naked capitalism Thu 2010-09-30 08:22 EDT

Why Backstopping Repo is a Bad Idea

The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for ``sale with agreement to repurchase.''...But the real problem is that the only securities that were once considered to be suitable were those of the very highest quality, namely Treasuries. The real problem is in widening the market beyond that. If you have absolutely impeccable collateral, you don't care if your counterparty goes belly up if you aren't at risk of losses on the assets you hold...the real problem is the use of low quality collateral...why would we possibly WANT a system that might down the road encourage the pledging of less than stellar instruments as repo?...we need to go back and look hard at why the need for repo has risen since 2001, and how much is related to legitimate activity. The fact that it grew much more rapidly than the economy overall suggests not...official efforts should proceed...to shrink the repo market (as we've recommended for a market that has contributed to the growth of repo, credit default swaps)...our efforts NOT to restrain banks leads to a tremendous tax on all of us...a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive...

Backstopping Repo; Bad Ideas; naked capitalism.

New Economic Perspectives Sat 2010-07-24 16:30 EDT

Deficit Doves Meet the Deficit Owls

Paul Davidson, James K. Galbraith and Lord Robert Skidelsky

...We support the central objective of the letter -- a full employment policy now, based on sharply expanded public effort..apart from the effects of unemployment itself the United States does not in fact face a serious deficit problem over the next generation, and for this reason there is no "necessity [for] a program to cut the mid-and long-term deficit." On the contrary: If unemployment can be cured, the deficits we presently face will necessarily shrink. This is the universal experience of rapid economic growth: tax revenues rise, public welfare spending falls...The long-term deficit scare story plays into the hands of those who will argue, very soon, for cuts in Social Security as though these were necessary for economic reasons...We call on fellow economists to reconsider their casual willingness to concede to an unfounded hysteria over supposed long-term deficits, and to concentrate instead on solving the vast problems we presently face. It would be tragic if the Evans letter and similar efforts - whose basic purpose we strongly support - led to acquiescence in Social Security and Medicare cuts that impoverish America's elderly just a few years from now.

Deficit Doves Meet; Deficit Owls; New Economic Perspectives.

Wed 2010-06-09 18:56 EDT

Rajiv Sethi: The New Market Makers

...the SEC's preliminary report on the flash crash...led me to believe that most of this activity was caused by algorithmic trading strategies placing directional bets based on rapid responses to incoming market data. Two strategies in particular -- momentum ignition and order anticipation -- were explicitly mentioned as potentially destabilizing forces in the SEC's January Concept Release on Equity Market Structure. The SEC invited comments on the release, and dozens of these have been posted to date. There is one in particular, submitted by R.T. Leuchtkafer about three weeks before the crash, that I think is especially informative and analytically compelling...Leuchtkafer traces the history of recent changes in market microstructure and examines the resulting implications for the timing of liquidity demand and supply...The standard argument against increased regulation of the new market makers is that it would interfere with their ability to supply liquidity. Leuchtkafer argues, instead, that the strategies used by these firms cause them to demand liquidity at precisely those moments when liquidity is shortest supply...

New Market Makers; Rajiv Sethi.

zero hedge Wed 2010-04-07 18:26 EDT

The Latest Gold Fraud Bombshell: Canada's Only Bullion Bank Gold Vault Is Practically Empty

Continuing on the trail of exposing what is rapidly becoming one of the largest frauds in commodity markets history is the most recent interview by Eric King with GATA's Adrian Douglas, Harvey Orgen (who recently testified before the CFTC hearing) and his son, Lenny, in which the two discuss their visit to the only bullion bank vault in Canada, that of ScotiaMocatta, located at 40 King Street West in Toronto, and find the vault is practically empty..."The game ends when the people who own all these paper obligations say enough and take physical delivery, and that's when the mess will occur."...It is funny that central bankers thought they could take the ponzi mentality of infinite dilution of all assets coupled with infinite debt issuance, as they have done to fiat money, and apply it to gold, in essence piling leverage upon leverage. They underestimated gold holders' willingness to be diluted into perpetuity - when the realization that gold owned is just 1% of what is physically deliverable, you will see the biggest bank run in history.

Bullion Bank Gold Vault; Canada's; Latest Gold Fraud Bombshell; practically empty; Zero Hedge.

