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Junkie
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Originally Posted by host
hey ace! Did you happen to click on the link to the Bloomberg article on CLO's?
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Yes. We are talking large sums of money, but the market currently needs an injection of liquidity. The US depression during the 1930'S was in part caused by liquidity issues that were made worse by government actions. I support the Fed's current actions.
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(By the way....what do you think of that black judge, in the video on the other thread? Isn't that something, what he said to the non-blacks, in his courtroom?)
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He used poor judgment and should have made his political comments in a different forum. On the other hand what he says has less meaning than applying the law in a color blind manner. If they have evidence of that, I would be more concerned.
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The link is in the first paragraph of the OP. Remember, before last month, the Fed didn't accept crap like MBS and CLOs from brokerages....or anything at all from them...since it hadn't made loans to them since the 1930s.
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Desperate measures for desperate times. People are currently over-reacting similar to the bank runs in the 1930's.
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Consider also, that before last August, the "principle dealers", the banks that sold T-Bills and had borrowing privileges at the Fed discount window, could not lend more than 10 percent of their total reserves, to their brokerage subsidiaries.
The Fed raised that limit, last summer, to 30 percent, for four of the largest US banks.
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Again, this measure is in the Fed's toolbox.
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The FED's 2nd Lever: Reserve Requirement Changes
When the FED lowers the reserve requirement on deposits, the money supply increases. When the FED raises the reserve requirement on deposits, the money supply decreases.
The reserve requirement is a rule set by the FED that must be satisfied by all depository institutions including commercial banks, savings banks, thrift institutions and credit unions. The rule requires that a fraction of the bank's total transactions deposits (e.g. this would include checking accounts but not certificates of deposit) be held as a reserve either in the form of coin and currency in its vault or as a deposit (reserve) held at the FED. The current reserve requirement in the US (as of March 2004) is 10% for deposits over $45.4 million. (for smaller banks, i.e., with lower total deposits, the reserve requirement is lower).
As discussed above, the reserve requirement affects the ability of the banking system to create additional demand deposits through the money creation process. For example, with a reserve requirement of 10%, Bank A that receives a deposit of $100 will be allowed to lend out $90 of that deposit, holding back $10 as a reserve. The $90 loan will result in the creation of a $90 demand deposit in the name of the borrower and since this is a part of the money supply M1, it rises accordingly. When the borrower spends the $90, a check will be drawn on Bank A's deposits and this $90 will be transferred to another checking account in Bank B. Since Bank B's deposits have now risen by $90, they will be allowed to lend out $81 tomorrow, holding back $9 (10%) as a reserve. This $81 will make its way to another bank, leading to another increase in deposits, allowing another increase in loans, etc, etc. The total amount of demand deposits created thru this process is given by the formula,
DD = $100 + (.9)$100 + (.9)(.9)$100 + (.9)(.9)(.9)$100 + …….
This simplifies to,
DD = $100/(1 - 0.9) = $1000
or
DD = $100/RR
where RR refers to the reserve requirement.
This example shows that if the reserve requirement is 10% the FED could increase the money supply by $1000 by purchasing a $100 T-bill on the open market. However, if the reserve requirement were 5%, a $100 T-bill purchase would lead to a $2000 increase in the money supply.
However, the reserve requirement does not only affect the FED's ability to create new money, it also allows the banking system to create more demand deposits (hence more money) out of the total deposits it currently has. Thus if the FED were to lower the reserve requirement to 5%, the banking system would be able to increase the volume of their loans considerably and it would lead to an substantial increase in the money supply.
Because small changes in the reserve requirement can have substantial effects upon the money supply, the FED does not use reserve requirement changes as a primary lever to adjust the money supply. In fact the reserve requirement has been fixed at the current level since 1992. (although the total deposit amounts affected by the RR are increased each year)
A more detailed description of open market operations can be found in this NY Fed Fedpoint. (http://www.ny.frb.org/aboutthefed/fedpoint/fed45.html)
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http://internationalecon.com/Finance/Fch40/F40-5.php
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You do see the progression here, ace? The Fed, before last month, only accepted collateral from primary dealer banks, against loans. The minimum collateral accepted were of the highest quality...... even from banks.
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Yes. I appreciate the Fed responding to inputs rather than being static and doing nothing, or assuming the best.
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Banks, if they are FDIC members, and they have to be if they insure deposits up to $100,000 per account, are limited to lending 7 times their total assets.
Bear Stearns was leveraged 30 times it's total assets. The Fed is lending to brokerages without regulating them or capping their leverage. which is 4 times the bank leverage cap of 7X....
The taxpayer via, the Fed, is now at risk because the Fed is holding the near worthless paper of the brokerages, and it is lending away it's own assets, which are taxpayer assets....why do you think this OP article is in the WSJ?
It is a trail balloon to test if anything the Fed does will illicit public comment and REAL objection.
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Regulators got caught with their pants down. The regulations will tighten. I compare it to a building being on fire. Put out the fire first, then determine the cause, then put into place protective measures to prevent or minimize the risk of future fires.
http://internationalecon.com/Finance/Fch40/F40-5.php
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"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."
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