Archive for the 'Federal Reserve' Category

Reserves Increase But Loans Decrease: What’s the Point of QE2?

Posted on December 9, 2010, 8:33 am. Closed

I think it’s most likely QE2 is and will be, as Pragmatic Capitalist says, “the greatest monetary non-event.” I believe its unlikely the Fed will accomplish any of its goals with QE2. If anything positive does happen, it will be in spite of QE2, not as a result of it.

One reason I think QE2 will not help is that there is no demand for loans because people and businesses are still repairing balance sheets and people and businesses still feel very uncertain about the future due to all the new laws and regulations surrounding Obama’s agenda. Below is a visual illustration I created of my point (click for larger image).

The data is indexed to 100 on October 1, 2008, which is when the value of commercial and industrial loans peaked. Here is an explanation of the data:

  • The monetary base is highly liquid money that consists of all coins, paper money, and commercial banks’ reserves with the Federal Reserve.
  • M1 are funds readily accessible for spending. It consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits.
  • M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds.

So, now an explanation of the chart. The chart simply shows the monetary base increasing at a far greater than the broad money measures of M1 and M2. The monetary base has increased at a greater rate because the Fed has been purchasing huge amounts of assets from the banks, thereby increasing the banks’ reserve accounts, but the banks have not been making more loans. In fact, loans have been decreasing despite all the Fed’s actions.

In my mind, the Fed is quite powerless and my best guess is that they feel its better to do something rather than declare they are impotent. The best and only solution to reviving the economy is through fiscal policy. We need tax cuts and more government spending on items such as education and large projects that will help stimulate demand now and will provide good benefits to our society in the future.

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.

Fifth Anniversary of the Death of M3

Posted on December 8, 2010, 7:32 am. Closed

Over at Mises Daily, author Jire Sekar writes about the five year anniversary of the death of M3. This is one of the events I remember very clearly as this was about the time I had started to spend more and more time learning about investing and economics.

Five years ago, in November 2005, the Federal Reserve announced that it would no longer be tracking the aggregate money supply. It issued a terse, cryptic 143-word press release entitled the “Discontinuance of M3.” M3 was the broadest member of the big 4 of monetary aggregates published by the Fed — M0, M1, M2, and M3 that the Fed had compiled monthly since 1959.

John Williams of Shadowstats noted the oddity of the announcement, opining that M3 was probably the most important statistic produced by the Fed and the best leading indicator of economic activity and inflation. The Fed’s lack of interest in the components of M3 can be directly linked to its inability to foresee the 2008 collapse of the financial system.

M3 is basically M2 plus institutional money funds, Eurodollar deposits and repo agreements. Though information on Eurodollar deposits and repo agreements was incomplete and difficult to collect, the author suggests that if the Fed had been tracking this data, they would have seen the cracks starting to form in the financial sector in 2007. Whether the Fed would have done anything is another question.

Nevertheless, my thoughts on the subject remain the same on this subject. I believe more information and transparency is a good thing. As such, I believe it was wrong for the Fed to stop collecting and assembling the M3 data.

Quantitative Easing Explained

Posted on November 16, 2010, 3:36 pm. Closed

This funny video has started to make the rounds. If you think about it too much, its actually kind of scary.

A Gold Standard

Posted on April 15, 2009, 10:54 pm. Closed

I’m reading Cra$hmaker, a two-volume +1,000 page book about a plan to take down the Federal Reserve and restore the gold standard. It’s filled with top notch discourse on constitutional law, economics, politics, history, religion, literature, and philosophy. Here’s one of the many interesting quotes about a gold standard.

A gold standard’s good for all nations because it integrates their economies in a world market, eliminates the rivalries, antagonisms, and exploitations from competitive inflations of national paper currencies. But the Establishment in the United States wants  no gold standard, at home or abroad. Return to a gold standard would undermine the Establishment’s domestic dominance. Inflationism, credit expansion by central banks, and monetization of debt could no longer buy political power by redistributing wealth. And return to a gold standard would end the role of the Federal-Reserve paper dollar as the world’s reserve currency. This would prevent the Establishment from exporting domestic inflation to other countries. Thus, restoration of a gold standard in the United States would curtail political corruption by the Federal Reserve at home and end its imperialism abroad.

This quote comes from a speech an incendiary academic gives to an economic conference which the protagonists of the book are attending. The academic is advocating that Russia’s chance at salvation and return to power lies in instituting a gold-standard in partnership with Germany.

