Posted on 04/27/2008 3:01:19 PM PDT by shrinkermd
When the Federal Reserve cuts interest rates for a seventh consecutive time this Wednesday, it will begin to wind down a pernicious campaign that has flooded the market with cheap dollars since last summer. At the same time, the whoosh of air from Europe's deflating credit bubble puts new pressure on the European Central Bank to begin cutting borrowing costs in order to goose growth.
The strategy shifts by central banks will drive a greenback comeback against the overpriced euro, turning back the 15% slide that since August has lifted the euro -- to a record $1.60 last week -- even as the dollar continues to struggle against the undervalued currencies of Asia.
Monetary policy isn't the only catalyst for a healthier dollar. "A lot of what has happened since last summer also is emotional, and that can change on a dime," says James Paulsen, Wells Capital Management's chief investment strategist. Among other drivers: mounting evidence that the credit crisis loosening its grip stateside is still tightening across the Atlantic, and a growing belief that the U.S. economy could bottom and rebound before Europe's.
The rehabilitation, ironically, is driven by a weak dollar, which makes bargains of our exports, fills Manhattan's 65,000 hotel rooms with European tourists, and entices foreign giants from Ikea to Toyota to open factories here to exploit our increasingly cheap labor.
Already, the dollar has begun to strengthen against commodity-driven currencies from the Canadian loonie to the South African rand, and odds are it is close to a bottom against the euro, sterling and most developed-world currencies. On top of that, "negatives about the dollar are more fully discounted compared to the potential positives," says Marc Chandler, Brown Brothers Harriman's currency strategist, who expects the euro to pull back to test the $1.40 threshold this year
(Excerpt) Read more at online.barrons.com ...
Of course
I knew that when i was six. It seesm to be you who has taken 200 posts to figure that out. For the bank to lend $10,000 it must have $10,000 in deposits + required reserves on deposit with a reserve bank (+ meet capital requirements, etc.)
Figure out yet that new loans boost M2?
Not bad, but that tremor when they actually did the rate cut knocked out my initial Euro and Yen trade. Luckily, I was able to adjust my stop loss so didn’t lose too much- but I have four more in the hopper now. The Aussie isn’t looking to good, but the other three are in positive territory.
The trading system is called Triple Screen, developed by Alexander Elder in the early 90s. It’s originally a stock analysis system, but we use a modded version for Forex.
Markets are discounting mechanisms. They don't wait around for lagging indicators to move them. When the next move in fundamentals is known to be favorable, they anticipate it and move.
There is nothing blameworthy in accepting collateral for repurchase agreements that are accomodative to the rest of the market. The Fed will return the securities and collect the usual interest on the hold. It is merely easing the counterparty banks' Basel reserve requirements for the duration of that hold. Do you know that it was an innovation in the depression to let the Fed hold treasuries? Originally it was suppose to rediscount banker's acceptances (lol). That was part of a "real bills" doctrine that thought such debt reflected a "more underlying", less merely monetary, demand.
Asset restrictions are purely conventional and at bottom utterly frivilous, in such things. The Fed lends freely or it doesn't. If it does, anyone *solvent* can become liquid.
The banks aren't undergoing mystico-magical contagion. They are simply increasing their ratio of lower risk reserves to total assets. They will earn out all credit costs of the present smash up easily, at present market spreads. Debt risk is now a buy, not a sell, because their pulling back has left so much paper go begging, and the price of said paper has rationally and immediately adjusted.
This is not remotely what happened in Japan, where prices did not adjust at all, rates went to zero and stayed there, banks deliberately hid all losses, and threw good money after bad merely to avoid revealing loan losses. Instead we have huge, high profile write-offs the instant market quotations turn. What we are seeing, in fact, is the greater rationality and openness of the open and market based Anglo-Saxon financial system. And you are shortly to see the resulting greater robustness, amply demonstrated.
All the silly people waiting around for it to cause the great depression in reruns, are just silly, and do not understand how the system works. At present credit spreads, you'd have to be brain dead to lose money as a banker. Granted, many did a passable imitation in the previous 3-5 years. But dumb and loss came from 0.1% spreads, and health and soundness will come from 2.5% spreads, as inevitably as the sun coming up.
The world financial order will merrily ignore your withheld approval and crush its critics under the triumphal car of progress, without batting an eye or even much noticing. And you are standing out on a streetcorner in a washboard screaming "the end is nigh". Well, the end isn't nigh. Every sane man knows it. You just aren't one of them.
Finance isn't theft, and no you may not get the government to outlaw it by force.
As for finance "distorting" the economy, every action by any entrepeneur, successful or unsuccessful, of any appreciable scale, has precisely the same effects. When they reposition assets successfully, they add to net wealth, but also move it around enourmously and change the real value of everything anyone holds. And when they reposition assets unsuccessfully, they reduce overall wealth, and again change the real value of everything anyone holds.
Some men want to pretend that is "theft", because it changes the value of some commodities they freely choose to hold. But if the government is to outlaw as theft, anything that does so, then no meaningful economic liberty will remain.
See, I flat deny that a banker making a new loan in a way that increases the money supply, is any different, at all, from any other entrepeneurial action with risk attached.
I also flat deny the pretence that it is the government, and not a lot of private bankers with their own tails on the line, making such new loans.
I also flat deny that it is in any way a "rigged" set up, or that you are in any way harmed by it. If you think the bankers have it easy, you are welcome to join them by holding bank stock, instead of lending to them (which is what holding dollar balances instead, is).
