Oh well...

[symbioidlj]

So now, you recall my posts on the Term Auction Facility, whereby the Fed loans cash to banks (who are flat-ass broke), and they've done over 200b, IIRC, of these loans.

Well NOW the Fed is doing a coordinated deal with other Central Banks (primarily EU and London), with a thing called Term Securities Lending Facility. This is *another* way for them to pump out 200b dollars in loans, on top of the other loans from TAF. This one apparently takes debt from the banks as, what, collateral??? Isn't this the same as CDO (Collateralized Debt Obligation?) Isn't that *exactly* what got us into the subprime bullshit? I don't know what the deal is with this.

If any of the other financial dudes on my list (I only know of 2 who've been following this stuff fairly closely, at least 2 who read my LJ) have better knowledge on this, please let me know. I'm not sure what the deal is here, except, that it sucks.

Comments

[roadriverrail.livejournal.com]

Mish isn't talking about the TSLF yet, but he has a great way of looking at the TAF. The TAF is basically a mechanism for taking in the bad debt, turning the Fed into a pawnbroker. Apparently, it's been a pretty judicious pawnbroker in that respect because they're not giving Treasuries and money tit-for-tat. Mish's blog says they're basically baking in the real estate devaluation. I just read up on it, and the TSLF looks mostly like a similar program.

The problem right now is that banks and investment institutions can't meet margin calls or won't write new business because...well, they just don't have money or securities that anyone wants to accept as collateral. Our current economy is basically like a simple engine. Credit is a fuel injected into it. When catalyzed, growth is generated and there's economic expansion. Credit gets paid back, which allows the cycle to continue. Right now, the engine is coughing because the fuel supply is being interrupted. Defaults have made a number of securities undesirable, so basically every time the spark plug fires, the fuel doesn't really burn.

That's a really crappy metaphor, but it gives an idea of what's going on in the minds of Bernanke and other central bankers. It's kinda an alternate way of trying to deal with the problem. Generally speaking, the problem as they see it is deflation, a situation over which they'll lose most of their traditional implements of monetary policy. If deflation occurs and becomes chronic, then you can end up in a long and slow-burning recession like Japan faced through the 1990s and 2000s. If you know prices will fall tomorrow, you'll do everything you can to defer buying something until tomorrow. If you know that things will be even cheaper the next day, you'll always buy only a bare minimum, deferring every next big purchase as long as possible so you can get it cheaper. After all, as long as you hold on to your money, you get richer. You also won't take investment risks. You'll just sack it away in your checking account, because it's making you richer with no risk.

The Bank of Japan tried dropping its interest rates to 0% and kept them there for years. Generally speaking, that's the major policy instrument a central bank has. Making debt free was designed to hopefully encourage an injection of credit back into the engine and get it to turn over. It didn't really work, and interest in Japan was 0% for many years.

Bernanke knows that slashing interest rates won't work because the problem isn't that credit costs too much...the problem is that nobody can afford it. So, it seems what's going on now is that the Fed is basically trying to take the impurities out of the fuel mixture-- allowing a sort of temporary exchange of undesirable CDOs for things with better liquidity.

I'm skeptical, but I'm withholding judgment largely because I don't have a better idea. If the Fed's balance sheet supports it and it's also baking in certain reductions in value, then I guess it might work.

[roadriverrail.livejournal.com]

Mish has provided a mild summary (http://feeds.feedburner.com/~r/MishsGlobalEconomicTrendAnalysis/~3/249571696/central-bankers-pull-out-all-stops.html), but it's rife with the typical Austrian Fed-bashing he and his buddies are known for.

The summary seems to reflect what I said, though-- the Fed's trying to move the shit debt onto its own balance sheet and get solvency back to the banks.

Also, please note I neglected to mention that the TAF and TSLF are actually our domestic echoes of an international agreement among all the major centralized banks. EVERY major economy now has a TAF and TSLF.

[vesicular.livejournal.com]

I'm curious, from your personal perspective, why this sucks.

[symbioid.livejournal.com]

Well, as I've alluded to in previous posts, I think continually bailing us out of situations that we should be going through isn't a good idea. It seems like this is more of the same.