I chose to type up the above quote because I think it’s quite interesting to me that Russia and China have recently suggested a new global reserve currency to replace the dollar. However, they only seem to be advocating a bundle of fiat currencies and not something based on hard, physical  assets.

The Fed’s Real Purpose

Posted on April 13, 2009, 10:45 am. Closed

The Fed’s real purpose—its hidden agenda—is to facilitate government spending through inflation. To avoid imposing politically intolerable levels of taxation to pay for the spending that returns them to office election after election, politicians rely on the Fed to confiscate wealth from the public through inflation. Inflation’s a hidden tax, and lessens the cost of borrowing by enabling the government to pay its debts in depreciated currency.

Page 84 of Cra$hmaker by Victor Sperandeo and Alvaro Almeida.

Taxpayers Stuck With Bear Stearns Losses

Posted on February 6, 2009, 8:32 am. Closed

Remember way back when the government brokered a deal for JP Morgan to take $30 billion of Bear Stearns assets? JP Morgan was responsible for only the first $1.15 billion in losses while the government was responsible for everything beyond that.

Bloomberg reports that the central bank’s Board of Governors wrote in a Dec. 29 report to Congress that it didn’t expect “any net loss to the Federal Reserve or taxpayers” from the Bear Stearns holdings. Looking at the chart now, it seems like taxpayers will be on the hook for a lot of money. Currently, taxpayers are down $3.07 billion.

Capitalists Turn to Intervention and Socialists to Laissez Faire

Posted on March 31, 2008, 2:00 pm. Closed

Ben Bittrolff of The Financial Ninja provides more excellent analysis and commentary on the current crises in the financial sectors.

First, Bittrolff argues that the Fed has done nearly all that it can do to prevent a total collapse of confidence in the financial systems and markets when he writes, “The Fed has almost run out of ammo. Much like George Soros on Black Wednesday, when he ‘broke the Bank of England,’ global capitalists are damn near close to breaking the Fed. 60% [of the $700 billion in Treasury securities on his balance sheet] has been committed and it doesn’t seem to be working. Another push and things could unravel quickly…”

Second, it seems inevitable that Citigroup will be breaking itself up over the coming years. Bittrolf sees Citirgoup’s separation of its credit card business from its banking business is the first step of the pending dismantling of Citigroup.

But, what struck me the most is this simple statement: “It is truly humorous that the Socialists across the pond are the one’s considering taking the ‘laissez faire’ approach while the CHAMPIONS of Capitalism over here are pounding the table for mass intervention.” I don’t think there could be a more telling signal of the immense troubles of the financial sector.

Grading the Fed and Downgrading the Financial Sector

Posted on March 27, 2008, 8:12 am. Closed

Five experts from the American Enterprise Institute (a former employer of mine) have graded and assessed the Federal Reserve’s recent policy decisions. Each expert gives good analysis, but the feeling I get is that the majority of would give Fed should get an “A” for effort and good intentions but a “C” for delivery.

Next, the Resourceful Bear Blog says Lehman Brothers is likely another Bear Stearns. The fact that Golman Sachs and Lehman Brothers debt was downgraded on Good Friday by S&P is cited as an indicator of this possibility.

Finally, according to Oppenheimer analyst Meredith Whitney, Merrill Lynch and and UBS may suffer respective first-quarter write-downs of $6.03bn and $11.06bn.

J.P. Morgan and Bear Stearns Craziness Continues

Posted on March 25, 2008, 11:02 am. Closed

When I read the news that J.P. Morgan had upped its bid for Bear Stearns from $2 a share to $10 a share I felt like I would be one of the few who would consider such news BAD, as opposed to GOOD. If JPM had to be bribed to take on Bear Stearns assets, why would paying more be a good thing? And by the way, JPM is now on the hook for just the first billion in losses that might occur from Bear Stearns assets. Formerly, I think JPM was on the hook for zero losses.

Anyways, I just want to show you this chart of JPM with its insane megaphone. I was short JPM as of yesterday.

 Chart of JPM as of 032508

JPM Buys Bear Stearns for $2/Share

Posted on March 16, 2008, 10:16 pm. Closed

JPMorgan Chase Buys Bear Stearns for $240 Million:

March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street’s fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

I’m not really sure whether this is a good or bad thing. Bear Stearns stock was trading in the low 30s last Friday. Does this severe depreciation of value mean than things are worse than we could have even imagined? Well, judging by the index futures as of this posting, things are looking bad, but who knows what things will be like next by the end of next week.

Here’s a list of some other recent articles on this mess I’ve been reading.