Financial Firms Hoist on ZIRP Petard

As Satyajit Das remarked, our post global financial crisis malaise has some troubling elements in common with Japan’s post bubble era. One biggie is denial of the seriousness of the hangover, which per Das lasted for five years in Japan.

The bizarre aspect of the crisis response in the US was the speed and recklessness with which the Fed cut interest rates. Remember “75 is the new 25”? And the central bank dropped policy rates below 2%, which many regarded as a crucial level (as in below there, the Fed would have perilously little wriggle room. As super-low Fed funds rates failed to defibrilate the financial system, it then moved to implement its now famed alphabet soup of rescue facilities, so as to rescue firms formally beyond its discount window/Term Auction Facility reach by propping up prices of assets to which they were heavily exposed (letting them be pledged to the Fed for loans prevented selling as a way to achieve liquidity).

Initially, continued low rates seemed like an obvious idea if you thought on conventional lines: low rates mean low borrowing costs, surely that will spur economic activity. But banks have been making terms more stringent on consumer loans, and have actually increased interest rates despite lower funding costs. On the business side, credit to small businesses is reported by many to be tight, but the bigger impediment is that most business aren’t terribly keen to borrow given the not-so-hot economic outlook.

But low rates initially operated as a big subsidy to the banks, a way for them to rebuild their balance sheets on the sly. The low rates were accompanied by a steep yield curve, meaning a larger than normal gap between their funding costs (short term) and their lending returns (pegged off of longer dated reference rates, which are normally higher to being with, but in the early post crisis era, the gap was particularly large). This was one of the big drivers of supersized bank profits in 2009.

But the Fed has made it clear that it isn’t giving up on low rates any time soon. As a result, the yield curve has flattened, reducing this source of easy bank earnings. In addition, low rates wreak havoc with certain products like mutual funds, where the expenses associated with the product now exceed investment yields. Since the industry is committed to a $1 net asset value per share policy, that means many money market mutual funds lose money. It is also causing trouble with bread and butter investment products like annuities.

The Wall Street Journal gives an overview of some of the casualties. Note the problem starts in large measure from the fall in yields of longer-dated instruments:

Picture 16

Persistently low rates could force firms to rethink or even exit from businesses. Consider fixed-rate annuities and life-insurance products that offer a guaranteed minimum payout. If insurers, when selling products, didn’t match that liability with assets generating similar income, losses could ensue.

Firms usually hedge much of that risk. But they also face the prospect of declining business for some new products offering lower guaranteed payouts. Sales of fixed-rated, deferred annuities, for example, fell 45% in the second quarter of 2010 from the same period a year earlier, according to insurance-industry group Limra.

Insurers also can expect to generate lower income from their huge investment portfolios. Analysts at Keefe, Bruyette & Woods estimated that U.S. life insurers could see a 2% reduction in 2011 earnings and 4% in 2012 if yields stay at currently low levels.

Banks, too, are feeling the pinch. Many have already taken deposit rates close to zero and have converted high-yielding certificates of deposit to lower rates. That gives them less room to cut funding costs. The amount they can earn from lending or investing, though, is under continued pressure, shrinking banks’ net interest margins.

If rates stay at current levels, U.S. regional banks could see net interest margins decline from an average of about 3.54 percentage points in the third quarter to some 3.44 percentage points this time next year, according to Credit Suisse analyst Craig Siegenthaler. That compares with margins well above four percentage points before the crisis.

Brokers such as Charles Schwab and TD Ameritrade Holding; banks with big brokerage or asset-management operations, such as Bank of America and Morgan Stanley; and trust banks, such as Northern Trust and State Street, face threats, Sanford C. Bernstein analyst Brad Hintz notes. One is the greatly reduced returns firms can generate from cash in so-called sweep accounts that hold customer funds between trades, as well as money-market accounts. Another is the falloff in securities lending margins and activity.

The financial sector needs to shrink, so reducing some of these activities is not necessarily a bad thing. But super low rates and government efforts to drive credit to the housing market means this process is taking place with distorted market signals at work. I’d feel a lot better if we’d forced more clean-up of bank balance sheets, in particular write down and restructuring of loans, so that we would be on a path to getting the banks off the official dole.

