I think what may be missing from my analysis is the fact that normally a bank with a momentary insufficiency in reserves can borrow from a bank with excess reserves (interbank lending) in order to allow the bank with momentarily insufficient reserves to continue originating debt. But since the banks don't trust each other and fear that certain banks they lend excess reserves to might default, the least trustworthy banks have to use the TAF or else debt origination at that bank would come to a complete standstill. But at some point those banks borrowing reserves through the TAF from the Fed must either reestablish the value of their investment portfolios and trustworthiness or become insolvent. That becomes increasingly difficult the longer the TAF rollovers continue.

Quote:

The money doesn't get cut off Guy, it just gets very expensive.

This ultimately forces the repudiation of "implied" guarantees - like entitlement programs.

Sometimes if the money is too expensive, its the same as cut off. And yes, cutting back on the "implied" guarantees means a whole lot of "safeguards" out the window. That's why, in my opinion, we CAN have another depression. That and the fact our whole society is based on borrowing and spending.

Its amazing how the progression is happening in fits and starts. The most recent contraction of HELOCs and cancellation of credit cards are especially fascinating clues.

Thanks for the ticker KD!

Gen I had a thought on this. Could this phenomenon be caused by the fact that its just easier for the banks (since its anonymous) to get the money via the TAF than having to attract depositors? Could it be that its just cheaper?

Well sure its cheaper Barnaby.

But for how long? See, either the hard money comes back (and the profits disappear) or it doesn't (and the profits disappear)

The only way out of the box is for the **** sandwiches to be identified.

The Libor has dropped because the TAF represents a cheaper competitive alternative to borrowing reserves. The banks borrow their reserves from the Fed at a cheaper rate. But that doesn't mean the banks trust each other. If the TAF goes away Libor skyrockets back to where it was before. And until the banks come clean with their losses so they can determine who among them is solvent, Libor rates only stay down so long as TAF is rolled over. But this merely serves to create further financial rot by allowing zombie banks dependent on the TAF for funding to continue making bad loans and avoid recognizing their losses. OK if the credit markets recover quickly and realize it was just an unjustified market panic and those subprime, HELOCs and CDOs were actually undervalued then problem solved. However, if it turns out that the value of the debt was as low or actually lower than what the markets assumed then game over. But the credit and equity markets will only accept this uncertainty for so long before they go into full panic mode. The longer the wait the more the markets will assume the worst.

I understand and agree with what you are saying. The nature of my question was more targeted at the human natured responses of bankers. Even if the TAF is not a good thing and in general the banks know it. They still have to compete day to day to loan out money. If a source of funds exists which can be borrowed at a cheaper rate than other sources, wouldn't every bank do it? Especially if there were no stigma attached to it?

Sure the fix is temporary, but how temporary? I suppose the question you and several others have asked is, how long can we do this? Banks are supposed to be pass-through brokers and now our central bank is acting as an originator of debt. Either this is the intended vector of inflation or it has to stop fairly quickly. Can the FED legally create credit, without Treasury approval? Could that process be occurring now?

Perhaps the drop in non-borrowed reserves reflects that SIVs have been placed back on the books.

Note that Libor went up today . . . first time in a couple of months, I believe.

Genesis, if you have a minute, please read this. Dave is on the BOD for several banks and I would say that he knows what he is talking about.

http://piggington.com/bank_reserve_requi....

This goes to the point/question I asked earlier. Could all of this liquidity being sucked down by the banks be not because they can't get it, but because its cheaper from the TAF than other sources.

You basically summed up in a nutshell how the froze markets haven't hit the equity or real world yet.

IE the FED is playing surrogate market, and that's fine it can for a time and it's actually one of the functions of the FED to smooth market panics and interuptions but what if the problem is so bad and so systemic it won't self cure.

I think that you've correctly identified the entire problem, the real market is still there it's just so far removed from what came before it that it would in fact cause a huge disruption in all markets for all assets of any kind.

