Among all this yelling about the US crisis, it is still the silence from Greenspan that bothers me.
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Brad Setser has a fascinating insight to offer in his newest post, Extraordinary Times:
In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:
Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);
Increased its “other assets” by about $80b (from $98.67b to $183.89b);
Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);
That works out to the provision of something like $370b of credit to the financial system in a two week period. And that is just what I saw on a cursory glance.
The most that the IMF ever lent out to cash strapped emerging economies in a year?
$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).
The most the IMF ever lend out over two years?
$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)
This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lent out these kinds of sums over such a short-period.
A look at Japan’s financial crisis in the 1990s is instructive, the Merrill report said. Like the current American crisis, Japan’s banking turmoil included the rescue and disposal of home-loan companies and the bankruptcy of a big securities firm — although the crisis in the United States seems to be unfolding much faster than Japan’s, possibly accelerated by the magic of securitization.
Judging from previous crises, Merrill’s economists suggest that the United States should move quickly to declare certain banks “survivors” and put the others out of their misery.
Doing so, they said, would end the “who’s next?” game that has gummed up the credit markets:
The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.
US 3-DOLLAR INTERBANK RATES INDICATED AT UPPER END OF 3.7-4.8 PCT RANGE IN EARLY LONDON TRADE.
Despite a $30bn repo auction to be held by the BoE today.With the cost of borrowing dollars over three months yesterday jumping by the most since 1999, the European Central Bank, Bank of England and Swiss National Bank said today they will auction a total of $74 billion in one-week funding. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion.
I understand that the explosion in the OIS spread is a reflection of the fear banks have for each others solvency. And it makes sense that it exploded right after the bankruptcy of LEH--it was not the bankruptcy per se, IMO, but the that $110b of senior LEH debt went from trading .95 to .12 in a matter of days that concentrated the market's attention. If you include the less senior debt that is trading at essentially zero, LEH had $110b hole in its balance sheet. And just days before this, the market was being told and was believing that the $10b disposition of Neuberger was going to solve their funding problems.
Now is there a precedent in this history of bankruptcy--excluding cases of accounting fraud--where bonds collapsed like this once a bankruptcy court opened up the books? I'm thinking the answer is 'no.' Which then makes you re-evaluate the premise that there wasn't fraud at LEH in marking the value of their assets.
Now extrapolate this reasoning across the entire banking system and, voila, you have the seizure of the interbank lending market.
Now this leads me to the question: if the OIS spread represents eminently legitimate fears of inaccurate marks on banks books, how is a commitment from the treasury to buy hundreds of billions of distressed assets from the banks any assurance to a counterparty that that bank will not still become insolvent. Obviously it helps on the margin, but the staggering hole in LEH's balance sheet that was revealed after bankruptcy creates profound fears about the true solvency of C or UBS. Until the market is convinced they are solvent--and TARP does not do this--the OIS spread will remain elevated and lending will remain frozen.
DislikedBig ass story but makes a valid point:
By Avery Goodman @ Seeking AlphaIgnored
DislikedIn the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:
Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);
Increased its “other assets” by about $80b (from $98.67b to $183.89b);
Ignored
Dislikedlots of opportunity to set things right and re-establish proper checks and balances along the way with majorities like the Republicans held.Ignored
The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.
DislikedI prefer to blame both parties.
Germany has a Green party. We have two of them here.Ignored