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  1. a

    Well yes, we live in a world where it’s choose your poison. Low rates hurt savers; high rates cause more bankruptcies. High fiscal spending raises sovereign risks; low fiscal spending increases unemployment. It’s not Scylla and Charybdis, where there is some golden mean through which you can make your way if you are careful. There just aren’t any possibilities which will not cause many pain and suffering.

    The solution – what it is – is to cause the pain and suffering such that the essentials – food, shelter, education, health care – are ensured for everyone, while the 3-cars are not.

    1. spectator

      The poison destroys real capital while increasing government capital that is largely wasted. Capitalism is destroyed in the process. Few realize just how destructive this “punish the savers” solution is. If they truly did, most everyone would choose to take the pain now.

    2. Doug Terpstra

      “There just aren’t any possibilities which will not cause many pain and suffering.” We should finish, “..except those which might modestly curtail the sybaritic splendor of the few. Those are off the table.”

  2. hermanas

    From today’s(9/29) Wa. Post article “Lost in the system…”, “This mechanism, fueled by the tremendous appetite to make money off mortgages among Wall Street investors, ensured there would be enough financing available to offer a mortgage to almost anyone who wanted one.” Also lost was the Fed’s ability to control money supply vrs. monetary policy.

  3. Maju

    Did not even think that banks would feel any pain from low rates, rates which are not even reaching the public because of extremely defensive-aggressive credit policies (i.e. high rates and high constraints). In fact my thought was that central banks such as the Fed would do better directly lending to the public and forcing banks to compete with them at least a bit, because otherwise they were strangling the economy with too hard credit.

    However, I see now that this can also be a problem for financial capital. And in my opinion it is something good because there is just too much financial capital and too little (by comparison) productive capital, what is extremely harmful for any economy in the mid run.

    What the fed is doing, I realize now, is forcing investment to focus not in financial speculation anymore but to touch ground and invest in production, in real stuff. This cannot be bad in any way. It should also force whoever wants to stay in pure finance to loosen up credit if they want to get returns, right?

    1. Glen

      This policy cannot work without real demand, and it seems we cannot have real demand until we flush out the bad debt.

      I’m going to have to agree with spectator’s comment. The quickest way to fix this mess STILL is to force the banks to write down the bad debt. Thinking the banks can grow back to health is only happening at the expense of the real world, and with no effort to reign in the “fake world” speculation (OTC derivatives, naked shorts), this becomes a never ending process.

  4. attempter

    Initially, continued low rates seemed like an obvious idea if you thought on conventional lines: low rates mean low borrowing costs, surely that will spur economic activity. But banks have been making terms more stringent on consumer loans, and have actually increased interest rates despite lower funding costs.

    This is because the finance sector has no intention of ever again spurring economic activity (if activity means activity within the real economy which is in any way distributed among the producers). This is the final plunder binge meant to:

    1. suck up whatever capitalistically generated wealth is still unconcentrated before “capitalism” reverts to re-feudalism once and for all, and

    2. to set up the liquidated populace to more easily be restored to serfdom under this refeudalism. The liquidation of all pensions and other annuities by the dual assault of ZIRP and “austerity” is part of this process.

    So the banks are meant to stay permanently on the official dole. They intend no further productive role, nor would they be capable of one even if they wanted it.

    None of the evidence makes any sense if still looked at in terms of normal corruption (let alone capitalist and good civics textbooks), but it all makes perfect sense if looked at as a terminal kleptocracy bent on restoring serfdom and feudalism.

    1. DownSouth


      I think you give the kleptocrats entirely too much credit when you compare them to the feudal lords of old.

      Serfdom and feudalism had a moral order. It might not have always been adhered to, but it was there—-noblesse oblige, chivalry, honor, Christianity, etc.

      Capitalism slowly replaced feudalism as the operative paradigm, the burgher oligarchs triumphed over monarchs and aristocrats in the new ruling heirarchy, and the former peasants became workers, workers who often found themselves worse off under capitalism than they were under feudalism.

