naked capitalism

Anonymous says:

That bloomberg piece is dated Feb 4.

Yves Smith says:

Anon of 6:15 PM,

The Bloomberg front page (”most viewed stories”) linked to the Feb 4 piece. I’ve corrected the link to the March 20 story.

Anon of 6:33 PM,

This is so out of bounds of normalcy that I’m not certain. The article suggests that a lot of Treasuries are now in the hands of players who aren’t used to repoing them (and it also may be inefficient, say if you have a customer of a high-net-worth investment service, like Citigroup’s Citigold or a private banking customer. It may not be practical for dealers to try to hoover them up from people who own fewer than a few million).

Anonymous says:

The rate on the three-month bill, viewed by investors as a haven in times of trouble, dropped 32 basis points, or 0.32 percentage point, to 0.56 percent at 5:30 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It’s the lowest level since May 1958.

2. The stock market going up, which increase the P/E of the indexes, which reduces the index yield, which implies that some people are willing to buy overvalued stocks, while the rest of investors take shelter for Katrina.

Anonymous says:

“Treasuries’ Scarcity Triggers Repo Market Failures (Update1)”
[ March 20 (Bloomberg) -- Surging demand for U.S. Treasuries is causing failures to deliver or receive government debt in the $6.3 trillion a day market for borrowing and lending to climb to the highest level in almost four years.

Failures, an indication of scarcity, surged to $1.795 trillion in the week ended March 5, the highest since May 2004, and up from $374 billion the prior week. They have averaged $493.4 billion a week this year, compared with $359.6 billion over the last five years and $168.8 billion back through July 1990, according to Federal Reserve Bank of New York data. ]

Anonymous says:

” The Fed may be running into constraints beyond the size of its balance sheet (note technically it can make its balance sheet larger, but those operations would be “unsterilized” or inflationary).”

This idea that there is a limit to the FEDs balance sheet operations is absurd. Of course the FED can issue sterilization bills to offset collaterals they finance. There is no limit to the FED’s balance sheet and it doesn’t have to be inflationary if the FED sterilizes.

Anonymous says:

I am interested in opinions on the following in regard to the discussion here related to Treasury three month bills trading at a 50 year low of 0.56%. Does anyone see any issues that might be of interest in terms of how that rate might impact profit?


From USB: http://www.secinfo.com/dsvR3.tP9.b.htm

At December 31, 2007, investment securities, both available-for-sale and held-to-maturity, totaled $43.1 billion, compared with $40.1 billion at December 31, 2006. The $3.0 billion (7.5 percent) increase reflected securities purchases of $9.7 billion partially offset by securities sales, maturities and prepayments. Included in purchases during 2007, were approximately $3.0 billion of securities from certain money market funds managed by an affiliate of the Company. These securities primarily represent beneficial interests in structured investment vehicles or similar structures and are classified as asset-backed securities within the consolidated financial statements.

Yves Smith says:

I do consider China to be a third world country. They are now in a terribly conflicted position on number of fronts due to ill thought out policies (example: banks can only pay interest rates of less than 1% to retail customers. With inflation around 7%, everyone has piled into the stock market. At first, the powers that be wanted stock prices to fall because they were clearly a bubble, but now that the fall is accelerating, they are trying to put on the brakes, since savings are being destroyed and they risk social backlash).

I was at a recent set of presentations at the Asia Society (and mind you, these were all by people who work in China in prominent advisory positions for Western firms and are effectively long China via the positions they hold, meaning you’d expect them to be loath to say bad things). One drily remarked that if he wanted to guarantee hyperinflation, he’d use policies like the ones the Chinese have implemented. I would not look to them as a model of sound financial practice.

As I have said before, first, this problem is bigger than the Fed. This will not resolve until housing prices fall to a level that can be supported by prevailing incomes.

Trying to prop up asset prices, particularly on this scale will simply not work. Japan is the only modern case where that happened to a degree, and all they did was delay the reckoning and they still got denflation (I have a recent set of notes from a high level buddy in Japan who conducted some interviews of top officials. Their view is, contrary to the conventional wisdom in the West, that more aggressive easing in the early 1990s would not have made much of a difference in outcomes. The banking system was bankrupt, and the real obstacle to reflating was that it took time to persuade the public to support measures to recapitalize them. Remember, the Japanese do not share their dirty laundry, so I doubt any analyst here knows the full extent of the hole in the Japanese banking industry’s balance sheet circa 1992, although Alicia Ogawa and David Asher have taken some stabs at it).

And Japan had (and still has) very high savings rates, so they could handle their crisis internally. We don’t have that luxury.

Once investors have some confidence that prices have bottomed, capital which is on the sidelines (including the vast sums overseas) will re-enter the market.

Second, the Fed’s actions are backfiring (we’ve written at length about this). Even the editorial page of the Financial Times has called on the Fed to do less.

The answer is not to save markets that cannot be saved, but to alleviate the damage to individuals via fiscal measures. This is the place to get creative, not in the “how do we prop up housing and related debt at unsupportable levels.”

Third, we have argued for regulatory reform to encourage greater confidence in instruments and institutions, but not much effort has been expended in that direction.

There are some problems that do not have good solutions, only bad and less bad. I argued earlier that the example of past housing busts (in countries that suffered 20+% declines) was that they had very bad recessions that were comparatively short (2 years-ish). We need to get over trying to save the housing market and the related debt. Others have been down this path and survived, albeit with a good deal of pain.

Francois says:

If, as Yves said:
“As I have said before, first, this problem is bigger than the Fed. This will not resolve until housing prices fall to a level that can be supported by prevailing incomes.”

