There has been much breathless discussion lately surrounding the national debt ceiling as total government debt approaches the legal limit. Treasury Secretary Timothy Geithner said there was "no alternative" and threatened Congress with unspecified "catastrophic" consequences if the limit was not increased. Of course, he is merely following in the tradition of terroristic threats by corrupt Treasury officials.
But just as the implied threats of martial law were used by Henry Paulson as cover for one of the biggest thefts in history, we must now ask what lurks behind the current spate of threats out of Treasury? Paulson lied about what the TARP was to be used for - which is why he demanded immunity in advance. Geithner is lying about the need for an immediate increase in the debt limit. What is being hidden is many activities that aid speculators and bureaucrats that will have to end if the limit stays in place.
In the real world there is a problem that a lot of money is being spent that has nothing to do with the operations of the federal government. This can be seen clearly in the recent announcement that the Treasury will be selling off some of its $142 billion of MBS (mortgage backed securities). There really is no legitimate function of government that relates to manipulating the price of bonds. It's good that they are looking to get rid of them but there is no reason to have them in the first place other than to overpay to help sellers and also to make continuing holders look more solvent by deliberately distorting the "market" price.
Then there are the loans which Treasury has extended to the states to cover their own spending. The state unemployment funds are in hock to Washington for $46.3 billion as of March 23. This is problematic in that it undermines the constitutional requirements that many states must balance their budget every year. It also undermines the ability of the states to function as sovereign entities when they are financially so beholden to the central government. Thus it is a direct attack on the our Federal system of government.
Secretary Tim Geithner is not running a Treasury Department. He is in fact running a bank under the aegis of the federal government and Congress needs to keep that in mind as he goes begging them for more money. Treasury should not be in the business of lending money to the states or of buying private market debt. Those are functions for commercial banks and bond markets. Worse still, those banking functions have been performed using the credit of the American People. If Geithner was not playing these games, the Treasury would have another $190 billion in borrowing authority remaining.
Any increase in the debt limit should be conditional on the Treasury ceasing all interference in state finances and public financial markets.
Showing posts with label MBS. Show all posts
Showing posts with label MBS. Show all posts
Friday, 25 March 2011
Friday, 20 February 2009
The Circle of Lies
Circular Money(TM): at least that's the PG-version of what several correspondents are calling it and we'll explain later. But first a little background. Quite a few folks have expressed concern about the Fed "printing" massive amounts of dollars and putting them into the economy, which will trigger inflation. This is certainly a reasonable fear given the numbers being thrown around and the rhetoric coming out of the Treasury and the Fed. However, we do not believe that the fear is well-founded and our evidence come from the Fed itself. Consider the latest report on reserve balances.
The total balance sheet has expanded by an alarming $1 trillion or 110% in 12 months - very disturbing. But the key question would be is any of this actually printed into existence? To determine this, look at the other side of the balance sheet - the liabilities and capital. Liabilities have expanded by $1,032 billion and capital by $3 billion. Liabilities mean the the assets are funded by borrowing. Real printing would go straight to capital since it creates no offsetting liability. The minuscule increase in capital is easily accounted for by interest on the Fed's bond portfolio so we may safely conclude that little or no actual printing is taking place - much less the monstrous quantities that some would suggest. So the money is being borrowed; now let's look at the liability details to see from where the incremental money is being borrowed.
Keep in mind, this is Circular Money(TM) only to the extent to which the entries offset and that is not a perfect match but very close. TAF loans increased by $388 billion and "other loans" (the rest of the alphabet soup) by $139 billion for a total of $527 billion vs $599 billion the banks lent to the Fed. The remainder comes from assets the banks sold to the Fed to raise cash. Clearly a large portion of the $34 billion in agency bonds and $65 billion in mortgage-backed securities (MBS) also was sold by banks. The money comes from the Fed and goes right back to them. Here again we see the Fed's actions in light of their attempts to maintain the deception. They started to pay interest to the commercial banks on required and excess reserves in October 2008. They are currently paying the banks 25 basis points (0.25%) on all reserves deposited with the Fed. Note that the Effective Fed Funds rate is a nearly identical 22-24 basis points. The ability to pay interest on the reserves was critical to offset the interest cost of borrowing. This way the imaginary accounting entries can be maintained nearly indefinitely with interest paid neatly offsetting interest received as well. The interest differential on huge sums of non-existent money would have unmasked the deception fairly quickly otherwise.
