just in in-tray, but posted in chronological order, a discussion
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From: Stan
Subject: Comments - Week of March 3
May we all assume that you think that Feb President Geithner was not provided with a quality speech to deliver today? ROTFL
"We're fighting inflation by lowering rates, and we're going to keep doing it until it works" -- Fed Babble-Speak at its best
From: Jim
Sent: Friday, March 07, 2008 2:08 AM
Subject: Comments - Week of March 3
Actually, in fairness to Geithner, he is probably the only “Fed Head” that saw this all coming. This is a quote from his speech at the HKMA in September 2006:
“The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by and complicate the management of very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones.”
Essentially, what he was talking about was the ‘safeguard’ in the system that called for extra margin when things began to unravel (fine if it is only one institution that needs to stump up the margin and always assuming someone is either willing to give them the funds or they could easily liquidate their securities). As things stand today, the scramble to call margin – an mandatory feature of the system – is what will bring this crisis to a head. Hence the title of my missive today to our clients: “Nuclear detonations”.
Jim
From: Stan
Sent: Friday, March 07, 2008 10:52 PM
Subject: Comments - Week of March 3
Hey Dr Jim -- I certainly get it about the margin calls -- they're analogous to the old story about the tide going out a bit and exposing more naked swimmers -- but what do you think about this idea of the Fed relaxing the haircut on collateral postings at the TAF? That would seem to be the opposite tack, although perhaps it selectively helps banks whereas increasing margin requirements screws hedge funds and speculators. On the other hand, ramping margins is going to create a lot of collateral damage that might well negatively affect the stock market, and that would seem to run contrary to Fed (Working Group) efforts to support the equity indexes to maintain public confidence
Meanwhile, interest rates are being administered lower, at least at the short end, with the side effect of encouraging speculation by those who already have or can access funds -- and plenty of those funds are finding their way into commodities, further contributing to the inflationary critical mass that is already building due to the falling USD.
So if one looks at these actions as a single policy initiative, one might be forgiven for concluding that the policymaker was a bit bipolar -- am I missing the grandiose plan behind all this? It seems to me that they are attempting to rein in some elements in one part of the economy while simultaneously pumping on others at the same time, and the end result could be that they screw them all up instead
From: Jim
Subject: Comments - Week of March 3
Date: Sat, 8 Mar 2008 08:44:28 +0800
I didn’t mean to imply that the Feds were happy with the systems they themselves had put in place! That would be too much like administering painful medicine and, as we all know, that must NEVER be done. What they have managed to do is put a supposed safety net in place that works only if there is not a systemic problem – just another example of the unintended consequences of government interference with the market.
The responses you describe are the entirely predictable ones when the Feds realise their mistakes (of course, it will be referred to as ‘market’ failure to make sure the blame is not attached to the true culprits). In fairness, I suppose, steepening the yield curve is the only thing that the Federal Reserve can do in order to bail out its owners (unlike most other central banks the Fed is owned by its members. I think JP Morgan now has about 45% of it after all the bank mergers that have taken place since 1913). What they, and I hope we, know is that method of rebuilding banks’ balance sheets is a slow one – years, not months. The TAF and the rest? Sticking plaster to treat the symptoms of an incurable disease – structured finance cancer.
Jim
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Recommendation: do not short JPM until nearing the bitter end :0) |
