Yet another comment posted.

Some people are too stupid for words.

Nice read. Certainly Bernanke understands the implications to the bond market, then why does he persist to let it continue? Are the dealers and the fed reserve consider a united equity...i.e., self preservation or something?

One way to get this message to the general public, is just like they do during the primaries...go to the people and hold town/city public meetings. Plenty of TFers (including myself) can prep for the speaking event and advertise in local papers, if you would be willing to speak and travel.

Jesus, just hand the Ticker around.

Its NOT that hard to understand.

Honestly guys, I'm a complete moron and I understood where this was going in December.

Non-Borrowed reserves are basically for the Fed to help 'spot' the banks the cash that they have loaned out - rounding out their reserves while the money is actually busy making more loans to someone else. BUT when good loans go 'bad' that money goes *poof* and leaves the banks short. Normally, this situation would cause them to write off that loss and be done with it. Now, instead, they're going to the Fed and collecting their 'spot' for the money they lent out....when it is in fact, not lent out any more, it's just GONE! The Fed isn't 'spotting' reserves any more (think of it like a payday loan), they're just handing over money in exchange for.....absolutely nothing.

*gack*

The Fed has enabled the banks to make us the bagholders for all their losses.

The Congress has enabled the Fed to enable the banks.

The poor ****tards that got a liar loan get to pay twice - they'll lose their home and get to foot the tax bill for the bank taking advantage of them.

On the bright side all those that got loans under false pretenses are going to end up paying the tax bill too.

Another beautiful illustration in that chart is the realization that the Fed doesn't have an infinite asset base; on the contrary, it's already blown half of the its assets in the past few months.

What happens when the Fed runs out of assets?

Read the Ticker.

Where would you put the money before a bond market crisis? I know the risk is getting uncomfortable for many of us.

- I think Gold, Stock Market, Real State, Bonds and other big commoditties would take a hit at the beginning.

- Other currencies? cash under the bed?

Wow! It's not like I don't know most of this but the way you present it just blows me away. I am drinking now when I read the ticker anyway, so just let it all hang out - I can take it. *looks for my pills WHERE ARE MY PILLS?*

Can anyone photshop my avatar? I really think it should be welling up with a lot more blood. Bleh!

The negative reserves at the Fed does not necessarily indicate bank insolvency (negative capital). It certainly indicates illiquidity. That stated, there are likely insolvent banks out there.

I respect the Fed in that they are keeping the borrowers on a short leash. It will be interesting to see what the Fed does with a borrower that becomes obviously insolvent.

Quote:

Just when Wall Street firms thought the worst of the credit crisis was over, investors in funky mortgage-tainted debt may unleash a fresh bout of pain for embattled banks like Citigroup, UBS, Lehman Brothers and Bank of America.

Investment managers, including GSC Group, which buy bonds in arcane securities known as asset-backed collateralized debt obligations, are looking to force Wall Street banks to take back onto their balance sheets a big chunk of the $380 billion in mortgage loans used to back these CDOs.

Hmmmm. Not good.

If it weren't putback to the banks the losses would be eaten by the investors.

If it is putback to the banks, we have more losses that Bernanke will try to transfer to taxpayers.

Even more reason to stop this fraudulent transfer of losses.

"increases in borrowed reserves must generally be met by a commensurate decrease in nonborrowed reserves, which is accomplished through a reduction in the Federal Reserve's holdings of securities and other assets."

sorry but i need clarification - what is meant by a reduction in the Federal Reserve's holdings of securities and other assets? Are they simply saying that reduction of assets = loaning them to the banks against the banks collateral?

Maybe the simplest way to put the matter... in plain English, would be this:

1. You go to the bank and you use the cash machine. You'd like to withdraw $100 to buy some food.

2. The bank doesn't actually have the money. They USED TO have the money, but they loaned it out to somebody who wanted a mortgage that they really couldn't afford. Now, that same house, which WAS the collateral on that $500,000 -- and which was appraised by a supposed "independent party" at $500,000 -- can only attract an offer of $400,000 and that $100,000 is actually lost. Gone. Doesn't exist anymore. Multiply this simple series of events by an extremely large number of homes/banks/mortgages to arrive at a final tally of a number of dollars that is probably in the Trillions -- and if it isn't in the Trillions yet (some debate on this point, to be fair), it is very likely that it will be WELL INTO the Trillions in fairly short order.