The Big Con
This game has no effect in reality, so what is the purpose of the Circular Money(TM) deception? It is yet another con game by the Fed to convince people that dead banks aren't really dead because Ben Bernanke says so. As long as a critical mass of people continue to buy the party line, the zombie banks will continue to lurch about spastically. We have long contended that the Federal Reserve is a very weak entity in reality and it's greatest power is that people THINK it is powerful. They announce things intended to influence the behavior of those under this illusion. They threaten to "print" in order to stoke fear of inflation and get people to act accordingly - they seem to be hoping to restart financial speculation by scaring people into draining their savings or taking on debt. But if the Fed could actually induce inflation, then we should already have it already as they've been taking radical action now for over 18 months. When the current threats fail to become reality, the already damaged credibility of the Fed will be severely compromised.
The concerns about inflation would be very serious if any actual printing were taking place but that would destroy the banking system - which is the last thing they want. As things stand, the money exists only in theory and cannot be lent outside the banking system since it doesn't really exist. In order for it to exist outside this circle of lies, the Fed would have to find a large funding source beyond the banks themselves to replace any funds the banks lend out to the economy rather than back to the Fed. They would have to compete for that funding with the Treasury who needs to borrow over $1 trillion in short order. Now do you see why the Fed prefers this deception to going to the market and trying to get that funding? If they tried and failed, it would reveal the Great Oz as the helpless little man behind the curtain that he really is.
The total balance sheet has expanded by an alarming $1 trillion or 110% in 12 months - very disturbing. But the key question would be is any of this actually printed into existence? To determine this, look at the other side of the balance sheet - the liabilities and capital. Liabilities have expanded by $1,032 billion and capital by $3 billion. Liabilities mean the the assets are funded by borrowing. Real printing would go straight to capital since it creates no offsetting liability. The minuscule increase in capital is easily accounted for by interest on the Fed's bond portfolio so we may safely conclude that little or no actual printing is taking place - much less the monstrous quantities that some would suggest. So the money is being borrowed; now let's look at the liability details to see from where the incremental money is being borrowed.
- $78 billion worth of Federal Reserve Notes has been issued - increasing the amount in circulation by 10%. This is a function of demand for cash, not Fed policy. Increasing distrust of banks naturally leads to an increased preference for cash instead of deposits.
- $32 billion of reverse repos - that is the Fed borrowing from other financial institutions using its Treasury holdings as collateral
- $917 billion of "deposits" - now a deposit is a loan so this is the Fed borrowing once again. Let's break this down further:
- $216 billion is borrowed from the US Treasury - through the general and supplemental accounts
- $699 billion is from "depositary institutions" - i.e. banks.
Keep in mind, this is Circular Money(TM) only to the extent to which the entries offset and that is not a perfect match but very close. TAF loans increased by $388 billion and "other loans" (the rest of the alphabet soup) by $139 billion for a total of $527 billion vs $599 billion the banks lent to the Fed. The remainder comes from assets the banks sold to the Fed to raise cash. Clearly a large portion of the $34 billion in agency bonds and $65 billion in mortgage-backed securities (MBS) also was sold by banks. The money comes from the Fed and goes right back to them. Here again we see the Fed's actions in light of their attempts to maintain the deception. They started to pay interest to the commercial banks on required and excess reserves in October 2008. They are currently paying the banks 25 basis points (0.25%) on all reserves deposited with the Fed. Note that the Effective Fed Funds rate is a nearly identical 22-24 basis points. The ability to pay interest on the reserves was critical to offset the interest cost of borrowing. This way the imaginary accounting entries can be maintained nearly indefinitely with interest paid neatly offsetting interest received as well. The interest differential on huge sums of non-existent money would have unmasked the deception fairly quickly otherwise.
The Big Con
This game has no effect in reality, so what is the purpose of the Circular Money(TM) deception? It is yet another con game by the Fed to convince people that dead banks aren't really dead because Ben Bernanke says so. As long as a critical mass of people continue to buy the party line, the zombie banks will continue to lurch about spastically. We have long contended that the Federal Reserve is a very weak entity in reality and it's greatest power is that people THINK it is powerful. They announce things intended to influence the behavior of those under this illusion. They threaten to "print" in order to stoke fear of inflation and get people to act accordingly - they seem to be hoping to restart financial speculation by scaring people into draining their savings or taking on debt. But if the Fed could actually induce inflation, then we should already have it already as they've been taking radical action now for over 18 months. When the current threats fail to become reality, the already damaged credibility of the Fed will be severely compromised.
