Results 1 to 2 of 2

Thread: no longer a question of hard versus soft landing ...

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default no longer a question of hard versus soft landing ...

    (snip)"Coordinated Central Banks Liquidity Injections: Too Little Too Late To Address the Fundamental Problems of the Financial System
    Nouriel Roubini | Dec 12, 2007

    Given the worsening of the global liquidity and credit crunch – with a variety of short term interbank Libor spreads relative to policy rates and relative to government bonds of same maturity being even higher recently than at the peak of the crisis in August – it is no surprise that central banks were really desperate to do something.

    The announcement today of coordinated liquidity injections by FED, ECB, BoE, BoC, SNB is however too little too late and it will fail to resolve the liquidity and credit crunch for the same reasons why hundreds of billions of dollars of liquidity injections by these central banks – and some easing of policy rates by Fed, BoC and BoE – has totally and miserably failed to resolve this crunch in the last five months. What was announced today are band-aid palliative that will not address the core causes of this most severe liquidity and credit crunch.

    There has some heated debate in recent weeks on whether the liquidity crunch is due to:

    a) short-term year end liquidity needs (the “Turn”);

    b) a more persistent liquidity risk premium;

    c) a rise on counterparty risk and broader perceived credit problems of counterparties; i.e. serious problems of insolvency rather than illiquidity alone.

    d) a more general increase in risk aversion due to severe credit problems and information asymmetries (risk aversion due to uncertainty about the size of the financial losses and uncertainty on who is holding the toxic waste of RMBS, CDOs and other ABS products);

    e) the failure of the monetary transmission mechanism in a financial system where most financial institutions are now non-bank and thus do not have direct access to the central banks’ liquidity or lender of last resort support.

    The severe financial crunch is likely due to all of the factors above; but the measures announced today can only partly deal with the first of the two explanations above of the crunch and will do nothing to address the other causes of the crunch. These measures will not be successful for a variety of reasons.

    First, you cannot use monetary policy to resolve credit and insolvency problems in the economy; and most of the crunch is due not just to illiquidity but rather to serious credit and solvency problems of many economic agents (households, mortgage borrowers, subprime, near prime and prime mortgage lenders, homebuilders, highly leveraged and distressed financial institutions, weak corporate sector firms).

    Second, monetary injections cannot resolve the information asymmetries and generalized uncertainty of a financial system where financial globalization and securitization have led to lack of transparency and greater opacity of financial markets; these asymmetric information problems that generate lack of trust and confidence and significant counterparty risk cannot be resolved with monetary policy.

    Third, the US is at this point headed towards a recession regardless of what the Fed does as the build-up of real and financial problems (worst housing recession ever, oil at $90, a severe credit crunch, falling capex spending by the corporate sector, a saving-less and debt burdened consumer buffeted by ten separate negative shocks) in the economy make a recession unavoidable at this point; similarly other economies are also now headed towards a hard landing as the US real and financial mess lead to significant contagion and recoupling.

    Thus, to mitigate the effects of an unavoidable US recession and global economic slump the Fed and other central banks should be cutting rates much more aggressively. The 25bps cut by the Fed yesterday is puny relative to what is needed; 25bps by BoE and BoC does not even start to deal with the increase in nominal and real borrowing rates that the sharp spike in Libor rates (the true cost of short term capital for the private sector) has induced.

    And the ECB decision not to cut policy rates – and deluding itself that it may be able to raise them once the alleged “temporary” credit crunch is gone – is dangerous and ensures a sharp slowdown in a Eurozone where deflating housing bubbles, oil at $90 and a strong Euro are already sharply slowing down growth. Central banks should have announced today a coordinated 50bps reduction in their policy rates as a way to signal that they are serious about avoiding a global hard landing. Instead the Fed yesterday gave a paltry 25bps with a neutral bias rather than the necessary easing bias.

    Fourth, the actions by the Fed today provide more liquidity to a greater variety of institutions but, as the Fed announced, these institutions are only “depository” institutions, i.e. only banks. The severe liquidity and credit problems affect today a financial market dominated by non-bank that do not have direct access to the liquidity support of the Fed; these include: broker dealers and investment banks that do not have a commercial bank arm; money market funds; hedge funds; mortgage lenders that do not take deposit; SIVs, conduits and other off-balance sheet special purpose vehicles; states and local governments funds (Florida, Orange County, etc.).

    All these non-bank institutions do not have direct access to the Fed and other central banks liquidity support and they are now at risk of a liquidity run as their liabilities are short term while many of their assets are longer term and illiquid; so the risk of something equivalent to a bank run for non-bank financial institutions is now rising. And there is no chance that depository institutions will re-lend to these to these non-banks the funds borrowed by central banks as these banks have severe liquidity problems themselves and they do not trust their non-bank counterparties. So now monetary policy is totally impotent with dealing with the liquidity problems and the risks of runs on liquid liabilities of a large fraction of the financial system (in a world where these non-bank financial institutions play a larger role in financial markets than non-banks).

    And let us be clear: the Federal Reserve Act striclty forbids the Fed from lending to non-depository institutions apart from very emergency situations that would require a complex and cumbersome approval process and the provision of high quality collateral. And the Fed has never – in its history – used this procedure and lent money to non-depository institutions.