3. So, in order to give you back YOUR money that YOU deposited into that bank (and now want to withdraw), the bank now actually has to BORROW the money in order to do so.

Think about that: the bank has to BORROW cash in order to allow you to make a withdrawal.

4. They don't have the reserves. That's why they have to BORROW them. Their actual book value (Assets minus Liabilities) is, to put it bluntly, negative.

5. This is hardly a good situation.

6. It also results in another economic reality, which is that since banks are so short of cash, they become less and less likely to make loans (in general). This is deflationary, since the money multiplier doesn't then function as it usually does, and reduces the aggregate supply of money.

7. A reduced supply of anything, of course, makes that supply more valuable (assuming demand stays the same), and the demand for money is ever-present, obviously.

I haven't posted in awhile -- nothing to say, I guess -- but I have wanted to post a plain-English step-by-step point-by-point breakdown on what is going on, and why it ain't exactly good.

On a side note, the reality is that we are in truly uncharted waters with this entire situation. Ticker Forum people, in general and as a group, have a consensus view that "feels" like parrots all repeating the same words, and it makes it seem that their view is something akin to a dogma. However, the actual truth is that we have nothing to compare this to. What the Fed is doing (and has done) is actually so far removed from anything in economic history, that no comparisons to ANYTHING in economic history (that I am aware of) can really be honestly made.

Within the realm of my own mind, I have gone back and forth on a lot of this... When I discovered the Forum here (last September), and I was reading the major views here early-on, I remember thinking that the people here were clueless-- I thought, "look, LIBOR doesn't show any major unwillingness by banks to lend to each-other... LIBOR is actually pretty low..." only to learn, recently, that LIBOR is probably one of the most manipulated numbers on Earth and that its entire chart history can be tossed out the window. What happened just under the radar with LIBOR is absolutely scandalous -- yet nobody in the press seemed to even want to touch it (or, as is more likely, even understood it).

Anyhow, to anybody new here, you're going to go through the same thing. You'll go back-and-forth on things in your own head until you arrive at a view that seems world-real to you. I'm not there yet. I've been here for 9 months now and I still have not yet solidified a world-real view of this entire situation (and I'm a bit suspicious of those who can come here to the Forum and instantly start repeating the herd here word-for-word).

The world's economy is a VERY fluid thing -- it's a highly-liquid, ghost-like thing that is VERY hard to model and to capture mathematically. Most economic activity takes place at the margins, and those are ever-shifting.

I'm not convinced that we are NECESSARILY looking at a collapse, but I'm in the minority on that view here on the forum.

Of course, it's entirely possible that we could collapse tomorrow.

Nobody here knows any better than I do, though. They'll tell you that they do, of course, but...

Challenge anybody here to predict closing values on the DOW for the next 50 trading sessions and you'll find they're all at about 50-50 in terms of accuracy -- yet that won't stop them from posting in the most shrill possible tones that they know more than you.

They don't, though.

None of them have a guess that is any better than yours.

The Forum here is a resource, with a VERY FEW bright people and a whole array of other folks who have no idea what they are even talking about. In other words, it stacks-up the same as any other Forum, although the moderator here has less tolerance for stupidity and that, by itself, is worth a WHOLE LOT.

If you're new here, don't be so quick to adopt the dominant view here. Think things through. If after 9 months you find yourself saying (like I just did) that you really can't see through the fog of this economic mess that we seem to be in, that's cool. It means that you prefer to think things through on your own.

It is also exactly what this forum needs more of, by the way.

If you're new here, take your time.

Read, learn, and let the conceptual chips fall into place at their own rate.

Whatever you do, please don't be a parrot here.

Lord knows, this forum has more than enough of them already.

"Whatever you do, please don't be a parrot here."

Summary to this long winding tripe by promising student aynrandfanny, listen folks, many of you may be intimidated by people who seem knowledgeable but are themselves fraud like asianbull or nothing and you are afraid you will be lynched before you get your message loud and clear.