Culture of Life News Tue 2010-04-06 10:23 EDT

Ireland And US Will Be Devoured By Derivatives Beast

Elaine Supkis

The banking mess in the West continues. It has rather deep roots. That is, we decapitalized our own banking system long, long ago. The fix for this was to create a fake banking system with virtually no real capital reserves at all. This was possible thanks to the floating fiat currency created when Nixon suddenly cut the gold standard back in 1971. By 1987, the banking collapse was tremendous during a deflationary time that followed a hyperinflation era. This fix created conditions that caused the near-total collapse in Western banking...So far, governments in the West are being bailed out by Asia. And this is being done so Asia can continue to rapidly expand its own industrial base. This savage business gets worse and worse over time due to the self-feedback system of this debt expansion: you get more credit from export powers via letting them export even more to your own home base. So as capital vanishes, the need for debt shoots upwards and the system continues to get more and more unbalanced...Sure, we have little inflation except in important commodities but this is due to the Goddess of Zero slashing away at the mountain of debt, using the default tool to fix this mess in a very brutal way. Unfortunately, the bankers still control our `democracy' so they are moving all their losses onto our books and far from things going to zero, it is actually heading towards infinity: infinite debts owed by the taxpayers who want to continue stupidly cutting taxes while increasing credit based on virtually no capital at all! Sheesh.

Culture; Derivative Beast; devouring; Ireland; Life News.

Mish's Global Economic Trend Analysis Mon 2010-04-05 14:50 EDT

UK Business lending Falls At Record Pace; UK Mortgage Lending Drops 32% to 10 Year Low; Bundesbank Fears Second Wave of Credit Crisis; Party's Over

Michael Shedlock

Recent data shows the economic slump in the UK and Eurozone is accelerating to the downside at a rapid pace...The European recovery is on its last legs. The global recovery will soon follow. Prepare for an economic relapse.

10-year low; Bundesbank fears; credit crisis; Mish's Global Economic Trend Analysis; Party s; record pace; UK Business lending Falls; UK Mortgage Lending Drops 32; wave.

zero hedge Tue 2010-03-09 17:59 EST

Is The Federal Reserve Insolvent?

...For a refined analysis of what would happen in that moment of clarity when the world realizes the world's biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled "Fiscal/Monetary Coordination When The Anchor Cable Has Snapped."...discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on "power money", and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store...the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: "what is the true basis of your capital account?" And when the Fed is forced to justify a valid response, is when monetizaton will begin...

Federal Reserve Insolvent; Zero Hedge.

Mish's Global Economic Trend Analysis Tue 2010-03-09 17:27 EST

Short Selling Restrictions "A Great Indicator of Imminent Market Crashes"

Michael Shedlock

...The Securities and Exchange Commission voted on Wednesday to limit short-selling of stocks that are falling rapidly in price...[quoting friend HB:] "Short selling restrictions are a great indicator of imminent market crashes. The biggest market declines in history all happened shortly after short selling restrictions were introduced."

great indicator; Imminent Market Crashes; Mish's Global Economic Trend Analysis; short-selling restrictions.

Culture of Life News Sun 2010-01-31 11:46 EST

US Dollar No Longer Main FOREX Currency

Elaine Supkis

A meteorite came crashing through the stratosphere on Tuesday. A reminder about what real danger is all about. The US dollar is breaking apart in the stratosphere, too. The FOREX holdings of all our major trade rivals is rapidly changing from sucking in US dollars to sucking in yen and euros. Both Japan and the EU hate this but can't stop it. As I predicted in July, 2007, the final result of the US, EU and Japan demanding China strengthen the yuan while not demanding Japan strengthen the yen, has led to this global shift in dollar holdings.

Culture; Dollar; Life News; Longer Main FOREX Currency.

Calculated Risk Wed 2009-12-30 11:11 EST

Housing Leads the Economy, Existing Home Sales are Irrelevant

CalculatedRisk

...Residential investment is the best leading indicator for the economy. Residential investment will not recover rapidly because of the large overhang of existing vacant housing units. Existing home sales are largely irrelevant for the economy. ...The key to reducing the overall inventory is new household formation (encouraging renters to become owners accomplishes nothing in reducing the overall housing inventory). And the key to new household formation is jobs. And usually the best leading indicator for jobs is residential investment.

Calculated Risk; economy; Existing-Home Sales; housing Lead; irrelevant.

zero hedge Mon 2009-12-21 20:25 EST

Here Is Why The Dollar Is Now Effectively Worthless

Currency in Circulation: $920 billion; MBS/Agency Holdings: $997 billion. The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing.