      But capitalism, even though it eschews morality, actually has a morality of its own. For instance, people like my mother, born to poverty but who scraped and saved all her life to accumulate a modest savings, embraced the new capitalistic faith that her savings would pay her some dividend in her old age.

      What I’m trying to say is that our new ruling class is completely without morality. It knows no law, has no sense of obligation or sense of duty other than satisfying its own greed and gluttony. It does not compare well to the aristocrats of old.

      1. Maju

        I think Attempter is pretty much correct, at least in the intent of the Olgarchs (the outcome hopefully will be different), while you really seem to be prisoner of an idealized version of history that has little or nothing to do with reality.

        The moralization of Feudalism only happened gradually as the Middle Ages advanced, and was quite shallow anyhow – more a propaganda stunt than anything else. Feudalism was essentially the ‘solution’ Rome (the Western Empire) to the crisis of their slavist-imperialist economic system (as slaves had become expensive because Roman expansion had stopped long ago and, since the Christian Coup, the capital had been moved to the Eastern Empire, which once used to bear the bulk of the load, so Rome, the Western Empire had become pretty much resourceless). In this context the late Roman Emperors simply decreed that nearly everyone would be a slave (servus > serf) from then on, that professions would be inheritable and that landlords (wold-be aristocrats) would get all control. This caused large rebellions (Bagaudae) and the Romans put the Visigoths, who were causing some trouble in Italy, to rule most of the Western Empire (other less important such foederati were the Franks, later to become more important).

        Similarly today the center of gravity is moving to the former colonies and semi-colonies, which cannot be exploited the way they used to be, so the new Empire has to fancy some remedy, which is, as the Romans did, to exploit the populations of the center (the former First World) much more dramatically. The methods and results are somewhat different but the intent is very similar.

        However conditions are very different today than in the Roman/Medieval era. The potential for workers to get organized and sabotage production actively or even eventually flood the streets overwhelming the troops and cops that guard the centers of power is infinitely improved and there is a recent history of such revolutions succeeding to a large extent and setting the rhythm of change, rather than failing as happened in Antiquity once and again (with very localized exceptions, such as the Basque revolt). Also the ecological contradiction in Roman times was weak if it existed at all, while now is central, blocking Fascist or otherwise corrupt Capitalism from establishing any sort of stable solution, even if it is a martial law one, because they are predatory and will predate all Earth to the last vital resource if allowed (Metal Ages/Roman/Medieval oligarchs could not do that).

        But the oligarchs don’t want/cannot see this impossibility of their neofeudal or neofascist or even global imperial projects. They are just in robbing rampage and let the future take care of its own business (Keynes dixit). It is a very decadent project-less situation and I really expect very troubled times in the decade or two ahead. Hopefully it won’t end in a nuclear hecatomb.

        1. DownSouth

          I’ve about come to the conclusion that human beings just don’t do reality.

          Maybe it was Nietzche who spoke first of this, foretelling the first crisis of modernism/capitalism in the later part of the 19th century, decades before it occurred during the first half of the 20th century.

          I like how Glenn puts it above, when he talks about the “real world” and the “fake world.”

          The Age of Reason and the Enlightenment were supposed to usher in an age of enlightened inquiry. But I think not. “The invisible hand,” the Enligtenment’s claim to rationality, has about as much basis in factual reality as do the Garden of Eden, the Tooth Fairy and Santa Clause.

          So capitalism ends up being propped up by a belief in the supernatural (classical economic theory) that rivals the belief in the supernatural (Christianity) that propped up the feudal order that came before it.

          I’ve been greatly influenced in this regard by David Sloan Wilson. In Darwin’s Cathedral he argues that the usefulness of a ideology is not whether it conforms to factual reality, since human beings just don’t do reality, but whether it is functional or dysfunctional. Functional is whether it serves to control greed and individual fitness in favor of group fitness, enhancing group cohesion and cooperation so that the group can survive. He also notes how ideologies, like Christianity or Classical Economic Theory, typically start out being functional when they are the dissident ideology, only to later be corrupted as they mature and become the dominant ideology.

