The Fed: Money For Nothing

[chequita guevara]

These days, after your initial 26 weeks, if you're in a high unemployment state, like Florida, you can get it extended another 20 weeks, so a month and a half shy of a year, at which point you can apply for unemployment again.

Inflation after the ethanol stupidity was almost immediate, prices of milks and other foods seemed to jump almost 50%. Not looking forward to more of that.

[KrazyHorse]

Inflation after the ethanol stupidity was almost immediate, prices of milks and other foods seemed to jump almost 50%. Not looking forward to more of that.

Dude, there's a reason food prices are considered not part of core inflation. They fluctuate wildly and are highly correlated with energy prices. Those prices are dependent on energy supply/demand, not on monetary policy (which would change prices across the board, not in specific sectors).

[Jon Miller]

My mom's husband was a good architect. He made over 80k a year, I think, and has been unemployed since the company he worked for shut down last September. Basically, the company that employed them halted all projects. His unemployment hasn't run out yet.

JM
(His former boss promised him that he would be the first he would hire if he found work, but apparently the former boss hasn't.)

[Jon Miller]

I think that inflation isn't so bad for someone like me, who has student debt, no bank account, and few assets.

It is just a problem for me if it goes crazy.

JM

[Victor Galis]

First off, you're now inserting all sorts of political suppositions with no real basis.

So, the Chinese are going to **** themselves in two ways according to you:

1) Selling their investments into a down (as far as exchange rates go) market
2) Choking off an export market they've developed their entire economy around

I didn't say they were going to divest themselves of their assets. Refusing to buy additional US bonds when the US is running a trillion dollar deficit would be bad enough. As for (2), we'd better pray the protectionists in Congress don't do something really stupid.

Am I claiming it will happen? No, I'm saying the possibility exists.

Not to mention the fact that the US government devalues the Chinese investment every time it issues new debt. Say, by spending 1.5 trillion dollars it doesn't have.

Not if the dollar doesn't fall in response. (Like when the interest rate on short-term US government debt hit almost 0% and there were still people lining up to buy it).

So you've finally managed to figure out what I was describing to you?

All you said was novel monetary policy. That can mean any of a number of things. I wanted to be sure you meant, what I thought you meant.

This is the most lame-brained excuse for a Keynsian analysis yet. You obviously have no conception of how to parametrise the different unknowns in this model. Instead, you make a blanket statement which has no solid basis in theory OR IN DATA.

We have a model for this now?

So now the OVERPRICED ASSETS are the ones investors have gone into the PANIC MODE about?

I suspect the panic mode may have something to do with the fact that many of those assets are almost worthless. The prices the Fed would buy them at in order to keep their owners solvent would be wholly unjustified.

It's funny that a panic which starts in (say) MBS and then spreads to other assets somehow magically fails to raise the risk premium (and illiquidity premium!) ON MBS above its long run value.

How the hell did you come to that brilliant conclusion? "I didn't know anything about MBS before it crashed, but according to what I can remember MBS has always been crashing therefore it always will crash"? From what I've seen of your thinking that would be about par for the course. That's the availability heuristic bias, by the way...

You're assuming I'm claiming there's no change in the underlying risk. The risk of default is far greater today than it was when those assets were first issued. Not only that, we are more aware of the risks than we were years ago when the assets in question were rated AAA.

The most important thing though is that purchases of such assets are totally unnecessary and involve giving handouts to people who got us into this mess in the first place. You're familiar with moral hazard, I hope.

[Unimatrix11]

[...], no bank account,[...].

For that, Sir, i admire you. How is that even possible these days? All salaries go to bank accounts these days, and most banks have the nerves to charge their costumers for withdrawels (at least via ATM). I have a chargeless card (cause that´s ALWAYS a must if i open an account, and i close it, as soon as they start to charge me), but on the machine i usually go to, there is a whole page, telling costumers what they charge (and it´s not that little) - and it makes me mad and flipping it off (hoping the cam-tapes are occassionaly watched) each time i go there. It´s like your ´account-dollar´ (which is not even legal tender) can not be ´redeemed´ for a real dollar 1:1 - but it´s money most people (are willing to) work for, not credit in their bank... So: Thumbs up for the complete evasion of that rip-off.

