulted in the Great Depression.
I have said a number of times in this column over the last three to four months that I believe that Dr. Ben is exactly the right man for today’s Fed job. I have said over and over that the tools the Fed has at its disposal are so much more far reaching than anyone in the financial markets realizes. And I have said that I expect that we will see Dr. Ben operate as no one has done at the Fed since it was organized in 1913 (save Paul Volcker, possibly).
Witness the following:
As I have already said, the day after the rate decrease, the Fed injected a huge $40 billion lump sum in new funds into the banking system — the first, I believe, of what will be a number of such auctions of funds and a very different activity from the repo activity at the Fed.
These auctions will, I believe, provide the banking system funds to substantially reduce some of the headaches they now have. You see, it is not interest rates, but money supply that is important — read his book! These auctions address that truism.
And as an additional kick to the world’s banking system, the Fed also made available to foreign banks an additional $24 billion to relieve the pressure on their financial systems.
That is a total of $64 billon, with a B! How appropriate when you recall that a French bank’s refusal to accept as collateral some "subprime” AAA paper because it felt it could not properly value it, started the entire “subprime” domino effect in the world’s banking system in the first place.
A side note: The foreign banks reciprocated the Fed move by buying huge quantities of U.S. dollars and bringing a solid rally to the dollar market. Granted, the rally will not reverse the dollar slide, but it was a clear vote of confidence for Dr. Ben’s action.
Dr. Ben is, clearly, out to bring back hard-nosed regulation of how and to whom banks can make loans and how, basically, banks will be allowed to operate in the future. [ :eek: :eek: :eek: ] And the banking system is obviously in little position to argue with him. Just look at this first collection of banking reforms announced yesterday by the Fed, ones that I expect will be expanded greatly over the next three to four years.
The Fed announced regulations that force banks to restrict loans only to “able to pay” customers and freeze the bank’s ability to raise rates on a loan under certain conditions, as well as to collect certain fees normally associated with the loan process.
Banks are now required to be sure the customer has received and acknowledged they have received a very full disclosure document explaining exactly who will charge what and who will get paid what amount for services provided to the customer by the bank, the mortgage broker, and anyone else involved in the making of the customers loan.
In addition, proof of the income of the borrower will be required before the bank will be allowed to make the loan. And note these regulations required only the stroke of a pen by Dr. Ben to put them in place. No Congressional hearings, no debates, and no long delays. And the impact on the wide world of borrowers is huge! That is the exercise of vast power! [ :eek: :eek: :eek: ].
There are other elements of these new rules, but you can see the direction these actions are taking. Banks and mortgage makers are being reined in. Why? Because customers need to have the confidence that they are not being “had” by the collection of folks involved in the loan process. Again, it is all about confidence. (By the way Dr. Ben, when will you address the obscene fees schedules the banks FORCE on customers for late payment receipt, overdrawn accounts, and the like – talk about out of control!)
I could go on a bit more, but I included only this portion of the changes since the Fed reduced interest rates eight days ago to spotlight what I have been saying for some time. The Fed is on the warpath. [ :eek: :eek: :eek: ]. Do not sell the power of the Fed short!
I clearly expect that if the going gets tough, the Fed could soon work directly with some large companies in need of cash by lending to them direct via a credit they can take to any bank. Sound crazy? It has been done before and if Bernanke sees the need, I believe it will be it done again.
My point this week is simple. There are leaders and there are bureaucrats. Dr. Bernanke is a leader. [ :rolleyes: :rolleyes: :rolleyes: ]. Leaders lead, most often, amid a lot of flack.
The reason for the flack, usually, is the “flacker” is reading the script by the old rules and sees no way out. But, new leaders, like Dr Ben, dig deep into history and their own resourcefulness and come up with answers that don’t fit the so-called “old” rules. I keep saying it over and over.
If you want to know where this Fed is going, read Bernanke’s book! The new rules are all there and they are like nothing before them. If I am right, these new rules will reign for the next 50 or more years, as they will meet the problems we face today — in spades! You need to read the new “rule book.” [ :p :p :p ]