What you do is you wait in the tall grass and that opportunity always comes. When that comes what you do is u unload on that person with whatever forceful vengeance and exposed them for the tripes that they really are. Why wait? Watching the # of victims growing is a pleasure I cannot describe.

Thank you for building such a great forum karl and I will go back to my foxhole in the tall grass and jackoff again. Carry on.

Yep.

To be clear, the $500,000 that was given to you to buy the house wasn't destroyed. It still exists.

The error that is often made in these situations is assuming there was only $500,000. That is false. There was really $1m = $500k in cash, and $500k in house.

The two were exchanged, but the house wasn't really worth $500,000.

That's where the destruction takes place - when the lack of value is discovered - not in the cash, which is still in the system and still is worth dollar-for-dollar what it was when it was originally transacted.

Wow KD sorry about the ****storm I caused over at CR. Just thought you guys should see the post. S.Patty obviously not a big fan...I thought photoguy was back on good terms :)

That's ok - heh, there are some fun folks over there... and plenty that don't get it.

They will, in due time.

Anyone who doesn't understand that paying interest to borrow reserves is beyond stupid is uneducatable. That breaks the bank funding model as it is the exact inverse of "borrow short and lend long"; the joke, in this case, is on them as they're paying interest but getting nothing for it, as those reserves can't be lent out.

Excellent ticker kd

fyi: - just noticed your ticker is #22 on reddit today.





-Thanks for sharing your knowledge Karl. Much appreciated.

ok -help me out here please...
So they pass this along to the taxpayer inevitable in my opinion
Then we add another trillion to our budget deficit
more debt to service
but the alternative in not proping the markets in this manner will cause a deeper recession as J6p loses his equity and his portfolio value, magnifying a reduction in spending
this cretaes less revenue,less taxes on profits and less money to service debt
a sure way for foreign investment to leave, seems the micro picture needs to be proped so the macro picture can gain traction to service all the debt. No?
The mark to market which seems to be getting more attention is slowly being filtered into the market
In the the meantime What does 6% unemployment still relatively low and a couple million foreclosures really mean in the long term- Home ownership was at an all time high-so it backs off a bit-homebuilders are ****ed for two years while they work off inventory and homes selling for less than the cost of building them return at least to cost of building.With no added inventory and the economy needing x amount of homes per year to keep up with growth-seems just a matter of time until excess supply is absorbed as some areas are reporting median property increases in housing..

That right Shooter, we can tax (or take on debt) our way into prosperity.

Are you REALLY that incapable ofanalysis?

No just trying to assertain what the difference is between what we've been doing for the last how many years? Building an exorbitant deficit and ultimately forcing fiscal prudence as to not lose these investors. And when push comes to shove I seem to recollect that the national deficit was reduced to a positive at some point I believe when Bush Sr, took office.Showing that the deficit does have the ability to be managed by controlling spending. Just trying to play devils advocate-since while it may***** you off I am begining to see the reasoning behind the adage "don't fight the fed"
1 million foreclosures projected this year by AP 5/14/2007 doesn't seems earth shattering-and these are the people likely running credit up to 15 billion and growing. as you pointed out Bk courts are looking at balance sheets and saying you don't have an income problem you have an outflow problem. Restructure your debt and pay your creditors
what happens to market should oil fall and speculators get squeezed due to decreased demand- and higher mileage averages begin to appear. In short I'm ****ING*****ed this market is so irrational and I'm trying to see what i'm missing that is causing me to go broke

Quote:

And when push comes to shove I seem to recollect that the national deficit was reduced to a positive at some point I believe when Bush Sr, took office.

Nope - you are wrong and have just displayed the partisan bull**** that I will not entertain. I've only explained that 20 times.

Have fun masturbating Shooter; I'm not going to debate with someone who will intentionally misstate reality because they have built their thesis around knowingly-false positions.

It's on reddit's frontpage: http://reddit.com/info/6ja50/comments/

Edit: Must by why the article's timing out now

Tip: submitting to the business subreddit gets better results.

"intentionally misstate"

I do take exception to that. It was not intenional that I seem to recall a budget surplus

Anyone who doesn't understand that paying interest to borrow reserves is beyond stupid is uneducatable."

