The Final Arbiter
Like we said before, the Fed has one bullet left in its six shooter.
And running out of Ammo is not the ultimate problem, getting the water logged ammo to work is. Hattip To Bloomberg.
The Fed has committed as much as 60% of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more
with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. (breaking tradition, by lending not just to banks.)
The action comes on top of Chairman Ben S. Bernanke's other balance-sheet commitments totaling as much as $430 billion through other auctions,
repurchase agreements and $30 billion in financing to help JPMorgan Chase & Co. purchase Bear Stearns Cos.
The Fed's other programs: as much as $200 billion in lending of Treasuries to primary dealers in exchange for debt that includes mortgage-backed securities.
Earlier this month, the Fed increased the size of separate funding auctions, to $100 billion in March from a previously announced $60 billion.
The central bank also said March 7 that it would make $100 billion available through repurchase agreements.
The Fed has lowered its benchmark overnight rate five times (from 5.25 to 2.25) and the discount rate seven times since the middle of August,
The actions mean the Fed, and consequently U.S. taxpayers, are assuming additional credit risks.
The Fed may also decide as early as tomorrow to start outright purchases of mortgage-backed securities.
In the most dire of circumstance, the Fed could go so far as to cut its benchmark rate to zero,
promise to hold it there and flood the financial system with more than enough money to ensure that happened, under a strategy known as "quantitative easing."
The Nattering One muses... And perhaps we are already there and they will.
Fannie & Freddie get lowered reserve requirements and investors go wild on stocks whose profits can only DECLINE?
Since the Fed can print up unlimited amounts of money, why don't we just ELIMINATE the reserve requirements for Fannie, Freddie and all the banks and start printing?
That would really get this Monopoly game, being played with funny money, rolling. Don't ya think?
To date the Fed has not printed, in fact the money supply has contracted...
as the capital base has shrunk into the deleveraging vortex of the multiplier effect working in reverse, or economic death spiral.
There is another name for this, a liquidity trap.
Not, The Tender Trap... legal tender that is...
Look at the 3 month T bill rate of 0.60%, look at 3 month libor 2.60, the TED spread is now at 2%, reflecting banks unwillingness to lend to one another.
The 0.60 rate reflects the real market rate, the market being the final arbiter, not the Fed rate of 2.25%.
At this point, without considering the real double digit stagflation rate, the market is in effect under 1% and we actually have negative interest rates.
Yet despite all the Fed, Treasury and congressional action, the situation continues to worsen. Why? Read on.
From Wikipedia: "a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero,
and the monetary authority is unable to stimulate the economy with traditional monetary policy tools.
In this kind of situation, people do not expect high returns on physical or financial investments,
so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments.
This makes the recession even more severe, and can contribute to deflation."
Mish has excellent observations on liquidity traps.
Artificially stimulating the economy eventually causes all sorts of problems.
The idea of a "liquidity trap" flows from a Keynesian approach to economic/monetary policy in the belief that
there is not enough money in the system and things would somehow be better if more money could be forced into the system.
There are major problems with this thinking. Throwing money at the problem simply encourages more overcapacity,
weakens the currency, and causes prices of necessities like oil to rise while not doing a thing for wages.
If dropping money out of helicopters worked, Zimbabwe would be the greatest economic force on the planet.
Furthermore, the Fed simply does not know the correct amount of money or the correct interest rate on it
either any more than it knows how to set the correct price of orange juice or TVs. If the Fed did know, the trap would never have happened in the first place.
Interesting Codicil: With stagflation screaming at 12% plus, and the government statistics LYING about the TRUE stagflation rate,
real interest rates are effectively -12% or more. So how could the Fed know what the correct prices were or what to do?
Mish concludes... Here's what to do about the liquidity trap: Nothing.
The concept of liquidity traps is imaginary. Home prices are too high, they need to correct.
There are too many houses and stores so we should not encourage more building. Savings should be encouraged, not discouraged.
Overcapacity needs to be worked off not fueled. Bankruptcies are part of the solution not part of the problem.
The real trap is doing something as opposed to nothing. Quantitative Easing and ZIRP did not help Japan and they will not help the US either.
The central bank simply cannot force additional credit down the throats of prospective borrowers, nor should it try.
Attempts to do so will only prolong the agony while punishing innocent savers, especially those on fixed incomes.
The Nattering One muses... Oh Mish, we agree, enough with the ill conceived management by crisis. Like we said before, cut all you want...
Nothing and no one can stop this trainwreck in progress. Its a fait accompli.
Banks and intelligent individuals are already liquidated and hoarding reserves, just let Atlas Shrug and nature take its course.
The Fed's only hope is to free the markets, stop the cutting, stop the bailouts and let the marketplace be the final arbiter.
