The Best of the Exchange: Bank Bailouts and Fed Solvency
Minyans wrestle with further Fed intervention into the capital markets.
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(Editor's Note: Some of the following posts have been modified slightly from their original form.)
Professor Depew laid out the case for consumers being squeezed from both sides, as mortgages fail to follow short term interest rates lower. Saving has never been more important, yet so poorly rewarded.
Kevin, your story strikes a chord with me.
I've been a saver my whole life. I've worked hard and went without while my friends were more willing to extend themselves. Now, I see the erosion of my hard earned dollars. I feel like the banks are deciding my fate. And what's worse, the federal government is complicit and are not even considering the interests of the American citizenry. I feel powerless, like a pawn in someone else's game.
But why should I be powerless? Isn't there a way I can have my voice heard? Isn't there a way in a democracy that the voice of majority should be stronger than the voice of the vested few?
Am I the definition of societal acrimony?
The Fed cuts rates. Mortgage rates are unchanged. Banks will not be forgiving nor will they lower interest rates, as they are in dire straights because of their miscues. I've heard and read that mortgage rates will not come down because banks need the margin in order to try and stay solvent.
Mr. Jones cannot refinance to try and improve his position because of the problem lenders are facing. Rightly, mortgage rates should be lower, but that would decrease the profits banks need to stay afloat. I have a friend that obtained a builder loan and when the construction was complete, the same bank that provided the construction loan would not provide a mortgage loan because of the decline in real estate prices.
As long as we are in this Catch-22 situation, I don't see how the consumer can turn things around. The Fed is lowering interest rates, impacting the value of the dollar. The trade deficit is impacting the value of the dollar. The value of the dollar is directly impacting the price of oil, which is a center piece to our economy.
What about the absurdity of converting corn to fuel was a good idea?
I see the Fed reaching a point at which they cannot lower interest rates because of inflation. Close to the 70's crises, but not the same in that the Fed is caught between the two forces, inflation and saving the finacial institutions.
Mr. Practical asked a question many are afraid, or unwilling to ask: Can the Fed go Bankrupt?
The signature of a collapse in my opinion is that U.S. Treasury instruments will stop trading as safe havens. That is what to keep an eye on. Haven't seen much commentary on it as of yet. But with long treasury paper trading at historic volitility levels. I have been thinking about it in context of the end game.
First the end of safe haven status, then the end of it's use as the risk free rate. Is it a long way off or right around the corner? Makes for a crowded keepee as Toddo would say.
The problem is liquidity, solvency, and something more: faith.
No one wants to buy the bonds, SIV's etc etc because nobody believes in them. Just as a credit bureau tells the likelihood of repayment of a loan for a consumer and allows a lender to measure risk, the ratings agencies were supposed to do the same thing. But nobody believes them.
It's the ultimate price for dishonesty: Faith in the system.
Liquidity pumping, all of the other tricks won't work. Because John Q public USA and worldwide doesn't want a thing to do with them. Thus, until the fancy named papers are properly rated what they really are, no one will want them. If it's CCC, call it that. Then we can properly judge the risk.
Our very financial system is in danger of collapsing because integrity has been stripped from the system. It will take years, and likely Congressional hearings with "weeping and gnashing of teeth" and more regulation/oversight before the system works again.
That is the price of conflict of interest and the incredible dishonesty that pervaded the mortgage system.
What the Fed did was to take on housing loans, it's as simple as that.
Hong Kong had a 5 to 6 year housing slump from 1998 to 2003 and eventually came out of it. The price of housing by 2007 had already surpassed that of '98-03. It was painful, of course, for the home owners and/or lenders during the storm.
The U.S. market will heal too, given a few years.
Therefore if you are a long term invester, you shouldn't be too worried at all.
Professor Shedlock has long been critical of the Fed, and this week's actions give him further proof Bernanke is running out of bullets, one by one.
If pumping approximately $500 - 600 billion into the banking system does not prime the lending pump, I believe it's over.
This move smacks of enormous despiration, in my opinion. The fact is that we have gone from July's "there is no subprime crisis" to March's margin calls and defaults in the CDS market, while the Fed still will not admit there's even a recession coming.
To me, they are pulling out all the stops because the lighted match of defaults has struck the fuse called the $47 trillion credit default market, and that fuse leads to the powder keg of the $516 trillion overall derivatives market. One default will lead to another.
All this while, mortgage resets remaining in subprime, Alt-A, and interest only loans take us all the way out to the end of 2011 before we experience a drop off.
I truly hope we're all drastically wrong about this.
"What is happening is the Zombification of Banks, that is exactly what happened to Japan as well."
I beg to differ, if only in a couple of nuances: This is a much more energetic intervention than the one in Japan.
I am ashamed to post this without data, I promise I'll be back with some research (if and when) but in the meantime, I seem to remember that although Bank of Japan did in fact increase liquidity and looked to the other way relating to the quality of credits on the banks' balance sheets, the trick they mainly played was consolidation.
There was a lot of voter concern about using taxpayers money to salvage the banks so, in most of the cases, mergers of relatively well performing banks with bankrupt ones were orchestrated by the government, giving birth to behemoths of unknown credit worthiness.
In the event, and that's my main point here, there were many waves of bad debt since the refloated banks seemed to draw the (correct) impression that they would be rescued time and again, so in each of these situations the bad debt at the involved institutions was found to have multiplied from the time of the previous rescue.
I think that's a very likely scenario in the U.S., where pressure from the Federal Government to enforce good risk practices at banks is nonexistent, also considering that here it's the Fed who takes that risk into its balance, rather than remaining in the hand of the troubled institution.
I have been considering for some time what on earth could the next bubble be. My best guess right now is bankruptcy of the Fed by a rogue trader after starting to accept derivatives as collateral.
Thank you for the good work
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