We’re seeing more happy talk on Wall Street this week. The markets are talking about “the worst of the credit crisis being over” and that the markets are going back up, this of course from the same people that got us into the mess in the first place.
But the only thing keeping the markets going right now is a massive flow of money into the financials through the Fed’s emergency lending window. How much money is the Fed parceling out?
Try close to $40 billion a day.
Fears are mounting that Wall Street banks are relying too heavily on tens of billions of dollars in loans made available by the US Federal Reserve. Their borrowing levels have rocketed by almost 200 per cent to $38bn (£19bn) a day in just three weeks.
The latest loan data released by the Fed shows that Wall Street banks and investment firms borrowed an average of $38.4bn every day last week, a big jump from the $32.9bn borrowed the week before, but almost three times the $13.4bn borrowed when the emergency scheme was launched on 17 March.
Almost $200 billion a week is going into the financials now in Fed money just to keep the banks going. This rate of lending cannot continue for much longer without breaking the Fed’s balance sheet. It’s gone well beyond emergency lending, it’s now a question of greed. The financials are now purely addicted to cheap Fed money and are gorging themselves on it.
The loan programme was part of a wider Wall Street rescue package ushered in to stave off the imminent collapse of Bear Stearns, the troubled investment bank being bought by JP Morgan.
The scheme, called the Primary Dealer Credit Facility, is made available through the Federal Reserve Bank of New York and is designed to help big investment banks oil the wheels of the credit market so they can continue with business as usual, even though the credit crunch shows no signs of abating.
The Fed has capped the amount available to all banks at $50bn, although insiders said it never imagined the banks would take advantage of the entire facility. Analysts and economists now fear it is being too heavily exploited, and that banks may be using it to delay facing up to liquidity problems.
David Wyss, the chief economist at Standard & Poor’s, thinks the Fed loan programme is a good idea, and perhaps the only way that government can keep the credit markets churning. Even so, he believes taking out such large short-term loans could cause problems.
‘My fear is that the banks could become too dependent on this money. At some point, the Fed will have to wean them off these loans, but how it does that I do not know,’ he said.
And the problem is now that they can’t. If they end the flow of cheap money, the financials will fold. Like an addict going cold turkey, the withdrawal symptoms could bring the whole house down. Only hundreds of billions of Fed dollars have kept the financials running for the last three weeks.
Happy talk, indeed.
Think about it. The Fed is now handing out hundreds of billions in short term loans that banks are snapping up at a dramatic pace. They should be getting these loans from each other, but they aren’t. The system has broken down and now the Fed is trapped feeding the bank’s addictions at the rate of $200 billion a week and rising.
Will these loans get paid back before the Fed runs out of money? Who knows? Congress should be screaming about this massive bailout, but nobody seems to care or know what’s going on.
How many hundreds of billions will end up being borrowed this week? Next week? Who knows?
Meanwhile in the muni bond market, the continuing collapse of the bond auction market is costing cities and states big money.
U.S. state and local borrowers from Denver to Atlanta, battered by rising interest costs from the collapse of the auction-rate bond market, now face rising fees to replace the debt.
Denver found only five banks willing to provide backing for new variable debt to replace $208 million of auction bonds, down from 30 five months ago, said Margaret Danuser, the city’s debt administrator. The cost to line up a buyer of last resort in case such bonds, variable-rate demand obligations, go unsold when yields are reset jumped as much as fourfold to $400,000 on $100 million of securities a year, borrowers say.
“It’s a lot of headaches,” Danuser said. Denver’s costs for a so-called liquidity facility on the new debt were double the fees on a similar agreement last year, she said. “It’s pretty telling of the tightness of the market.”
States, cities, hospitals and other municipal borrowers that sold $166 billion of auction-rate securities plan to replace at least $36.7 billion of the debt by May 23, according to data compiled by Bloomberg. The auction-rate market collapsed in February after investors shunned the securities and dealers that run the periodic bidding to set interest costs stopped committing their capital to prevent failures.