          As to the history of the Roman Empire, that’s a controversial issue. There are hundreds of renditions offered by historians, whose popularity tends to ebb and flow with time, but I particularly like The Fall of Rome: And the End of Civilization by Bryan Ward-Perkins. His version is strikingly different than yours, but he qualifies his by admitting there are many versions, and explaining why he endorses his.

          1. DownSouth


            But whatever route we use to get there, you and I wind up at the same place, which you sum up wonderfully:

            But the oligarchs don’t want/cannot see this impossibility of their neofeudal or neofascist or even global imperial projects. They are just in robbing rampage and let the future take care of its own business (Keynes dixit). It is a very decadent project-less situation and I really expect very troubled times in the decade or two ahead. Hopefully it won’t end in a nuclear hecatomb.

      2. Edward Lowe

        Thanks attempter, I was just lecturing on that transition this week, so you points were fresh,in my mind. I would add one speculative observation. The feudal system was one tied to the land and a system of simple commodity production. The aristocracy was just as dependent on the workers of the land for their survival and the survival of the servants in the manor as were the peasants tied to their lords. Material relations reinforced culturally shared moral codes. Duty runs both ways.

        But, in a system of privative property and complex commodity production, built on a logic of the accumulation of capital, capitalists have no material dependency either on land or those who work it. Thus, no material basis for cultural and legal codes that sanction mutual interdependency.

        Moreover, serfdom simply isn’t possible in a highly commoditized market society absent totalitarianism … which of course undermines the accumulative basis of capitalism. In our present case, Debtors can and will walkaway from contracts, banks will not be able to extend credit (new contracts) into an impoverished, low or negative growth society. Debt requires service which requires a source of income independent from the credit stream.

        1. attempter

          I asked myself how they planned to impose debt slavery and prevent the debtors from jubilating, and came up with this.

          They plan to privatize everything, set up virtual toll booths for every step one takes, so that the indenture is insurmountable. Picture the crop lien, but encompassing all elements of life.

          Throw in restored debtors prisons/forced labor, a police state, supplement with state violence (some targeted, some random), and that completes what I think is the plan.

          (Not that I think there’s likely a master cabal who literally plans this stuff out; but it’s where all the logic, all the inertia, and all the criminal intent are projected to end.)

          1. Maju

            That’s what happens with the very poor (and illiterate) in India and other places. Debt servitude is very common, sadly, even if most often illegal too.

            But in the USA or the developed world in general, people should know better (they have an education) and can actually challenge the system by means of organization (unions and such – not necessarily your usual boot-licking unions though). Such organization can totally sabotage the economy and subvert the politics of a country or even regional bloc, maybe even the World eventually. And drills in that direction are happening as we speak (yesterday some 72% of Spaniards walked out and there’s a clear drift towards the most combative unions and away from the old ones).

            So I don’t think they can really implement that, even if they are trying hard. A socialist revolution should happen a lot easier than Big Capital prevailing with such bondage plans for all. Social radicalization is unavoidable as they push ahead such plans and can effectively stop them and even depose them altogether.

          2. attempter

            I sure aspire to that. That’s what I’ve dedicated my life to figuring out.

            In that piece I wrote about the intended end state, what I think is likely to happen if the people don’t organize to fight back.

        2. Tao Jonesing

          With Hayek’s neoliberalism, all roads lead to serfdom. And the infallible “market”– backed by the full power of the state– is the very mechanism that ensures the rise of the new feudalism. Just call it market totalitarianism.

          That’s the delicious irony of neoliberalism’s double truth doctrine. It exhorts the masses to turn away from their government as tyranny, even as it co-opts government to be tyrannical on its behalf.

      3. attempter

        Everything I’ve read about Chivalry (mostly Tuchman’s Distant Mirror and histories of the Crusades) says what I would have expected – that the moral pretensions of the ideology were enacted little better than those of capitalism. Same old fig leaf for the same old thugs.

        1. DownSouth

          That’s true. Perhaps no one did a greater job of pointing out chivalry’s inherent contradictions than did Cervantes.