[Jon Miller]

I have a bank account, just not really any money in it!

JM

[Unimatrix11]

oh, that we have in common, then...

[KrazyHorse]

Not if the dollar doesn't fall in response. (Like when the interest rate on short-term US government debt hit almost 0% and there were still people lining up to buy it).

I see. The US$ responds to changes in its supply but Treasuries don't.

[KrazyHorse]

All you said was novel monetary policy. That can mean any of a number of things. I wanted to be sure you meant, what I thought you meant.

No, I mentioned this a number of times and until I put it in the guise of pushing down other yields you pretty obviously didn't understand it.

We have a model for this now?

errrr....yeah

A number of them. Way to choose none of them and simply state your "conclusions" i.e. bald assertions.

I suspect the panic mode may have something to do with the fact that many of those assets are almost worthless. The prices the Fed would buy them at in order to keep their owners solvent would be wholly unjustified.

I suspect you're a muppet. The market panicked, yet somehow DIDN'T DROP LOW ENOUGH? These assets are currently trading at a non-zero price DESPITE INVESTOR FEAR AND ILLIQUIDITY, yet the market's STILL far overvalued.

You're assuming I'm claiming there's no change in the underlying risk. The risk of default is far greater today than it was when those assets were first issued. Not only that, we are more aware of the risks than we were years ago when the assets in question were rated AAA.

No, I'm assuming that you're not smarter than everybody else. And everybody else has looked at these assets and decided that there is some residual value in them, DESPITE A RIDICULOUS RISK AVERSION AND LIQUIDITY PROBLEMS



Why don't you go make a fortune in the market shorting all these "junk assets" dude. You know, the junk assets which are still producing revenue.

[Victor Galis]

Not if the dollar doesn't fall in response. (Like when the interest rate on short-term US government debt hit almost 0% and there were still people lining up to buy it).

I see. The US$ responds to changes in its supply but Treasuries don't.

If interest rates are 0% and there is a shortage, an increase in supply doesn't do anything to price. We're not there anymore. The dollar is nowhere near anything like the artificial floor that zero interest imposes.

No, I mentioned this a number of times and until I put it in the guise of pushing down other yields you pretty obviously didn't understand it.

I may not have read those posts.

I suspect you're a muppet. The market panicked, yet somehow DIDN'T DROP LOW ENOUGH? These assets are currently trading at a non-zero price DESPITE INVESTOR FEAR AND ILLIQUIDITY, yet the market's STILL far overvalued.

I suspect there's a lot of under-valued assets. I suspect there's also a lot of over-valued assets as well. I suspect the toxic assets are toxic because they're actually worthless, no one wants to admit it, and so there's no market.

No, I'm assuming that you're not smarter than everybody else. And everybody else has looked at these assets and decided that there is some residual value in them, DESPITE A RIDICULOUS RISK AVERSION AND LIQUIDITY PROBLEMS

Of course, there's some value there. I suspect it's closer to 20 cents on the dollar rather than the above 50 that the government seems to be pretending.

Why don't you go make a fortune in the market shorting all these "junk assets" dude. You know, the junk assets which are still producing revenue.

Who in their right mind would allow me to do that with no collateral? Also it would be a terrible idea if the government decides to give those assets value.

[chequita guevara]

.

Published on Monday, March 23, 2009 by The Guardian/UK
The Geithner Plan: Billions More for Failed Banks The last-ditch effort to save Wall Street will hurt taxpayers and still require another big bailout down the line

by Dean Baker
Treasury secretary Timothy Geithner's latest bank bailout plan is another Rube Goldberg contraption intended to funnel taxpayer dollars to bankrupt banks, without being overly transparent about the process. The main mechanism is a government guarantee that would allow investors to buy junk with a 12-to-1 leverage ratio, where they only risk the downside on their own investment, not the borrowed money.