The extra costs for Denver are still lower than keeping bonds in the auction market, where interest costs rose to as high as 10 percent in February from 3.5 percent in January.
“They were a lot higher than we ever anticipated,” Danuser said. “As we were getting up over 5 percent, it was apparent to us that we were paying more than we thought we needed to.”
The easy credit game extended to cities and states too. Now that the game is over, banks are getting as much as they can out of these large customers. You gotta love it, getting money out of the Fed and out of municipal bond fees too. The financials are putting together as much cash as possible to try to stay solvent, even as the albatross of toxic derivatives continue to pull them down more and more.
Taxpayers are bailing out the banks to the tune of hundreds of billions, which will soon become trillions. The de facto bailout continues and there’s not a peep from lawmakers…or taxpayers.
Finally, government economists are finally admitting that we’ve been in a recession for three months now.
Martin Feldstein, who heads the group that is considered the arbiter of U.S. recessions, told CNBC that he believes the U.S. has been sliding into a recession since December or January.
“I think the professional forecasters have been a little slow to come to the recognition that we’re in a recession,” Feldstein said in a live interview.
Feldstein, president of the National Bureau of Economic Research, said the downturn could go on longer and deeper than the two most recent recessions.
He also said the U.S. gross domestic product would be a misleading, positive number.
“But within this quarter, we’re seeing the monthly numbers coming down,” he said. “As I said, employment, sales, production, all of that are trending down at this point.”
Feldstein said he expects a bounce in the second half of the year as rebates roll out. But, he cautioned not to count on consumer confidence.
It’s good to see some realism, but it would have been much more useful three months ago.
“And indeed it runs the risk that those checks will go to paying down credit card debts and other kinds of debts, building up liquidity as people prepare themselves for possible hard times ahead.”
Although the Fed is injecting liquidity into the markets, Feldstein said, they are not dealing with the fundamental issue: the excess of negative equity mortgages.
“They’re providing a little bit of liquidity, but they’re not dealing with the fundamental problem of this wave of potential defaults on mortgages which we’re yet to see, but which I think will become a reality as house prices continue to come down.”
Feldstein noted that further interest rate cuts would not have a significant impact at this point.
“Lower interest rates work by–they will help, but the usual way which lower interest rates push the economy is by expanding housing,” he said. “Well, with the housing market in it’s current situation with the vast overhang of unsold houses, another 50 basis points on the Fed Funds rate isn’t going to do much.”
Which is what I’ve been saying now for quite some time, as long as the housing depression continues, the rest of the economy will suffer. The question is that of how much and for how long.
As long as that glut of unsold and unsellable houses remains pushing houses down, reducing real estate values and pushing more homeowners into negative equity, creating more foreclosed homes on the market, we remain in a deadly spiral that threatens to upend the entire economy.
Frank talk on this from our government “leaders” is what is necessary, so that we can start looking at actual solutions, not turning the Fed spigot on and hoping we can raise the financials’ boats by drowning everything else in a sea of red ink.
What we need less of is Alan Greenspan covering his ass.
Former Federal Reserve Chairman Alan Greenspan has defended himself from charges that easy U.S. monetary policy created the current credit crisis by inflating a housing bubble, and instead blamed professional investors.
In an article in Monday’s Financial Times newspaper, Greenspan wrote that the housing bubble which inflated between 2001 and 2006 had not been unique to the United States.
“The U.S. bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile,” Greenspan wrote.
Under Greenspan the Fed cut rates from 6.5 percent in late 2000 to 1.0 percent in mid-2003.
Most other leading central banks followed suit, although not to such low levels apart from the Bank of Japan.
You’re no doubt informed of the real culprit, both Greenspan AND the investors playing fast and loose with derivative speculations. They all share the blame.
As this gets worse, we’ll see more and more major players start blaming each other for the Bush Bubble Burst. Bad times are coming, and soon. The Fed cannot keep up this level of cash lending without literally breaking the bank.
Be prepared.