Real incomes are still declining as of now. This means that prices have a long way to fall before situation normalize.

And we consider this data point from Fitch:

http://www.housingwire.com/2008/03/20/fitch-its-not-over-yet-not-by-a-long-shot/

“Roll rates for 2008 vintage subprime first liens are significantly higher than in previous vintages; those roll rates are provided in the graph to the right. Roll rates capture the number of loans moving from current to delinquent each month — and the graph shows that 2007 vintage loans are rolling into default at a greater than 4 percent rate. Per month. Every month. Consistently. And that only includes originations through the third quarter of last year, to boot.” [Emphasis mine]

Then I cannot see how in the world we could have a recession that goes on for only 2 years.

Perhaps we’ll be lucky if we get out of this in 2011. And let’s not forget that short of smart intervention by the federal government, like realizing, AT LAST,that our infrastructure needs at least a trillion in investment for repair and that btw, this could help putting tons of idle hands to work, then society as a whole will suffer.

Rich_Lather says:

Has anyone considered the mass of baby boomer-soon to retire 401-k/IRA folks who are not economics junkies, trying to save what they have in a secure asset? They’re not rich, individually, but as a mass, they must surely have an effect on the markets.

How does the power of many children of Depression era parents compare to a rich Saudi prince or a few families in Manhattan?

Anonymous says:

8:19, Per David, I have to think the debt and currency market reaction would be unpredictable at best to something like that….and it could be really negative, which would make things worse than if the Fed stood aside.

David Pearson says:

Just on other thing on sterilization bonds: many third world countries that I can think of did NOT resort to financing bad debt through the Central Bank. Mexico’s ‘95 Forbaproa scheme, for instance, was financed off of the federal budget. Argentina did not, to my knowledge, instruct its Central Bank to buy up defaulted dollar debt, of which there was plenty to be had. Two cases of extreme financial crises where the Central Banks of those countries showed enough independence no to intervene.

So, my question to the sterlization bond boosters is this: did those countries screw up? Should their Central Banks have been more “innovative” and “creative”?

I’ll provide my own answer: they didn’t intervene and buy bad debt because to do so would have jeopardized further the confidence in the currency.

Anonymous says:

What is the consequence of the failure to deliver? If there are are $1.795 trillion of a failures a week, and it is hardly mentioned then it seems like it cannot be that big a deal. Does it indicate that Federal Reserve Notes and short term treasuries are essentially equivalent now?

Yves Smith says:

fareconomist,

Thanks for asking. I love it when I get to recycle old posts. This comes towards the end of one in August last year:

The housing recession of the early 1990s was far worse overseas…..

So while these economies all have different structures than the US, their experience nevertheless suggests that even severe housing recessions do not inflict long-term damage. I’d very much like to hear the views of those who have studied the international record more deeply, but this quick survey suggests the price of a housing recession is a sharp but short-lived real economy contraction.

The post continued with a discussion of the bust in Japan, if you are curious. Any comments appreciated.

Yves Smith says:

a,

Thanks. This is one reason I have studiously avoided doing anything that involves Black Scholes. The model has several assumptions that trouble me (they are not observed in the real world) and per your comment, as a result, the inputs used aren’t the ones the model calls for.

Which in my mind means it works as long as everyone respects the conventions, but those conventions seem awfully subject to breakage.

FairEconomist says:

Yves, thanks for the info. There’s entirely too much rhetoric and too little data in all theses discussions. In spite of the vast amount of discussion I’ve seen on the housing bubble, this is the first reference I’ve seen to the foreign 90’s crashes, which I agree seem plausible as analogues. Besides the scale and housing foci, another point of similarity is that the late-80’s boom was partly driven by low interest rates dropped to save the world economy from a stock market crash.

I’m a little late to the bubble, but I’ve read an awful lot on this and it’s pretty shocking these examples aren’t leading the discussion. Everybody discusses Japan, and I agree with you that that was a far more extreme situation, with a larger RE bubble coinciding with a monster stock bubble. I say it’s extreme foolishness to confront this crisis blind, without benefit of prior experience, yet that seems the current process.

The one issue I’m concerned with is whether the financial system has more exposure in the US than in the 90’s examples. I know the UK in particular has led us in mortgage “innovation” and maybe they had lots of 5% or no down mortgages in the 1990’s. Or maybe not. Another thing to research. I think they would have been more exposed in terms of DTI since housing costs have long been higher there.

I do have to disagreee with your evaluation of the UK recession as “short”. 2 years of negative GDP growth is a long recession, IIRC worse than anything the US has seen since 1945 except 1981-3. That’s actually a honker of a recession. But, it’s not a depression, and not a threat to the existence of the economic system.

Yves Smith says:

FairEconomist,

Thanks for the update. I suspect the differences result from:

1. More than half of the recent-vintage subprimes being “cash-out refis” meaning the mortgage was sucking more equity out of the house. Cash-out refis are often the last resort of people who are overextended.

2. Much higher equity extraction among all borrowers due to home equity loans (if memory serves me right, they were a new product 20 years ago, and I would suspect not common in the UK then either)

3. Few loan mods today. The servicers lack the incentives and the skills to do them. In the old days, it was a given that banks went to some lengths to keep the owner in place.

Even though that may mean a worse recession than the precedents, I don’t see trying to prop up the markets as remotely viable. Unlike Japan, we lack the savings to execute an internal resolution, and I can’t imagine our foreign creditors will supply enough capital, particularly as our slowdown hits their economies. It would be politically a non-starter.