And running out of Ammo is not the ultimate problem, getting the water logged ammo to work is. Hattip To Bloomberg.
The Fed has committed as much as 60% of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more
with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. (breaking tradition, by lending not just to banks.)
The action comes on top of Chairman Ben S. Bernanke's other balance-sheet commitments totaling as much as $430 billion through other auctions,
repurchase agreements and $30 billion in financing to help JPMorgan Chase & Co. purchase Bear Stearns Cos.
The Fed's other programs: as much as $200 billion in lending of Treasuries to primary dealers in exchange for debt that includes mortgage-backed securities.
Earlier this month, the Fed increased the size of separate funding auctions, to $100 billion in March from a previously announced $60 billion.
The central bank also said March 7 that it would make $100 billion available through repurchase agreements.
The Fed has lowered its benchmark overnight rate five times (from 5.25 to 2.25) and the discount rate seven times since the middle of August,
The actions mean the Fed, and consequently U.S. taxpayers, are assuming additional credit risks.
The Fed may also decide as early as tomorrow to start outright purchases of mortgage-backed securities.
In the most dire of circumstance, the Fed could go so far as to cut its benchmark rate to zero,
promise to hold it there and flood the financial system with more than enough money to ensure that happened, under a strategy known as "quantitative easing."
The Nattering One muses... And perhaps we are already there and they will.
Fannie & Freddie get lowered reserve requirements and investors go wild on stocks whose profits can only DECLINE?
Since the Fed can print up unlimited amounts of money, why don't we just ELIMINATE the reserve requirements for Fannie, Freddie and all the banks and start printing?
That would really get this Monopoly game, being played with funny money, rolling. Don't ya think?
To date the Fed has not printed, in fact the money supply has contracted...
as the capital base has shrunk into the deleveraging vortex of the multiplier effect working in reverse, or economic death spiral.
There is another name for this, a liquidity trap.
Not, The Tender Trap... legal tender that is...
Look at the 3 month T bill rate of 0.60%, look at 3 month libor 2.60, the TED spread is now at 2%, reflecting banks unwillingness to lend to one another.
The 0.60 rate reflects the real market rate, the market being the final arbiter, not the Fed rate of 2.25%.
At this point, without considering the real double digit stagflation rate, the market is in effect under 1% and we actually have negative interest rates.
Yet despite all the Fed, Treasury and congressional action, the situation continues to worsen. Why? Read on.
From Wikipedia: "a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero,
and the monetary authority is unable to stimulate the economy with traditional monetary policy tools.
In this kind of situation, people do not expect high returns on physical or financial investments,
so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments.
This makes the recession even more severe, and can contribute to deflation."
Mish has excellent observations on liquidity traps.
Artificially stimulating the economy eventually causes all sorts of problems.
The idea of a "liquidity trap" flows from a Keynesian approach to economic/monetary policy in the belief that
there is not enough money in the system and things would somehow be better if more money could be forced into the system.
There are major problems with this thinking. Throwing money at the problem simply encourages more overcapacity,
weakens the currency, and causes prices of necessities like oil to rise while not doing a thing for wages.
If dropping money out of helicopters worked, Zimbabwe would be the greatest economic force on the planet.
Furthermore, the Fed simply does not know the correct amount of money or the correct interest rate on it
either any more than it knows how to set the correct price of orange juice or TVs. If the Fed did know, the trap would never have happened in the first place.
Interesting Codicil: With stagflation screaming at 12% plus, and the government statistics LYING about the TRUE stagflation rate,
real interest rates are effectively -12% or more. So how could the Fed know what the correct prices were or what to do?
Mish concludes... Here's what to do about the liquidity trap: Nothing.
The concept of liquidity traps is imaginary. Home prices are too high, they need to correct.
There are too many houses and stores so we should not encourage more building. Savings should be encouraged, not discouraged.
Overcapacity needs to be worked off not fueled. Bankruptcies are part of the solution not part of the problem.
The real trap is doing something as opposed to nothing. Quantitative Easing and ZIRP did not help Japan and they will not help the US either.
The central bank simply cannot force additional credit down the throats of prospective borrowers, nor should it try.
Attempts to do so will only prolong the agony while punishing innocent savers, especially those on fixed incomes.
The Nattering One muses... Oh Mish, we agree, enough with the ill conceived management by crisis. Like we said before, cut all you want...
Nothing and no one can stop this trainwreck in progress. Its a fait accompli.
Banks and intelligent individuals are already liquidated and hoarding reserves, just let Atlas Shrug and nature take its course.
The Fed's only hope is to free the markets, stop the cutting, stop the bailouts and let the marketplace be the final arbiter.
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