I'm not really sure what the deal is, hence why I asked. But we keep loaning money to banks/financial institutions to make sure they stay afloat, and while it's a great theory (and don't get me wrong, I don't wanna see everything come crashing down), I'm worried that the goal is to avoid any pain whatsoever.

Bubble-jumping is what seems to be happening. The more I look at it, the more I feel sickened by how much our larger scale economies are just shell games played by massive institutions. Anyways, it sucked for the "avoid pain at any cost" issue.

If that makes any sense.

[roadriverrail.livejournal.com]

The TSLF does not loan money. It exchanges MBS for Treasuries. This is basically trading out an undesirable financial instrument for a more preferable one.

The TAF swaps MBS for money, and the Fed has to be careful in its use because it affects the target funds rate as a result. The TSLF is a more safe way to move the bad financial instruments off to the side. Also, it's a 28-day trade rather than a permanent transfer.

I'm worried that the goal is to avoid any pain whatsoever.

Supply-side economists believe wealth trickles downhill. I don't know that that's true, but there's something else that's true-- economic pain ALWAYS rolls downhill. Once it rolls downhill, the game is over. The game is absolutely, positively, categorically over. Game over, dude. Game over. It's so Game Over that you can't put in a quarter to continue.

Why? Because you won't have a quarter to put in.

Basically, the problem is about bank solvency. A number of institutions are now insolvent. If they're insolvent, they can't meet their obligations. They start trying to call in debts others owe them in a desperate attempt to meet their own obligations. The result is essentially a new kind of bank run (http://en.wikipedia.org/wiki/Bank_run). This affects you in me profoundly. As I previously mentioned, credit is the fuel of an economy. There are only two ways to grow an economy-- credit or by taking things as "free" when they are not. These days, the latter option is called "empire" and nobody likes it. So, since that's not an option, the only choice is credit.

So, a business sees a chance to expand. It needs capital. It can't get it because banks are insolvent and slitting one another's throats. So, they can't hire more people. More people stay unemployed. Maybe the company had an outstanding bond with a recall option and the bank is desperate and makes a recall on the bond. Well, there's now no capital for that project a bunch of people were working on. They get canned. Consumer confidence falls and a culture of prudence sets in. Prices begin to fall because people refuse to spend. As prices fall harder and harder, people have even less incentive to spend.

That condition will last for a good decade. When it happened here, we called it The Great Depression. Japan just got done with their version of it.

So, unless you like pain for yourself, please hope that two things happen-- that a relatively painless bailout is found and that, afterwards, we nationalize the financial system.

Bubble-jumping is what seems to be happening. The more I look at it, the more I feel sickened by how much our larger scale economies are just shell games played by massive institutions.

You shouldn't confuse bubble-jumping with the natural pumping of an economic engine. You can demonstrate the necessity of credit for expansion using an economy with fewer than ten people in it and it'll contain all the same principles as you'd see on a larger scale, it'd just be "person" instead of "company".

We have been bubble-jumping. That's because Greenspan was blowing a bunch of bubbles and basically left Bernanke to clean up the mess. This is proof positive that you should never let an institution be run by someone who believes that institution is wrong. Greenspan is a strong libertarian who feels the Fed is not a proper institution. He ran it as a bubble blower.

[symbioid.livejournal.com]

I recall in the UK (England?) that there was a bank run at some point in the past year. Granted it was, I believe, a one time thing, and they were able to stop it. But that was an indicator, I think.

I guess I'm confused by your statement that the only way to grow an economy is credit or theft. I always thought the idea was that as productive capacity grows, so does profit. Or something like that. Obvious, you have so many other factors (demand, for one).

I forgot where I read it, but they discussed the term flock as an etymological root of something. The idea was that interest was generated by the reproduction of sheep. This is how value grew naturally.

We, as a tool-making creature, have invented machines that can create more machines. I guess maybe I'm more Marxist in this sense? That the value comes from productive capacity and especially the growing mathematical compounding of that production.

I guess it just bothers me that people jump from one commodity to the next in the hope of some magical value raise, and waiting to cash out. There's some sense of disequilibrium there, and that's why I feel like a lot of this is just more shell games. Look, let's take your bad valued stuff, and, give you money for it.

