(no subject)
Oct. 15th, 2008 08:10 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
which_chickCat #1 thinks I am a nice warm platform upon which to lie. Cat #2 thinks I am going to feed her even though it's two hours before Food Time. (The cats are on a diet because Cat #1 is too fat and Cat #2 is getting fatter. Neither cat likes the diet business.) I, however, think it is time for another round of Finance Posting, which I know everyone is absolutely enthusiastic about reading.
Let's start with a recap of the financial goodness for the last month or so. It's been interesting times, indeed, and there's been a lot going on. Here are some of the highlights.
9-14-08: Lehman Bros. filed Chapter 11.
9-16-08 Bridge loan from Fed to AIG, $85 Bil.
9-19-08: Fed gives $50 billion to prop up money market mutual funds, offers to loan even more $ to banks to buy the aforementioned paper from the MMMFs, SEC bans short selling of most all financial stocks
9-21-08: Morgan Stanley and Goldman-Sachs now "Bank Holding Companies".
9-23-08: Buffett puts $5 Bil into Goldman-Sachs
9-24-08: Bush addresses the people on matters financial.
9-25-08: JP Morgan buys WaMu depositors and some branches.
9-29-08: Bailout fails House of Representatives, Citigroup buys Wachovia, Federal Reserve dumps $630 billion into the global financial system (not part of the "bailout", this is part TAF and part currency swaps with foreign banks)
10-1-08: Bailout bill passes Senate, Fed increases FDIC insurance limit to $250K, gives them a blank check to cover claims, Buffett puts $3 Bil into GE for preferred stock at 10% and options and shit.
10-3-08: California needs a lot of money. They're the first state in line, but I bet they won't be the last. The Bailout passes the House of Representatives and is signed by President Bush forthwith.
10-6-08: Four Digit Dow
10-7-08: Fed introduces Commercial Paper Funding Facility (CPFF). This buys commercial paper using a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The CPFF will run like a tilt-a-whirl until April 09 and then as needed after that. (This news release did not have any exclamation points in it and I really think it should have.)
10-8-08: Fed now paying interest on required/excess reserve announcements. Also broadening the "collateral" they'll accept at the (TAF), thus adding about $150BN to 28 day and 84 day auctions. The ECB, Sweden, Fed, UK, Canada. Switzerland all cut rates half a point, too. Also, the Fed announces that it will lend directly to American corporations for the first time since the Great Depression. (Again, no exclamation points.)
10-9-08: Dow under 9K.
(weekend)
10-13-08: Huge Dow Rally, up 1K. In other news, the Bailout is underway. The Treasury plans to buy stock in 9 large banks: Bank of America, J.P. Morgan Chase, Goldman Sachs Group, Morgan Stanley, Citigroup, Bank of New York Mellon, State Street, Wells Fargo, and Merrill Lynch.
10-15-08: Dow down 700 points again.
In the last month, the Dow has lost about two thousand points. This is a lot. Trading has been heavy. The markets are unsettled and worried. So are we all.
The Fed and Treasury Secretary Paulson, over the last month or so, has been pulling out all the stops to dump money at the problem. Look at the list of goodies I just posted.
$85 billion to AIG
$50 billion to prop up money market mutual funds
$630 billion into the global financial system
??? Commercial Paper Funding Facility (CPFF).
$150 billion to 28 day and 84 day auctions.
These are steps to increase liquidity that are outside the loudly-discussed $700Bn bailout.
Where is all the money going? Why do we suddenly NEED money? How come these huge infusions of cash aren't doing any damn good?
I reckon a lot of it is to do with Fractional Reserve Banking. Fractional Reserve Banking leverages stuff. When a depositor puts money in the bank, that money multiplies according to the reciprocal of the reserve. In the United States, the reserve requirement is 10% (1/10) so the multiplier is 10. If you deposit $100 with your local bank, that $100 turns into $1000.
It seems like magic, but it isn't. See, out of your hundred, the bank has to keep 10 bucks for the reserve requirement. They loan out the remaining ninety bucks to Joe Smith to buy a car. Joe Smith buys a car at the local dealership. The dealership banks at the bank. The dealership puts the ninety bucks back in to the bank. The bank keeps 9 bucks of that in reserve, loans out 81 bucks to Sally Doe to buy an air conditioner. She buys the AC at the local hardware, which banks at the bank. The bank keeps $8.10 for the reserve requirement on THAT deposit and then loans out the remaining $72.90... and so forth. Now, Joe Smith still owes the bank ninety dollars. Sally Doe owes the bank eighty one dollars, and other, successive borrowers owe ever-smaller amounts. Too, the bank owes you a hundred bucks, the car dealership ninety bucks, the local hardware eighty one dollars, and other depositors lower and lower amounts. At the end of the game, there's a thousand dollars in play as the result of your hundred dollar deposit, but there was only ever a hundred dollars to start with, right? So, that's how fractional reserve banking "multiplies" money.