          Can you imagine a writer with the same genius and wit as Cervantes doing to capitalism what Cervantes did to chivalry?

    2. Doug Terpstra

      Yesterday’s quote from Cynthia fits this unenlightened strategy. From American Bankers magazine 1892.

      “We must go forward cautiously and consolidate each acquired position, because already the inferior social stratum of society is giving unceasing signs of agitation. Let us make use of the courts. When through the law’s intervention, the common people have lost their homes, they will be more easy to control and more easy to govern, and they shall not be able to resist the strong hand of the government acting in accordance with the control of the leaders of finance”.

      This casts the blatantly obvious housing bubble in an ominous light as conspiratorial strategy, especially as “special-purpose” judges are hired to dispense with due process in foreclosures; no foil hat required.

  5. SteveB

    Large corporations have probably also benefited from low interest rates on their commercial paper and in their bond sales. That may also be why they have been able to increase profits as a percent of sales.

  6. ds

    This post insinuates that the Fed’s rate actions were reckless and hurt savers. This is really backwards.

    New savings can only be created from new investment. Someone, somewhere, has to take out a loan in order for money to be saved over a given period. To the extent that high interest rates discourage new investment, high interest rates hurt savers. If the Fed had kept rates higher for a longer period of time, whatever scant demand for new investment there was would have been completely choked off, resulting in a catastrophic economic collapse with far worse consequences for pensioners than low savings deposit rates. Where does the poster think the interest payments to savers come from if not from the income generated by new investment?

    I know a lot of people hate the Fed, hate the Treasury, etc. Leadership has indeed failed us in many ways, but the Fed’s rate actions were absolutely justified. Lowering rates and lowering them aggressively is exactly what the Fed is supposed to do in a situation like this. Virtually every economist from far left to center right agrees with this. Only a few from the fringe right who believe that depressions are a necessary purge of the system would really take issue with the Fed’s rate actions.

    1. DownSouth

      I think your comment might have some validity had the banksters used their windfall profits—-windfall profits that resulted from the fat yield curve engineered by the central bankers—-to bolster their balance sheets. But this didn’t happen. Instead, the banksters used those windfall profits to once again pay themselves the same sort of obscene bonuses that they did before the crisis, as if nothing had ever happened.

      So all the sacrifices inflicted on savers like my 92 year-old mother went for naught.

      1. liberal

        Agreed. I’m not a finance guru, but I recall reading a long time ago about how the Fed rescued banks in a previous (smaller) crisis by lowering rates. I thin it was early 1990s.

      2. ds

        I completely understand the hatred of the banks here, but the bottom line is that without the Fed’s aggressive lowering of rates we would be immersed in a catastrophic depression unseen since the 30s. The idea that higher interest rates would have helped savers and hurt banks is wrong and in fact backwards.

        Once again, without new investment, there is no channel for savers to receive interest on their investments. You can’t expect positive returns on savings without credit growth. Leaving rates higher would have completely obliterated all demand for new credit. The Fed did the right thing here.

        1. DownSouth


          The issue isn’t hating bankers or hurting bankers.

          The issue is hating and putting some major hurt on sociopaths, who just happened to have been bankers, and still are bankers.

          They should have been replaced, and had the book thrown at them.

        2. call me ahab

          Fed’s aggressive lowering of rates we would be immersed in a catastrophic depression unseen since the 30s

          I always love replies where the author knows exactly what the future holds-

          and the certainty that the Fed can lower some rates here- add some liquidity there- shake and presto- catastrophe avoided!

          so easy a child could do it

    2. Tao Jonesing

      What you say is correct in theory but incorrect in practice.

      When ZIRP cannot overcome the unwillingness of banks to lend (because they are insolvent) and the unwillingness of the private sector to borrow (because it is already overburdened with debt), ZIRP cannot spur investment and needs to be abandoned to promote savings instead of speculation (i.e., throwing your savings into the stock market to seek higher yield).

      Another way of thinking about it is that savings equals investment except when it equals speculation. ZIRP and QE are driving speculation, not investment, and that is not a good thing.

    3. Jim the Skeptic

      I assume you must be speaking of some grand economics theory when you state that new savings can only happen with new investment.

      But I live in the real world and if I set aside $100,000 from my wages and bury it in the back yard, it is saved. I suppose a similar effect could be achieved by keeping the money in a checking account. I have savings but the bank really can not invest what I could withdraw tomorrow. There is no investment unless you count my initial labor as an investment for those wages but that is now ancient history.

      In that sense the Fed’s interest rate actions have harmed me as a saver. I would invest the money in a CD or bond if there was some significant interest. But why assume any risk whatsoever for a pitiful return? Better to bury it!

      1. Maju

        “I have savings but the bank really can not invest what I could withdraw tomorrow”.

        Are you kidding me? They can and they can invest many times what you and all the other savers have in accounts. That’s M2 and M3 or how to make 100 out of 10, magic of banking because only them are authorized to lend what they don’t have, not just your money (which is not theirs) but many times it.

        “if I set aside $100,000 from my wages and bury it in the back yard, it is saved”.

        Not because inflation. But if you manage to acquire a product with stable or rising value, such as gold, then it is. It is in fact an investment of the speculative kind, because you expect gold (or whatever) to go up and not down.

        But this kind of investment produces nothing for society or the real economy (except maybe for the gold mining sector). There’s no objective value in it, just speculation.

        Similarly you can buy real state, which does not produce anything of real value either if you keep it “buried” (idle) – but feeds the machine of construction industry, what does indeed generate jobs.

        Pure savings is a wrong concept, at least if abused, because nearly all products and the dynamics of the economy, are not stable but decay or otherwise vary.

        “In that sense the Fed’s interest rate actions have harmed me as a saver… why assume any risk whatsoever for a pitiful return? Better to bury it!”

        No, better to invest it in an industry or business that produces some returns. I suspect that is the idea: you cannot save anymore, you have to invest. However investing is difficult, specially in the context of a crisis. But in theory at least it should bring capital to the real economy, instead of being merely kept in a bank or equivalent financial instrument.

        One of the big problems of the economy in the past decades (the bubble) was that high returns were offered for no effort, what can only happen (for some time) in a pyramidal scheme (Ponzi scheme, bubble, whatever name you prefer). Illusions do not feed you… unless you are the illusionist maybe.

  7. spigzone

    And what happens if, by 2015, maximum worldwide oil production is 6 to 10 million bbls a day short of present capacity?

  8. TeemZeer

    As part of QEII, the Fed should say that all of its purchases of Treasuries will be confined to maturities of less than 5 years. Benefits are:
    (1) the curve would steepen back out
    (1.a.) thereby turning back on the goldmines of positive carry and roll-down
    (2) long-term rates would be something a bit more like “market-determined”
    (3) savers would have the ability to earn decent rates of interest, particularly if they invest over long horizons
    (4) It would signal to the market that the Fed views the problem as having a horizon of less than five years
    (5) Insurers could create annuity products that would serve the needs of the wave of retiring booomers
    (6) defined benefit pension plans might have a prayer of closing their funding gaps

    As said so well in the main post, low rates are fine, but a steep curve creates lots of opportunities for investors and speculators in fixed income. And certainly of a more benign form than the fraud-driven mortgage/securitization wave we endured recently.

  9. F. Beard

    On the business side, credit to small businesses is reported by many to be tight, but the bigger impediment is that most business aren’t terribly keen to borrow given the not-so-hot economic outlook. Yves

    Anyone sick of an elastic money supply yet? Or more accurately of a money-for-debt economic system?

  10. Siggy

    ZIRP is stupid. QE1, QE2 etal are stupid. TBTF is stupid.

    Nationalize the insolvent financial institutions. Fire the management and set about an inquiry as to probable fraud. Shareholders are wiped out. Unsecured lien holders are wiped out and secured lien holders take a big hair cut. Easy to say, very difficult to do.

    Or; muddle thru with delaying stupid think in the hope that the banksters will mend their ways. But then we find that the banksters know no other way? So here we are. And who gets penalized the most, all those 92 year old mom’s who brought us to this life. There’s something very wrong about that.