    Fifth, as discussed before on this blog, this is the first real crisis of financial globalization and securitization; it will take years of major policy, regulatory and supervisors reform to clean up this disaster and create a sounder global financial system; monetary policy cannot resolve years of reckless behavior by regulators and supervisors that were asleep at the wheel while the credit excesses of the last few years were taking place. Now the US hard landing and global sharp slowdown is unavoidable and monetary policy – if aggressive enough with much greater and rapid reduction in policy rates – may only be able to affect how long and protracted this hard landing will be."(snip)

    -------------------------------------------------------------------------------

    The proverbial catch-22 in this situation is that the US Fed cannot afford to cut rates any further or any faster than it already has. The first reason of course is that US price inflation is already rampant ( today's wholesale price jump was the highest in 34 years ) and Fed rate cuts only accelerate the rate of price inflation.

    The second reason, and the more important one, is that the Euro Central Bank, the Canadian Central Bank, the Japanese Central Bank etc. all have a vested interest in making the US dollar stronger versus their own currencies. Thus any unilateral rate cutting by the US Fed will only prompt these other central banks to take equal and opposite action to prevent their own industries (Airbus, Toyota, Canfor etc.) from losing any more profits or market share to American companies as a result of a widening US dollar exchange rate versus their own currencies. Frankly the US Fed does not have sufficient reserves to fight this battle successfully, so they are now apparently showing the sense not to continue to try.

    Of course the Chinese are probably sitting behind their Sovereign Wealth Funds and smiling ...
    Last edited by Melonie; 12-13-2007 at 12:53 PM.

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: no longer a question of hard versus soft landing ...

    ... and here's the reason the Chinese are probably smiling ...



    (snip)"The banking crisis in the West gets worse and worse each week. All the nostrums and fixes are like band aids on a breaking dam. They want liquidity in a world that is utterly drenched in debt. The reason why no more liquidity is forthcoming is due to the collapse on the part of the parties who must pay debts, not lenders. There is still 'sovereign wealth' out there aplenty. But it won't be lent at super-discount rates. Except if the West RAISES interest rates and let the yen fall even further in value. Then the Bank of Japan will resume the carry trade. The surprising announcement that the Fed and other G7 banks are doing a major rescue must amuse the Bank of China, I'm betting.

    The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.

    The Fed said in a statement it will make up to $24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S.


    Wow. Another $65 billion rescue? This is giving us a clue what the real losses are. We are definitely going over a trillion dollars in this frantic effort to paper over the mess Greenspan made. This endless rescue scheme began back on 7/17/7 and today is fittingly, another kind of harmonic number day. Each stage of this banking collapse has the same story-plan as set up by our rulers. First, there is no crisis, they claim. Secondly, the crisis is under control. Thirdly, it is already over, no need to worry.

    To prove this, they try desperately to flood the banking system with 'liquidity'. This is fancy talk for the central banks creating the ultimate in funny money: they simply throw darts at a pie chart with different numbers and then try to sell bonds to someone speaking Chinese, Japanese or Arab princes in robes or guys in turbans. Then these people should take these bonds and hide them in bank vaults in Switzerland or Singapore. Or Tokyo, of course.

    But the losses continue so now, instead of each central banker offering funny money, they are doing it in this elaborate Peter lending to Paul who then borrows it from Hu, Fukuda, and His Majesty, the King of Saudi Arabia. This pathetic game is on top of these same central bankers yelling at everyone either in public, in the case of China and Iran, or in private, as in the case of Japan and Saudi Arabia.

    The fury of the empires is obvious. I can see it in many of the statements they made to the press today. This story requires lots of quotes from a lot of very angry, scared and unthinking individuals. Their collective loss of power due to lack of sovereign wealth is rather astonishing.

    Central bankers took the action after interest-rate reductions in the U.S., U.K. and Canada failed to allay concerns that banks will reduce lending, sending the U.S. into recession and hobbling growth abroad. Borrowing costs have climbed as mounting losses on securities linked to subprime mortgages caused lenders to conserve cash.

    And here it is, in a nut shell: the US needs infinite debts. We have 0% savings now, actually, our savings has collapsed. No banking system in a sane world can run on no savings. We just tried it and failed. Instead of addressing this failure, we are trying to restart the Home ATM machine. We are like children wanting the machine to spit out dollars no matter what.

    All banking systems that get out of whack and cease to save around 10% or more go bankrupt if they don't switch gears. The simple mechanism for this is to raise interest rates until people are again tempted into saving money again. But if rates drop along with savings and there is less and less money flowing into savings accounts and if people pay down less and less principal on their loans, we get this negative system going that gets worse and worse. The Fed, in cutting rates again, has made the SAVINGS CRISIS much worse. Indeed, they are openly begging for everyone to continue the destructive LENDING SPREE and consider the natural death of a lending spree to be a bad thing. They want this game to continue and it can't because no one is saving...IN THE WEST. The G7 has collectively decided to keep the US on a wild spending/debt spree that is unsustainable. The trade partners doing this to the US are doing it to keep their trade SURPLUSES going despite our massive debts that are now terminal."(snip)


    The dichotomy between the two links only emphasises the Fed's predicament ... caught between the proverbial rock and a hard place.

Similar Threads

  1. Replies: 12
    Last Post: 10-03-2010, 04:01 AM
  2. weekend commentary - Comstock sees 'Hard Landing'
    By Melonie in forum Dollar Den
    Replies: 0
    Last Post: 08-27-2006, 05:17 AM
  3. Replies: 0
    Last Post: 06-28-2006, 07:52 AM
  4. Hard contact, soft contact???
    By Sunnsand in forum Newbie Board
    Replies: 14
    Last Post: 04-14-2005, 09:52 AM
  5. Yet Another Breast Question (A Hard One)
    By Nicolina in forum Dancer's Discussion
    Replies: 14
    Last Post: 03-30-2005, 07:19 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •