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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: jrhana who wrote (2638)	6/25/2003 1:02:48 PM
From: Little Joe	Read Replies (2) \| Respond to of 4905

I am not so sure. One of the little discussed facts is that there are huge reserves of oil in Russia, which have not yet been brought to market. I do not think a premium will be paid for alternative fuel until most of the relatively cheap fossil fuel is gone and I believe that there is more than most think available. Also, it is my view that we are a long way from a true energy crisis. There will be peaks and valleys, but I don't think we will see much more than temporary shortages. Little joe

To: jrhana who wrote (2638)	6/25/2003 10:30:37 PM
From: GraceZ	Read Replies (3) \| Respond to of 4905

The Fed creates reserves by buying securities, mostly short term Treasury debt. When it buys these securities from the member banks it writes a check on its Treasury account which is really just a book-keeping entry, the member selling the security to them then the deposits the check into their bank, a commercial bank. This raises the bank's reserves without taking reserves from any other bank as it would if I wrote them a check instead of the Fed. From those reserves the bank does its lending but the lending is a multiple (reserves are a fraction of the loans outstanding) of the reserve deposited in the Reserve bank. So whatever money the Fed creates gets multiplied by bank lending, so in essence the Fed gets the ball rolling by increasing overall bank reserves but it is the bank lending on those reserves that creates the actual money. Now to your question about Fannie and Freddie. The Fed also buys mortgage backed securities but not for permanent additions only temporary actions. There has been some talk they would start buying MBS for coupon passes but AFAIK they haven't started that yet. (I'm sure someone will correct me if I'm wrong) If you look at the RPs for the past year you will see a lot of MBS in there. app.ny.frb.org This is how I understand it: Fannie and Feddie both have reserve requirements which are looser than a commercial bank primarily because all their lending is secured by residential real estate. So they also create money with their lending, not the way the Fed does, but the way a bank does by making loans that are a multiple of their reserves. They receive their reserves from people buying their securities, interest and from people paying off previous loans. If the money that the Fed creates by purchasing securities winds up going into MBS it means that Fannie and Freddie are doing the part that the commercial bank usually does, the act of multipling the original money creation on the part of the Fed, and they are doing more of it because they have a lower reserve requirement. They can leverage their reserve more than a commercial bank can. The big difference though, is in what happens after that money leaves them. For the most part mortgage lending is a deadend, its chained to the housing market, there's very little that gets multiplied in the economy except housing prices and a bunch of mortgage agents get fat. This is why we see the money supply rising so steeply but nothing is heating up except housing prices, a deadend for money. When you buy a house you take out a loan, the seller gets cash over and above their loan and they usually go out and buy another house with that money or maybe they get all crazy and spend it on a trip to Vegas, but for the most part it gets consumed or locked up in another house. Some of it finds its way to me since my biggest client has as his biggest client a major home builder. Whereas C&I lending goes directly into capital equipment and inventory. This kind of lending gets multiplied over and over again. This company borrows to buy a machine that creates more product, the guy who sells the machines puts in a new salesroom, the guy who builds the salesroom hires a few new guys and buys some more equipment, etc etc. Fed created 50 billion last year, at 1:10 that equates to 500 billion. Guess what the figure was for additional real estate loans last year? C&I has been dropping for over two years, going on three.