This is a bit like having an air tank on your back, the oxygen levels in the room fall to deadly levels and you put the mask on and live, but what happens if you can't restore the oxygen levels to normal or acceptable levels?

The real market for money like I said is and will always be there but what's happened is the people with money have figured out the scam, not entirely but enough that they don't want to play the game anymore, they're going to need to trust that it's not a total sham to come back in and since no one seems capable of proving that they will demand ridiculous can't lose premiums to play.

The market has disclocated, the boat drifted off the pier, the FED is now got one foot on the pier and one foot on the boat and it's still moving away from the pier, we all know what's eventually comming.

Barnaby, as usual, "Mr. Board" only tells half the story in an attempt to make you feel good.

As I said in the blog, the issue is NOT whether banks are insolvent (which he conveniently tries to make it an issue of, then claim I'm wrong because he says I made a claim I didn't make. Cute eh?)

It is whether there is credit demand of any material amount, and whether those loans for which there IS demand can be made off actual reserves (or whether all are "fake" reserves - aka loans from The Fed)

That's where the problem is and what "Dave" doesn't address.

Why not?

Because if he does, he's got a little problem eh?

See, here's the thing. On the latest TAF the Bid-To-Cover was anemic. That is, there was no big demand for the money.

Yet that money is being used to originate the new credit.

See the problem here? Credit demand is basically gone! What IS there is being met off the TAF.

This is what a deflationary credit collapse looks like! Credit demand collapses, private credit GRANTORS walk off as there's no rate you can pay them that compensates them fairly for their risk and money, and yet there's no good collateral left that borrowers can put up either.

The Fed is reduced to pushing on a string......

Oh, and from the announcements made of late expectations are that the TAF won't be expanded either - why would it be, given that there's no material amount of demand for it?

Bw, nice metaphor -- it could turn nightmarish though. Imagine if you will -- the Fed MOONING you from the boat after an adroit vault, while the pigmen at the oars are rowing in earnest. OINK! OINK! OINK! Monolines, shmonolines! All your skulls are belong to us!

On the positive side -- they're ****ed.

I guess my problem is maybe this statement: But what it does indicate is that the banks are continuing to lend into a locked "hard money" environment - that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going.

My question is why is this an issue? If the reserves are there from TAF funds because those are the "cheapest" funds available (banks do have a vested interest in deploying as much capital as they can), it doesn't pressage a crisis. The other money was either loaned out or used for operations. Covering mortgage losses perhaps? Maybe even hiring strippers for the CEO and board. If the TAF money goes away, or gets expensive, then the banks need to get that money from some other source, probably a more expensive source.

Seems to me that all thats happened so far is the FED gave a bunch of banks a below market rate loan to get them to go out and loan to others. The question then would be, have they in fact done that, or are they just hoarding? That would be deflationary.

Maybe a bunch of smaller banks took the TAF money and that was enough for them -- larger banks like C had to take Guido loans from Dubai in addition to what the Fed provided.

Barnaby, the Bid-To-Cover on the last TAF was anemic.

There's your answer.

Oh, and the rate for hard money? What did "C" pay for theirs?

See, that's the problem - "Dave" says "oh its the cheapest source" which is true but misleading, because the "other source" carries a double digit interest rate, or, in the case of suckers, er, "retail depositors", is requiring a huge rate (witness the near-6% rates being offered by some institutions) to attract.

So let me see if I have this right.

If treasury rates shoot up, holders of current bonds take a loss. That's inflation hitting them but new purchases of treasuries are bought at a price that compensates the buyer for the inflation the Fed is trying to sneak through.

Question:

If I'm invested in a treasury bond mutual fund, do I gain or lose when treasury interest rates go up? I'm actually not holding the bonds myself, I'm winning or losing based upon the fund manager's bond tradings. Right?

I'm trying to upgrade myself from the short bus.