Now, when things are going well, Fractional Reserve Banking is a fucking fountain of prosperity. Hurray!
However, when things are not going so well (like right now, for example), Fractional Reserve Banking turns into a sucking vortex that causes a horrific shortage of liquidity as the multiplier of ten thingie starts working against the banks.
What we're having now, I reckon, is a problem where the sucking vortex of Fractional Reserve Banking is shrinking liquidity faster than the Fed can pump it into the system. By having the Treasury buy stocks in the nine big banks (first steps of the Bailout) and making them loan that money to each other, the government is dumping a huge amount of money in large banks to try to run the pump the other way, to turn it into a fountain instead of a giant sucking vortex. (It's still a profoundly inflationary move and I still don't approve of the bailout plan, but I do believe that this is what they are trying to DO with the bailout.)
Let's start with a recap of the financial goodness for the last month or so. It's been interesting times, indeed, and there's been a lot going on. Here are some of the highlights.
9-14-08: Lehman Bros. filed Chapter 11.
9-16-08 Bridge loan from Fed to AIG, $85 Bil.
9-19-08: Fed gives $50 billion to prop up money market mutual funds, offers to loan even more $ to banks to buy the aforementioned paper from the MMMFs, SEC bans short selling of most all financial stocks
9-21-08: Morgan Stanley and Goldman-Sachs now "Bank Holding Companies".
9-23-08: Buffett puts $5 Bil into Goldman-Sachs
9-24-08: Bush addresses the people on matters financial.
9-25-08: JP Morgan buys WaMu depositors and some branches.
9-29-08: Bailout fails House of Representatives, Citigroup buys Wachovia, Federal Reserve dumps $630 billion into the global financial system (not part of the "bailout", this is part TAF and part currency swaps with foreign banks)
10-1-08: Bailout bill passes Senate, Fed increases FDIC insurance limit to $250K, gives them a blank check to cover claims, Buffett puts $3 Bil into GE for preferred stock at 10% and options and shit.
10-3-08: California needs a lot of money. They're the first state in line, but I bet they won't be the last. The Bailout passes the House of Representatives and is signed by President Bush forthwith.
10-6-08: Four Digit Dow
10-7-08: Fed introduces Commercial Paper Funding Facility (CPFF). This buys commercial paper using a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The CPFF will run like a tilt-a-whirl until April 09 and then as needed after that. (This news release did not have any exclamation points in it and I really think it should have.)
10-8-08: Fed now paying interest on required/excess reserve announcements. Also broadening the "collateral" they'll accept at the (TAF), thus adding about $150BN to 28 day and 84 day auctions. The ECB, Sweden, Fed, UK, Canada. Switzerland all cut rates half a point, too. Also, the Fed announces that it will lend directly to American corporations for the first time since the Great Depression. (Again, no exclamation points.)
10-9-08: Dow under 9K.
(weekend)
10-13-08: Huge Dow Rally, up 1K. In other news, the Bailout is underway. The Treasury plans to buy stock in 9 large banks: Bank of America, J.P. Morgan Chase, Goldman Sachs Group, Morgan Stanley, Citigroup, Bank of New York Mellon, State Street, Wells Fargo, and Merrill Lynch.
10-15-08: Dow down 700 points again.
In the last month, the Dow has lost about two thousand points. This is a lot. Trading has been heavy. The markets are unsettled and worried. So are we all.
The Fed and Treasury Secretary Paulson, over the last month or so, has been pulling out all the stops to dump money at the problem. Look at the list of goodies I just posted.
$85 billion to AIG
$50 billion to prop up money market mutual funds
$630 billion into the global financial system
??? Commercial Paper Funding Facility (CPFF).
$150 billion to 28 day and 84 day auctions.
These are steps to increase liquidity that are outside the loudly-discussed $700Bn bailout.
Where is all the money going? Why do we suddenly NEED money? How come these huge infusions of cash aren't doing any damn good?
I reckon a lot of it is to do with Fractional Reserve Banking. Fractional Reserve Banking leverages stuff. When a depositor puts money in the bank, that money multiplies according to the reciprocal of the reserve. In the United States, the reserve requirement is 10% (1/10) so the multiplier is 10. If you deposit $100 with your local bank, that $100 turns into $1000.