Ostensibly, this is supposed to reveal the "true" price for junk assets, as investors compete at auctions to buy assets under the new rules. But this story doesn't pass the laugh test. All we will really learn is what price investors are willing to pay for these junk assets when they are given a large subsidy from the government to buy them. In reality, this plan is a way to use taxpayer dollars to get investors to pay far more than these assets are worth in order to give more money to bankrupt banks.

The results will be mixed. Some of the assets undoubtedly have some value. There are, no doubt, shrewd investors who have identified certain assets that they would have been willing to buy from the banks, but instead put off purchasing while they waited for a deal like this. Now these investors will have the opportunity to buy these assets with large subsidies from the government, allowing them to make substantial profits. (It's not clear if President Obama will want to invite this new group of hedge fund billionaires, who got rich off this government programme, for photo ops in the White House Rose Garden.)

A second outcome is that many investors will see the subsidy and decide to dive in, recognising that most of any potential loss will be borne by the government. This route might prove especially attractive for one of the zombie banks, which would effectively have nothing to lose anyhow, since they are already bankrupt. In these cases, the government can expect to take substantial hits, since the investors would bid more than the assets are worth - and the government would be stuck with the eventual loss.

A third result of this path is that the subsidised class of assets would rise in value relative to assets that do not benefit from the government subsidy. This could cause banks that are relatively healthy, and therefore not taking part in this programme, to suffer. With investors opting to buy assets that come with government subsidies, the demand for mortgages or mortgage-backed securities that don't have these subsidies might suffer.

A fourth likely outcome is that even with the subsidies, much of the toxic waste would stay on the banks' books. There is a large gap between the price that investors have been willing to pay for these junk assets - which has been around 30 cents on the dollar - and the price that banks list on their books, which has been 60 cents on the dollar. If the government subsidies raise the price that investors are willing to pay by 50% (a very large increase), then the banks would still have to write down these assets by another 15 cents on the dollar in order to make the sale.

It is likely that the gap between the asking price and the offer will not be closed for a large portion of these assets, even with the government subsidy. As a result, the banks are likely to have several hundred billion dollars' worth of bad assets on their books even after this plan has been put in place. The Obama administration will then be forced to go to Congress with yet another bailout proposal.

It is also worth noting that this is a situation that invites all manner of fraud, since there are very large government subsidies that could be appropriated through clever schemes. The Obama administration assured the public that the Federal Deposit Insurance Corporation (FDIC) will be closely monitoring the programme, but the FDIC does not have the staff or the expertise to effectively track a programme of this size. The situation is complicated further by the fact that many of the big actors are likely to be hedge funds and private equity funds, which are almost completely unregulated in the current environment.

It is hard to understand this plan as anything other than a last-ditch effort to save the Wall Street banks. Unfortunately, Obama seems prepared to risk his presidency on their behalf.

© 2009 Guardian News and Media Limited Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org ) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

[Victor Galis]

http://www.ft.com/cms/s/0/2970532c-0421-11de-845b-000077b07658.html

Insight: Time to expose those CDOs
Published: February 26 2009 16:34 | Last updated: February 26 2009 16:34
Just how much should a debt vehicle backed by subprime mortgage bonds be worth these days? Two years ago, most banks and insurance companies assumed the answer was close to 100 per cent of face value – or more.

Since then, however, that “price” has clearly collapsed, triggering tens of billions of dollars worth of writedowns, particularly in relation to a product known as collateralised debt obligations of asset-backed securities (CDO of ABS.)

But as the zeroes relating to writedowns multiply, a peculiar – and bitter – irony continues to hang over these numbers. Notwithstanding the fact that bankers used to promote CDOs as a tool to create more “complete” capital markets, very few of those instruments ever traded in a real market sense before the crisis – and fewer still have changed hands since then.

