Tuesday, March 11, 2008

a redirection of liquidity, not a creation of liquidity; and more fed thoughts

these short-term financing arrangements, taf and tslf, are an attempt of the fed to redirect liquidity from ordinary channels (fed funds and the like), to the short-term funding of banks and dealers with acceptable collateral. acceptable collateral varies, with differing haircuts depending on the collateral and the financing program. at this point, agency mbs and aaa whole loans (not on review for downgrade -- presumably that means no negative outlooks from any ratings agency) are encouraged.

what is interesting is in all of this how little true liquidity the FOMC has injected in this cycle. the monetary base is flat. what this looks like is an attempt to selectively reflate the economy -- help the banks and dealers, but keep total liquidity close to fixed.

and, in the face of this, total bank liabilities keep expanding at a 10%+ clip. it almost feels like any source of liquidity is good liquidity to the banks. of course, they get alot of it from the fhlb, which has been the big unconstrained lender in this cycle. fnm and fre may now be able to make larger loans, which loosens up hosing finance a bit, but only the FHLB has the balance sheet to do so in this cycle, and they have done it. call them the "shadow fed." but even their balance sheet is finite, and they are only implicitly backed by the us government, like fnm and fre.

so i guess we're still muddling along. even the redirection of liquidity may not get the banks too excited, because they are only short term measures, with uncertain long-term funding availability and cost. more attractive than the "free" market for now, but that's about it.

the fed is trying some unorthodox ideas; remember, if you want a really long recession, you need a central bank.

switching gears, in a perfect world these fed and other government actions would not be initiated. but do we want millions of people seriously hurt?

the fed is now decisively blurring the boundaries between the private and the public. apparently the government is now in the business of pricing mortgage debt and preventing the investors from figuring out which institutions may or may not be on the brink of insolvency. this is exactly what forbes magazine and the wall street journal spent the entire '90s criticizing japan of doing. it's strange, because we're supposed to be pure capitalists, but of course we are not. for example, when finland faced a similar banking crisis in early '90s, the response was brutal and efficient. some of their biggest banks were effectively nationalized, shareholders got wiped out, new banking systems had to be built and the GDP shrunk by 10%. talk about painful; but in an election year here, is anyone really surprised the course we've taken? back to finland, it was painful, but highly effective - after the crisis had been dealt with openly and transparently, the economy took off. gdp growth topped 4% regularly and the helsinki stock market outperformed ours over the following decade. that was the free market approach.

right now in america, we're witnessing a triumph of "champagne socialism," cloaked in secrecy. both the mortgage market and the financial sector are being gradually nationalized, with fed setting prices of securities and helping banks to keep their true health secret. we don't know - we can't know - what happens behind the oak doors of the luxurious conference rooms were the details are being hammered out. this is of course the antithesis of how free markets work.

but we're not going to do it finland's way, so to even think of other possibilities is just an interesting intellectual exercise i guess. concerning the fed's new securities lending facility, here are the primary dealers that benefit: (only primary dealers have access, as opposed to the term-auction facility, where banks only had access)

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
JPMorgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

interesting to see cfc on the list........

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