    1. Glen

      If we want to discuss “traditional” ways to handle bad banks – this is it. We’ve already had to do this over one hundred and twenty times this year alone. Why we refuse to do this to just a few TBTF institutions which have massively corrupted banking, the markets, the housing market, and other financial norms is like trying to buy fire insurance while our house burns down.

  11. Hugh

    With ZIRP already here, I’m a little hazy on what a second round of QE would entail. Would, for instance, the Fed expand its balance sheet taking on more crap from the banks? Because beyond this, I don’t see what’s not already available.

    As it is, and despite the current mini-surge in the markets, markets have been sideways for months. So this game is about played out or covering and recovering the same territory. Those who are getting hit by the low rates, like savers or pension funds, are really just casualties in the Summers-Geithner-Obama to recapitalize insolvent banks at everyone else’s expense. They are effectively paying an unannounced backdoor tax to finance the banksters.

    1. alex

      “With ZIRP already here, I’m a little hazy on what a second round of QE would entail.”

      I always found that confusing myself. I think the difference is between short and long term rates. ZIRP refers to short term (Federal funds) rates. QE would involve buying more long term (5-10 year) securities, thus pushing down long term rates more. Could be treasuries or (heaven save us) commercial trash.

  12. hermanas

    Help me out here Yves, I was hoping a reader could. When wall street can monetize securities or pull out on a moments notice, is the Fed’s monetary policy irrelevent?

  13. alex

    The bottom line is that you can’t fix all problems with monetary policy. It’s tempting to believe that you can because it appears costless. After all, no taxes or increasing government debt are involved. There are no bankruptcies or other painful restructurings. What’s not to like?

    As far as low rates being the right thing to do in this situation, that’s true but there are limits. Nobody is calling for high rates, but some question having ultra-low rates instead of low rates. Raghuram Rajan has some good points on this. He’s a Chicago guy, so I’m a little surprised to find myself agreeing with him, but right is right. He also called the financial house of cards well before the collapse.

  14. theyenguy

    I would love to see the banks come clean; but that ain’t a gona happen; no way never.

    I study the 30:10 Yield Curve Daily, $TYX:$TNX, and it today has completed its finaly steeping; it will be flatteinng; that is it will be going flat in months to come wiping out those invested in the Zeroes, ZROZ, and the 20 to 30 Year US Treasuries, TLT. The longer out debt is the worst palce to be.

    The US Dollar, $USD, is oversold at 78.78 on 9-29-2010. Should the Euro FXE, go down, then stocks will go down. Better said, when the, EUR/JPY, that is the FXE:FXY, goes down, then the stocks will go down. Volatility pick up.

    Banks KBE have fallen below support of 23. And European Financials, EUFN, have fallen from support of 22.5. Stocks could fall lower 9-30-2010 or 10-1-2010.

    I am bearish stocks due to regional news coming out of Europe, such as the EU Banking Sector Stability Report for September 2010, produced by the ECB relates funding difficulties for a number of European banks.

    I am bullish gold. As carry trade investment comes out of gold, it is likely to fall under $1,300 for a period of time, before it moves once again, substantially higher.

    The Fed may announce QE 2 on November 3, 2010. If it does, it will be gold inflationary.

    I had been thinking it wise to go short the market, as the EUR/JPY, has reached full expansion, but after reading Tyler Durden’s article … Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame … I’ve concluded that further fiat asset expansion is possible if the Fed does come out with a surprise QE 2.

    Yes, QE 2 may come November 3, 2010, as the Federal Reserve may announce a plan to buy US Treasuries, it may simply print Dollars, yes simply print and print and print; and buy US Government Debt, to prevent a deflationary collapse.

    This of course would send the value of the US Dollar, $USD, plummeting, and would be quite inflationary to many assets, such as food commodities, FUD, and especially gold, $GOLD. I think it wise to buy gold, specifically gold coins, at this time, even though a Surprise QE 2 is likely coming on November 3, 2010, which may create a demand for SHY and IEF.

    I’ve provided a link to my ChartList Site with charts for your review and analysis.

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