It was a loan, though... I thought the TAF and TSLF were basically low interest loans. They had to be paid back, but at a lower rate than the offical interest rate or something. They used mortgages to back it. I guess, since the Fed has a longer term financial solvency (in theory, really), they can take on that risk, and wait the game out?

When you say "nationalize" the financial system, do you mean to bring it back to the founding fathers thoughts (banks, inflation, deflation, slaves on the continent their forefathers conquered, yada yada???)

What do you mean by that? Bernanke, at least, seems a little wiser in how he's dealing with this, I think, or maybe his hand has just been forced to think about this in more depth than Greenspans little games.

Back in the late 90s I thought Greenspan was an alright guy, how little did I realize how bad he was fucking us up.

I guess the way I see it is that nothing rises forever, and that we will eventually have to face a downturn. I do think we should attempt to prevent massive catastrophy, but I'm worried that some of the prevention is an overreaction to feeling any pain.

But at this rate, we are feeling pain, regardless. I just saw an article where Pilgrim's Pride is closing a plant and 1100 workers are losing their jobs due to increase in grain prices, and he basically lays the feet (and I don't disagree) at the ethanol industry and government subsidies.

Not that I think feeding grain to chicken is a wiser use than, I dunno, feeding it to humans. Anyways, that's one more pinch to ponder.

[roadriverrail.livejournal.com]

I guess I'm confused by your statement that the only way to grow an economy is credit or theft. I always thought the idea was that as productive capacity grows, so does profit. Or something like that. Obvious, you have so many other factors (demand, for one).

Improving productive capacity requires investment in labor, plant, and equipment. The money to do that has to come from somewhere. Either you borrow it, gather investors and split profits, or you rely on a supply of "free" labor, plant, and/or equipment. There's a reason that Chapter 2 of any book on film making discusses budget and how to court investors.

Like I said. I can give you an economy of 10 people (maybe less) and show you how adding person 11 requires credit.

The idea was that interest was generated by the reproduction of sheep. This is how value grew naturally.

I said your choice was to take credit or declare something "free". In this case, pastureland is "free". If the herder had to pay by the blade of grass, he would need a loan for every lamb born.

We, as a tool-making creature, have invented machines that can create more machines.

They aren't invented for free, serviced for free, or running for free.

I guess it just bothers me that people jump from one commodity to the next in the hope of some magical value raise, and waiting to cash out. There's some sense of disequilibrium there, and that's why I feel like a lot of this is just more shell games. Look, let's take your bad valued stuff, and, give you money for it.

I understand your anger at speculators. I really think, though, that you are viewing the problem of a few who are "far away". They're not. They're all around us, here and now. For better or for worse, they're the heart of the system. It's easy to show this-- every major recession or depression begins with a cascade of defaults on credit.

When you say "nationalize" the financial system, do you mean to bring it back to the founding fathers thoughts (banks, inflation, deflation, slaves on the continent their forefathers conquered, yada yada???)

No. I mean I think the government needs to exert far more control over banking. It's not without its own problems, but I think our rather loose control over banks has shown itself to be a problem again and again.

Generally, in public policy, the verb "to nationalize" means "to put under control of the government".

I guess the way I see it is that nothing rises forever, and that we will eventually have to face a downturn.

I disagree. Downturns are the result of an unsustainable process. If the process is made more sustainable, the oscillations will be smaller and slower.

But at this rate, we are feeling pain, regardless.

If we're not careful, the pain we could experience will make this look like the setup to a joke that's not funny. In the words of Al Gore, I am super-serial. Neither of us has a means to gauge how unhappy things will get because it'll be the first time in both of our lives.

[symbioid.livejournal.com]

Improving productive capacity requires investment in labor, plant, and equipment. The money to do that has to come from somewhere. Either you borrow it, gather investors and split profits, or you rely on a supply of "free" labor, plant, and/or equipment. There's a reason that Chapter 2 of any book on film making discusses budget and how to court investors.