I agree KD, paying interest on reserves is stupid. The reason they are doing it is to allow them to expand their reserves once the remaining 50% of their balance sheet which is not already crap is loaned out under TAF and PDCF.

Remember last weeks threads about the WSJ article on May 7 which said the following:

"If the Fed used all these Treasuries, it could purchase more, but in the process it would create large quantities of excess reserves. As banks lent out those excess reserves, the federal finds rate would fall to zero. By paying interest on reserves, the Fed could put a floor under the funds rate and expand its balance sheet to deal with credit crunch."

Charging interest on reserves is stupid, but why they are doing it is the simplest answer to Tsberts question of : “What happens when the Fed runs out of assets?”

You and I talked about this yesterday in the non-borrowed reserve graph thread:

ME:

“FED has the crap on its balance sheet now though. They (TAF) started out with 50 billion of it, raised that to 100 billion, then to 150 billion. I'm sure they are not done raising either.

Then comes the next step -increasing the length of the loan. These TAF loans are supposed to be for 28 days. Watch that length of time get extended. Probably up to 90 days. Then 180 days.

The FED will increase the composition of it balance sheet which is crap paper until the whole damn thing is crap paper the pigmen want to unload. Then the FED will increase the length of the loan from the TAF so that this crap paper never has to come off the FED balance sheet.”

YOU:

“... and treasuries will go to 20%”

That’s the long and short of it to me. Its either pay interest on reserves and be able to expand the balance sheet, or, have T-Bills go to 20%.

Pick your poison. The FED has picked theirs.

KD,

Great ticker. Your cogent writing is a thing to behold. Your descriptive powers are magnificent, tying all these threads together, day after day. Your prescriptive powers.... not so much.

You described the FIRE economy perfectly, but when it all flies apart, you seem to think that hyperinflation won't roll over us like the wildfires that are swallowing Florida right now. With all of NOTHING's, LD's and other's well-articulated positions, chaos, which we are teetering on, will be one hell of a fickle mistress.

Chaos will KILL our fiat currency. Bernanke and his Boyz are in the process of destroying the full faith in the American economic system. Nobody with oil will want our currency (whether we have 40,000 nukes or not.) Look what Iran just did with their bourse. Dont think that China isn't next after the Olympics. Their dollar dump may be the black swan event we all dread, or hope for.

Hyperinflation will set in because all of our cash on hand (J6P has none) will go towards the survival resources, like food and water, and since hoarding will immediately take effect, prices will skyrocket, and very quickly as the bank holidays drag on, a HUGE black market economy will occur and barter will quickly take hold. (See Argentina, Cuba, Italy seventeen times over etc.) Gold, silver and other primitive shiny metals may play a big role in it. The human race always defaults to its old ways during chaos.

Despite your will to power, nobody will come back to our FRN's. We have nothing that the world wants, except arms, and the intellectual properties we value to the moon, MSFT, YAHOO, technology is all dependent on CHEAP energy. And those days are past us, we are in the shadow of Peak (Cheap) Oil and no drilling on the coasts and in ANWAR will change this.

I agree with you ultimately we are headed for a catastrophic DEFLATIONARY collapse, that the Rethugs want to drop in Obama's lap. The finish line is too far though and the coming bond market collapse will freeze everything in place. All the faxes to pliant congresscritters won't stop what we deserve. This was an All-American effort and the Dantesque fiasco that WILL ensue will probably send us back to feudal times. Those who have guns and gas will rule.

How am I trying to mitigate this coming calamity? I am working with the emergency management department for the City of Seattle to draft plans for food rationing and a long term way of feeding the teeming masses of urban poor that will be clamoring for food soon. I am trying to get the City to buy a series of solar powered greenhouses to spread about the City so that some fresh food and citrus can be grown so that we all aren't dying of scurvy up here in five years.

Do what you got to do but all the white papers and petitions will not stop the BULL**** TSUNAMI that is headed towards our shores. It only encourages the rational and the aware to continue picking the shells on the exposed beach by the surf suddenly going out.

Instead, we should be buying solar-powered greenhouses and bio-diesel stills: You guys probably have all the guns and ammo you need.