The Fed's actions had secondary impact on the real estate bubble. Dramatic enough actions by the Fed would have changed the behavior of everyone participating in the real estate bubble. But the Fed didn't put guns to anybody's head, and force them to buy more house than they could afford, or to lend acres of money to deadbeats. Free men did that all on their own. Then, when it was hurting the real economy, the Fed *did* do its job, raised interest rates, and broke the real estate bubble.
In the glowing fallout aftermath, it is a little silly to pretend it is all their fault because they should have nuked New York City a year earlier.
His big recommendation was that Fannie and Freddie should be the places to park such paper, and the ones to lend more in this situation. Which fits the instituational set up in his own day, but present day Fannie and Freddie are not equipped to do it. In case nobody noticed, their stocks were being taken out and shot in the previous 9 months, as it is. If the congress wants to up their capital and revise their mandate, I think that would be fine, and I take Volcker to be recommending as much. But they were, and absent new legislation still are, in no position to replace the Fed in this matter.
Yes, we have fractional reserve banking, in the sense that the Fed requires a certain *deposit* at the *Fed* from all its member banks, as a ratio to their own *demand deposits*. This limits the growth of *very narrow* money supply, to at most a fixed fraction of the total size of the *Fed's own* balance sheet.
But there are no Fed deposit requirements for many other forms of bank assets. And there are many financial institutions that are not its member banks. As a result, broader money is not closely controlled by the Fed.
In addition, in practice these days none of the big commercial banks is limited in the growth of their whole balance sheet, *first*, by the Fed deposit requirement. One, because the Fed adds reserves if they are needed, and bids for them pressure up the Fed Funds rate (overnight loans between its member banks). Two, because all the big commercial banks are constrained *more strictly* and *sooner*, by their own *desired* level of capital reserves, under the Basel II international capital adequacy standards.
Citi is running off its assets. Why? Because it doesn't have enough on deposit at the Fed, to cover its demand deposits? No, hardly. Because its tier 1 capital is slightly under 8% of risk weighted assets (the Basel standard is at least 4%), and its total capital is just over 11% of risk adjusted assets (the Basel standard is 8%). But wait, those are way above the Basel minimums. Exactly.
They have a *desired* target of more like 8% for Tier I capital. Anything over 5% and 10% respectively will earn a "well capitalized" ruling from the regulators. And they want the "firepower" to be able to expland assets significantly without touching that line - let alone the "adequate" lines at 4% and 8%. Enough to keep the credit rating agencies happy, and enough to finance the biggest deal they might face.
This is very far from producing as much net new money as they can legally get away with. Since in practice, their risk adjusted assets measure is what determines how much money they will create or not create, the fractional reserve system is *not* governing the total money creation. Yes, it legally sets an upper bound beyond which the banks as a group cannot go. But they aren't at that upper bound, which the Fed would move out of their way anyway, to keep its Fed Funds target, if they were.
What determines their ratios of capital to risk adjusted assets? Their capital, net of recent losses, and added to by selling more common or preferred stock. The total size of their balance sheet, overall assets. And one more - the risk adjustment the give to those assets, under the Basel rules.
Swap in a treasury for a corporate, and their risk reserves go down. Notice, this has *nothing* to do with their *Fed* "required reserves".
As for "in theory the Fed can give the banks license", um, it can, without batting a eye, by law. It sets the reserve percentage requirement and can change it at will. But that isn't the issue. The issue is how much risk the banks want to carry with their capital. Answer, a lot less than last year.
And what has either to do with silly figures like 90 trillion in derivatives? Not a darn thing. Derivatives aren't money, they aren't money substitutes, they aren't loans. They are just entirely notional bookkeeping about every past trade they've engaged in, with any time still to run. Derivatives don't "net out". They don't clear. It is a figure like the total volume of checks written, not like the amount in accounts at any one time.
Again we see exploitation of ignorance. If not the latter, itself.
Banks do not need to have anything to open a loan. Money is the debt of a bank. When a bank opens a loan, it simply offers to pay all the drafts of the lendee, with its own IOUs, which everyone else will regard as money.
In clearing with one another, they will cancel out all their mutual offsetting IOUs within a given time window, and then transfer other assets for net movements (securities mostly).
The difficulty for the bank is not how to fund a loan, but whether it is worth the risk, doing so. It must pay its own creditors on the nail. Will it be paid on the nail by the man it lends to? If it is, no problem at all. If it isn't, problem.
People can stop accepting its IOUs as money any time they please. That is exactly what happened to Bear. People said, en masse and at all at once, "that's very nice, but I'd like to be paid in IOUs drawn on someone else if you please, and by the end of the day."
Good luck with that! LOL!
And that is the real story, isn't it? When I see these guys criticize the Fed for easy money policies I never see them criticize the Fed for the tight money policies that removed the puchbowl. But the ash heap of economics is littered with the Orange County, Californias and the Bear Stearns dead bodies that couldn't outlast the tight money.
The reversal on the U$D may last a while and then there will be the typical government economic reports, reversing the reversal.
Below is another interconnected article on the Euro, plus a nice commodity website you might not be aware of.
When did that happen. Bernanke was so late in the game that the real estate bubble was headed for the CCU for a detox regime. It didn't matter what he did. The culprit is Greenspan, starting about the first day of his reign of terror.
While I think that Bernanke was in a boxwith nor right moves - he was an idiot for taking over a losing hand and even more of an idiot if he did not know the hand he was taking over was a losing hand - I think he is now picking the worst moves of all.
2. Orange County was not caused by tight money. It was caused by an idiot who thought he was going to make a lot of money with the taxpayers money betting on a derivatives position that went South when interest rates were raised.
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