The concerns about inflation would be very serious if any actual printing were taking place but that would destroy the banking system - which is the last thing they want. As things stand, the money exists only in theory and cannot be lent outside the banking system since it doesn't really exist. In order for it to exist outside this circle of lies, the Fed would have to find a large funding source beyond the banks themselves to replace any funds the banks lend out to the economy rather than back to the Fed. They would have to compete for that funding with the Treasury who needs to borrow over $1 trillion in short order. Now do you see why the Fed prefers this deception to going to the market and trying to get that funding? If they tried and failed, it would reveal the Great Oz as the helpless little man behind the curtain that he really is.
Tuesday, 26 August 2008
MBS Deep Freeze
According to various sources, the GSEs Fannie Mae and Freddie Mac have been buying somewhere between eighty and ninety percent of all mortgages recently. This has led to very rapid growth of their mortgage portfolios. Just a few weeks ago, this report appeared in Newsday:
Although Treasury Secretary Paulson pushed the GSE bailout bill through Congress by saying he needed a bazooka so he wouldn't have to use it, the market appears to have called his bluff. The problem is that many commercial banks hold Fannie and Freddie preferred stock as part of their capital. Simply guaranteeing the debt does nothing for the preferred it would be wiped out in the re-organization - adding another hit to capital and more failed banks. Government purchases of preferred stock would be less bad for the banks but they would still be diluted and have less capital. Only purchasing common stock would leave the preferred (and bank capital) intact. But that would bail out the management and prevent a much, needed re-organization of the companies. More to the point, it would also be seen as a pure bailout and politically very damaging heading into a national election.
There has been very little reason for the credit inflation crowd to cheer lately and the rapid growth of the GSE portfolios was one of the few bright spots for them. This growth appears to be done as well. The Shadow Banks are now shattered banks as off balance sheet vehicles are unwound and hedge funds shut their doors. We should expect to see even more of the later in the near future. The WSJ reports that July was the worst month ever for the Morningstar 1000 hedge fund index at negative 3.07%.
Fannie Mae, the largest provider of funding for U.S. residential mortgages, on Wednesday said it grew its investment portfolio in June at the fastest annualized rate in nearly five years.What a difference a month makes. Buried deep inside a Bloomberg article today, we find this:
Fannie Mae's mortgage portfolio increased at a 22.8 percent annualized rate to $749.6 billion in June, from $736.9 billion in May, the Washington-based company said in a statement.
The government-sponsored enterprise (GSE) has been boosting growth in its investments since its regulator earlier this year began easing requirements on capital it must hold against the assets. Lawmakers consider such purchases by Fannie Mae and rival Freddie Mac as playing a key role in supporting the U.S. housing market that is going through a wrenching downturn.
Growth went from north of 20%, to low double or high single digits, then possibly to NEGATIVE in just a few months. It is a tribute to the speed with which leveraged pyramid schemes fail once the confidence is gone. Since the massive growth of the GSE portfolios was unable to arrest the rapid fall in bloated housing prices, the removal of this prop and sidelining the buyer of last resort is likely to result in another down leg in prices and unit sales.Freddie's portfolio expanded at a 9.8 percent annualized rate to $798.2 billion in July, the slowest since March. The holdings may shrink this month based on forward commitments, according to the company's monthly volume summary today. Fannie expanded to $758 billion, an annual rate of 14.4 percent, the smallest increase since April.
The declining demand from the federally chartered companies, the biggest buyers of home loan securities, is sending mortgage prices lower and causing home loan rates to increase.
``It's become pretty obvious that they're not going to be able to grow going forward,'' said Walt Schmidt, a mortgage-bond strategist at FTN Financial Capital Markets in Chicago. ``Without a capital raise, you're not going to see a major recovery in'' mortgage securities.
Although Treasury Secretary Paulson pushed the GSE bailout bill through Congress by saying he needed a bazooka so he wouldn't have to use it, the market appears to have called his bluff. The problem is that many commercial banks hold Fannie and Freddie preferred stock as part of their capital. Simply guaranteeing the debt does nothing for the preferred it would be wiped out in the re-organization - adding another hit to capital and more failed banks. Government purchases of preferred stock would be less bad for the banks but they would still be diluted and have less capital. Only purchasing common stock would leave the preferred (and bank capital) intact. But that would bail out the management and prevent a much, needed re-organization of the companies. More to the point, it would also be seen as a pure bailout and politically very damaging heading into a national election.
There has been very little reason for the credit inflation crowd to cheer lately and the rapid growth of the GSE portfolios was one of the few bright spots for them. This growth appears to be done as well. The Shadow Banks are now shattered banks as off balance sheet vehicles are unwound and hedge funds shut their doors. We should expect to see even more of the later in the near future. The WSJ reports that July was the worst month ever for the Morningstar 1000 hedge fund index at negative 3.07%.
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