Thus, the “prices falls” that have blasted such terrible holes in the balance sheets of the banks have not been based on any real market numbers, but on models extrapolated from other measures such as the ABX, an index of mortgage derivatives.

What has blown up the capital markets is thus a set of theoretical swings in prices that were always pretty abstract.

This takes the concept of virtual banking onto a whole new, terrible level.

But now, at long last, one shard of reality has just emerged to piece this gloom. In recent weeks, bankers at places such as JPMorgan Chase and Wachovia have been quietly sifting data trying to ascertain what has happened to those swathes of troubled CDO of ABS.

The conclusions are stunning. From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.)

Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi.

The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

I dare say this might be an extreme case. The subprime loans extended in 2006 and 2007 have suffered particularly high default rates and the CDOs that have already been liquidated are presumably the very worst of the pack.

Even so, I would hazard a guess that this is easily the worst outcome for any assets that have ever carried a “triple A” stamp. No wonder so many investors are now so utterly cynical about anything that bankers or rating agencies might say these days.

After all, when the ABX started taking a dramatically bearish tone 18 months ago, many banks claimed that it was ridiculous that they were writing their mortgage assets down to prices extrapolated from the ABX, since it was popularly claimed that the ABX overstated likely future loss. Even the Bank of England appeared to share that view.

But with the ABX now suggesting that triple A subprime mortgage assets are worth around 40 cents on the dollar (depending on the precise vintage), the message from that might almost be too optimistic in relation to some CDOs. So where does that leave the banks? In reality we will not know whether that horrific 95 per cent loss is unusual until the rest of the CDO of ABS are liquidated too. But for my part, I suspect that the saga strengthens the case for financiers now biting the bullet – and conducting some open auctions of this stuff, to get a bit of market price discovery.

Hitherto, most bankers – and policy makers – have vehemently resisted that idea since they feared that public sales would produce painfully low prices. That is a valid fear. After all, there are very few investors in the system right now with any appetite or capacity to take risk.

But in a world where investors already feel utterly terrified by the inability to determine values – and the recovery rate on triple A assets has tumbled to just 5 per cent – conducting an open fire sale might now be the least bad of some terrible options.

After all, if an open auction ends up pricing mortgage-linked CDOs near zero, at least the capital hit to the banks and insurance companies will be clear; and if it is higher than zero, it might even cheer investors up.

Either way, until investors get some sense of what something might – or might not – be worth, it will be painfully hard to rebuild trust in capital markets and banks alike.

Those American officials who are implementing flashy new “stress tests” of banks would do well to take note.

This is what I'm basing my pessimism on. If you have reason to be more optimistic, please share it.

[KrazyHorse]

If interest rates are 0% and there is a shortage, an increase in supply doesn't do anything to price. We're not there anymore. The dollar is nowhere near anything like the artificial floor that zero interest imposes.

Yield curve, you ****ing buffoon. The treasuries the Chinese hold are not short-term bonds in bulk.



OMFG, you seriously do not understand this ****, do you?

I suspect there's a lot of under-valued assets. I suspect there's also a lot of over-valued assets as well. I suspect the toxic assets are toxic because they're actually worthless, no one wants to admit it, and so there's no market.

Yeah, sure dude. They're all conspiring.

Even if the only residual value left in those truly terrible assets was the chance that they could pawn them off on the Treasury there would be a ****ing market.

Repeat after me: there's no conspiracy. A defunct market is a sign of mistrust and asymmetric information. In this environment a large (economies of scale!) purchasing program to divest liquidity-constrained firms of these illiquid assets will most certainly show a profit.

You haven't a leg to stand on and you know it. I have plunged my mighty **** of truth deep into your hungry little hole and delivered a blast of truth (semen). Now go back to playing with blocks until you ****ing figure out how this stuff works.

[notyoueither]