Dollar; Effectively Worthless; Zero Hedge.

Wed 2009-11-25 09:59 EST

Hussman Funds - Weekly Market Comment: "Should Come as No Shock to Anyone" - November 16, 2009

John P. Hussman

The big picture is this. There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed's position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed's actions, and can't make long-term loans with these funds anyway. Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government. This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

2009; comes; Hussman Funds; November 16; shocks; weekly market comments.

Tue 2009-06-16 00:00 EDT

Calculated Risk: Citi: Net Credit Losses Rising Rapidly

Calculated Risk; Citi; Net Credit Losses Rising Rapidly.

Mon 2009-04-06 00:00 EDT

Bill Moyers Journal . Transcripts | PBS

ex-banking regulator William K. Black calls fraud: ``make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.''

Bill Moyers Journal; PBS; Transcript.

Fri 2009-01-16 00:00 EST

naked capitalism: Cautionary Tales: Central Bank Liquidity Injections Made Crises Worse in Latin America

Carmine Reinhart and Kenneth Rogoff; ``authorities found it difficult to mop up the liquidity they had created. Rapid growth in money supply stoked serious inflation''

cautionary tale; Central Bank Liquidity Injections Made Crises Worse; Latin America; naked capitalism.

Thu 2009-01-15 00:00 EST

Mish's Global Economic Trend Analysis: Fiscal Insanity Virus Rapidly Spreading The Globe (Part 1)

Fiscal Insanity Virus Rapidly Spreading; globe; Mish's Global Economic Trend Analysis; Part 1.

Thu 2009-01-15 00:00 EST

Mish's Global Economic Trend Analysis: Fiscal Insanity Virus Rapidly Spreading The Globe (Part 2)

Fiscal Insanity Virus Rapidly Spreading; globe; Mish's Global Economic Trend Analysis; Part 2.

Sat 2008-05-17 00:00 EDT

Winter (Economic & Market) Watch >> GRIN and Bear It

Winter (Economic & Market) Watch >> GRIN and Bear It; Great unreported Inflation (GRIN) rapidly emptying pocketbooks

Bear; economic; GRIN; Market; watch; winter.

Tue 2008-05-13 00:00 EDT

RGE - The de facto nationalization of the global financial system

by Brad Setser; perhaps "the rise in inflation in the Gulf and China and the difficulties both are facing trying to sterilize the rapid growth in the foreign assets is an indicator that there is a small risk that the US also might end up being a bit too large for the emerging world to save"

de facto nationalization; global financial system; RGE.

Wed 2008-04-09 00:00 EDT

Sudden Debt: Free Markets vs. Cronyism

"Free markets...without tight regulation...rapidly deteriorate towards crony capitalism"; "excellence in market regulation leads to better and freer markets"

cronyism; free market; Sudden Debt.

Mon 2008-03-31 00:00 EDT

Mish's Global Economic Trend Analysis: Who's Holding The Bag?

Buffett versus Greenspan on derivatives; "the development of credit derivatives has contributed to the stability of the banking system", or "rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy"; 2007-07-04

bag; Mish's Global Economic Trend Analysis; S hold.

Fri 2008-03-21 00:00 EDT

Winter (Economic & Market) Watch >> The Lender of Only Resort

Winter (Economic & Market) Watch >> The Lender of Only Resort; "the financial sphere will be rapidly downsized, large layoffs spun as bullish, and power and capital more intensely concentrated...if you thought financial markets were rigged and manipulated before, you ain't seen nothing yet."

economic; lender; Market; resort; watch; winter.

Fri 2008-03-21 00:00 EDT

Urban Dictionary: bear stearned

1. to crash, to collapse, to plummit, to fail; 2. The rapid loss of confidence in one's capabilities from one's traditionally supportive network of friends, customers, etc. 3. Buying an item and then realizing a week later it is worth 3.33% of what you paid for it.

Bear Stearns; Urban Dictionary.

Fri 2007-11-30 00:00 EST

Mish's Global Economic Trend Analysis: Lenders Rapidly Tighten Credit

watching LIBOR spreads widen dramatically; "increasing risk of a major bank failure or major market dislocation"

Lenders Rapidly Tighten Credit; Mish's Global Economic Trend Analysis.