It seems like magic, but it isn't. See, out of your hundred, the bank has to keep 10 bucks for the reserve requirement. They loan out the remaining ninety bucks to Joe Smith to buy a car. Joe Smith buys a car at the local dealership. The dealership banks at the bank. The dealership puts the ninety bucks back in to the bank. The bank keeps 9 bucks of that in reserve, loans out 81 bucks to Sally Doe to buy an air conditioner. She buys the AC at the local hardware, which banks at the bank. The bank keeps $8.10 for the reserve requirement on THAT deposit and then loans out the remaining $72.90... and so forth. Now, Joe Smith still owes the bank ninety dollars. Sally Doe owes the bank eighty one dollars, and other, successive borrowers owe ever-smaller amounts. Too, the bank owes you a hundred bucks, the car dealership ninety bucks, the local hardware eighty one dollars, and other depositors lower and lower amounts. At the end of the game, there's a thousand dollars in play as the result of your hundred dollar deposit, but there was only ever a hundred dollars to start with, right? So, that's how fractional reserve banking "multiplies" money.
Now, when things are going well, Fractional Reserve Banking is a fucking fountain of prosperity. Hurray!
However, when things are not going so well (like right now, for example), Fractional Reserve Banking turns into a sucking vortex that causes a horrific shortage of liquidity as the multiplier of ten thingie starts working against the banks.
What we're having now, I reckon, is a problem where the sucking vortex of Fractional Reserve Banking is shrinking liquidity faster than the Fed can pump it into the system. By having the Treasury buy stocks in the nine big banks (first steps of the Bailout) and making them loan that money to each other, the government is dumping a huge amount of money in large banks to try to run the pump the other way, to turn it into a fountain instead of a giant sucking vortex. (It's still a profoundly inflationary move and I still don't approve of the bailout plan, but I do believe that this is what they are trying to DO with the bailout.)
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no subject
Date: 2008-10-16 02:51 am (UTC)(This is not your fault. You're the first person who has convinced me that the bank-loaning really did create money that wasn't there. I just have high expectations for what "I understand" should feel like - it is different from "I can recite the steps of the argument and arrive at the conclusion", which is where I'm at now - and apparently I've voided the warranty on that part of my brain.)
no subject
Date: 2008-10-16 11:41 am (UTC)If I understand correctly, a lot of banks and more importantly, corporations acting as banks, have been holding mortgage-backed securities or MBS in a pseudo-reserve capacity, as significant assets on their balance sheets.
Part of the point of Fannie Mae and Freddie Mac was to *get* illiquid mortgages off of bank balance sheets, to eliminate the cyclical boom-bust destruction of banks which was such a feature of the economic world prior to the establishment of Fannie Mae so many years ago. The recent introduction of MBSs was supposed to re-introduce mortgages in a much more liquid fashion than the traditional mortgage market. When that brave new market for MBS turned out to be profoundly illiquid, their novelty and more important, their value evaporated. Suddenly what had become one of the legs of the world's financial leverage tripod turned to dust and whomp! the whole damn thing went over on its ear.
And deleveraging is why right now, I'm still worried more about asset deflation than retail inflation. Especially with commodities cratering.
Well, to be honest, right now I'm more worried about a card-carrying socialist being put into the Oval Office with majorities in both houses of Congress & a wicked gleam in their collective eye. Expect an economic state of emergency for at least the next eight years. Progressives thrive on economic states of emergency. They won't let them end if they have anything to do about it.
Obama isn't a New Democrat - those guys can be damnable fools, but they still think of private business as a flock of sheep - to be kept fat, well-sheared, and happily growing wool for the next shearing. Obama's from the school of thought which sees private business as a vast herd of buffalo - obstructing progress, feeding the savages. It's best to keep people who think like that away from the buffalo guns if you can. Because as far as I can tell, we're the Lakota in this little metaphor.
Enjoy your reservation.
no subject
Date: 2008-10-16 12:10 pm (UTC)Basically, because of accounting called "mark to market", banks cannot continually value an MBS for what they paid for it. They have to find a market rate for the MBS and use that value on their accounting.
So, if a bank bought the MBS's at $X a share, and the MBS's have subsequently lost value because people are not paying their mortgages, then the MBS's are not worth $X per share anymore. The MBS's have to be valued at market rate (which nobody really knows but everyone suspects is a lot lower than face value) and this means that the bank's reserve requirements that were in MBSs suddenly are gone, evaporated into thin air.
Oops.
How much value have the MBSs lost? Right now, the general feeling is "a lot" but nobody really knows. Lehman Brothers is now worth approximately .08*X, at least to the people who have to make good on their insurance of Lehman Brothers risk. A pre-Lehman figure that was being thrown around was twenty cents on the dollar, give or take. Twenty cents on the dollar, or eight... it's still a hell of a hit because of the deleveraging thing.
How will you know when the shit has really hit the fan? If the Federal Reserve (who is in charge of stuff like this) sets the reserve requirement for banks to zero, they've given up on ever having a stable dollar again. All of the Fed's "profoundly inflationary" behavior up to that point will be as a lawn sprinkler compared to the cat 5 hurricane of zero reserve requirement banking. (Because, yo, the creationary effect of bank lending is the reciprocal of the reserve requirement. We just went over that. Do the math, here.)