And where do these investors get their money? It's all rooted in the physical world. That's what I'm trying to get at. This is what baffles me. On the one hand, everything we do is rooted in physicality, yet economics and the concept of interest is this weird intangible thing. We've got a chicken and egg thing. Why do we pay investors? Because they gave the money. Why did they get the money? Because they invested it. Why aren't the laborers getting the money and investing it (and yes, in this case it is also an investment, but it's coming from it's own productive capacity).

Honestly, my brain can't handle this kinda stuff right now :(

That said, I'll try to focus on the easier (IMO) things:

1) I get that speculators are all around us. Hell, in 97 I wanted to buy stock. I don't know if that counts towards your "all around us", but like, my boss is always asking me to check on his stocks. Or Brent (or I believe, you, or abadman all own stocks, whether through work or individual investment)

2) I mean I think the government needs to exert far more control over banking.

I guess this is what I'm asking. Do we revert to the constitutional "Congress shall have the power to coin..." or do we just add more oversight to the private institutions who run the joint? What level of nationalization do you mean?

3) I disagree. Downturns are the result of an unsustainable process. If the process is made more sustainable, the oscillations will be smaller and slower.

In this case, we're really talking about scale. An oscillation is a downturn. But in the long run, things are always going up, I mean, even after the great depression. So in that sense, yes, things keep rising. Of course, Mother Earth has a finite supply, and we haven't run out yet, but you and I both know we're on an unsustainable course. It's temporarily sustainable, I suppose. True sustainability is homeostatic. Which means there is a limit to growth, and I think we've hit that limit (when it comes to true sustainability). But that's a whole other topic, now, innit?

[roadriverrail.livejournal.com]

And where do these investors get their money?

Generally, from things that were claimed "free". This gave the initial seed wealth to allow the engine of credit to turn over.

It's all rooted in the physical world. That's what I'm trying to get at. This is what baffles me.

This is kinda like saying you're baffled that you can't read Italian because English and Italian both "contain letters". Currently, the only place where economics is genuinely rooted in the physical world is in the Land of Economic Ideals, which is next door to the Universe of Platonic Ideals. Economics is only rooted in the physical world to our extent that we see physical limitations or the rare moments when these physical limitations actually slap us in the face.

Economics is rooted only in human behavior. If it were rooted in the physical world, then there'd have never been an unpaid externality on CO2 pollution and we probably wouldn't be facing global warming.

We've got a chicken and egg thing. Why do we pay investors? Because they gave the money. Why did they get the money? Because they invested it.

You really need to slow down and start at the beginning. You're observing a complex engine in motion when what you need is to start with a non-moving engine with few parts. The most basic economy contains two people. Start there, with a farmer who grows grain on the land "for free" and sells it to a herder who raises sheep on the land "for free". Contrive the barter process. Abstract it to money. Then start adding new actors. You'll need credit the moment you have currency and the farmer or herder wants to expand their operations.

In response to your points:

(1) No. I meant that your insurance company is doing it and so is your bank and whoever is managing whatever pensions you might have. If you'd like to see your insurance premiums stay at their current levels, then you have a vested interest in speculators doing well, because the moment the insurance company's investments don't do well, you'll see your premium go up several times over.

(2) I think it's pretty fair that the government should set stringent regulatory targets for the balance sheets of banks as well as what kinds of financial instruments may exist. If Congress approves shitty securities, we can at least fire them.

(3) Actually, true stability is homeostatic only over variables you want it to be homeostatic over. There is no reason to believe that you can't hold the variables of environmental and social justice fixed while productivity and cleverness bring us more stuff with fewer inputs. I think there is a maximum, though, at which point we either need the population to become static or we need to find new planets to live on. If you go back to what I mentioned about how the credit cycle or "things for free" become necessary in economic expansion, you'll also see that the essential driving force for economic expansion is population expansion.

That said, I was addressing what I believed was you arguing that the business cycle is inevitable. I don't know that it is, but if you use the engine metaphor again, the private sector is basically one cylinder in an engine. Keynsian economics attempts to strap in a second cylinder in the form of government spending and tax policy. The second cylinder, just like in an engine, runs in the opposite direction of the first, providing continuous engine output and a technically sustainable process (so long as credit's available).