Note: It might be wise for banks to offer high interest rates to hard cash depositors. Why? Because in a deflationary environment the bank can use that money to invest in stressed assets.

Boz,

I think that a fund holding bonds loses when rates go up, because they take a capital loss on what they are currently holding. If they hold to maturity, they would be losing due to having lower yields than comparable funds.

Bottom line: current holders of bonds get pounded when interest rates climb, and they win when they decline.

Viewed the ticker EOD 2/4 that was (or wasn’t) depending upon on one’s perspective / Anywhoo, good luck -w- your endeavour.

Concerning Ben Bernanke, I have to disagree -w- your assertion that he thinks he’s a "God". Watching the man early-on its’ easy to see that he was an individual who felt the gravity of the situation he, (beyond this, the economy) is faced with. Only recent does it seem like he’s coming through with any degree of confidence to an American (or further) a global audience. Maybe he's just slipping more comfortably into the roll…Maybe a prescription of valiums? Either which. . .

I agree with everything else, but I have a question for you. . .When you refer to him as playing -w- TAF and aside from, that we *don’t know* just how bad things are on the larger institutional balance sheets (true), do you think there’s a potential of a 'domino effect' sweeping through the institutions once it is known? Does he suspect and fear the possibility? One must consider this -w- recent actions / redacted info. Pika-steph referred to here: http://www.tickerforum.org/cgi-ticker/ak.... and also the Jan. publication from:

http://www.fsa.gov.uk/pubs/cp/JointCP_ba.... (Page 11, Chapter 1, Parts 33-34) which, one may interpret as a shadowy image to our own actions.

(Or) converse, do you think its’ just a case of 'one hand washing the other?' as to the lack of proper action? If the latter true, this would imply a ‘good ole’ boy network’ though is possible to exist, I have difficulty believing it to be of that scale. . .To compare, it would be like the 9/11 truthers’ argument as to the ways [that] was pulled off

Reason I ask is because numerous times in the past you have stated that you believed (and I have no reason to doubt, makes sense as its’ plausible) "The FED has info. Before J6P does though it’s illegal", given that, one must assume he knows scads more about what's going on than we. Could the lack of confidence he projects at times be otherwise interpreted as fear?

Third option: Could it be that he perceives (like the FSA) a collapse could occur driven by pure psych? The reason for the above-mentioned subterfuge when viewed as a 'whole'?

To close, I agree with you and I don’t think for a moment that I believe this to be TEOTWAWKI. Like you, I see America as being resilient and strong enough to survive this mess.

Thanks for all your great work and the amount of effort you put into the Forum and the Ticker. I've learned MUCH from you as well as the input from various members.

Joe (Bigsky770)

Oh, he knows. And I believe he is very fearful about his moves, simply because I'm also sure he knows that if he screws things up even worse guess where the finger will point?

Its easy when you're wrong in academia. When you're wrong in the real world, bad things happen to your reputation.

As to reserves, I often refer to this article by Aaron Krowne that was posted over at ...... a while ago. Explains the discontinuity in the stock market in the mid-90's, for one thing.

http://www........com/forums/showthread.....

(I hope the link works - first attempt at this)

Upshot is, for lots of accounts, the reserve requirement is 0%. Sorry if this is old news here, but figured this thread would be a good place to mention the info.

This may be a dumb question...

But if I am a bank and I am not capital impaired at all, why would I need the TAF for hard money? Even though the debt money folks may have shut their wallets and quit providing me money for debt origination, if I am well capitalized, why would I need the TAF?

If what determines insolvency is capital ratios, then I think all of this that's going on would be very strong, although be it indirect, evidence of aggregate insolvency.

Am I missing something in the way of the money flow here? Somebody give me a TF bitch-slap if I am just not getting it

You're getting it.

The problem is that its likely NOT aggregate. The problem is likely very severe in a few places, rather than widely dispersed and slight.

Why? Simply because of the number of banks .vs. the number who have been directly securitizing.