Munee, Munee Get Yer Free Munee!

[?...!]

This would be a "In a surprise move, Japanese bank X has today taken over, say, Barclays...." bank going under situation (as someone described it yesterday - can't remember who) as opposed to a "run on the bank" bank going under situation, would it?

Peter.

More likely to say.

Mizuho Financial offers Barclays sharholders £1 per share.

[dstars]

Bump.

This is important. This is the key.

[Blue Peter]

Indeed. The BOE are therefore subsidizing banks. The problem with this approach is that it will not and cannot work its way properly through the system. That is to say that the BOE are giving banks free money in the form of artificially low interest rates.

They say it is to help the liquidity problem but the actual liquidity problem would only be helped if all of this was passed on. Are banks lowering their credit card charges as the lower rates are offered to them? Are they lowering their mortgage rates? No. And they will not.

It's easy to see how they think this might help. It is a band-aid but what they seem to either be missing or unwilling to take on board is that this is a tainted band-aid: With every negative basis-point on the band-aid is attached a little inflammatory poison.

This is a liquidity crunch caused by the provision of excess liquidity in the system. Providing free money (or artificially low rates) is the perpetuation of that which caused it in the first place. They're trying to cure a burn with a burn.

"This is a liquidity crunch caused by the provision of excess liquidity in the system"

This sounds counter-intuitive - too much money is causing too little money. So, in the interests of continuing my education, could someone explain it to me, please (I think that this might also be relevant to the inflation discussion in the "Edgy" topic but that has now been moved off-forum).

As I understand things: interest rates have been set low, money is easy to come by and even dodgy ventures get funded. However, too many dodgy ventures get funded and they don’t produce the returns and suddenly, we have a liquidity crisis. The money that’s supposed to be coming back from the investments isn’t.

So, where has it gone? We had too much money and now we don’t have enough. Where has the previous excess disappeared to? And why has it done so?

Peter.

[Servettien]

From the Guardian (quite a good summary):

"The Bank of England did not go soft yesterday. It did not splash vast sums of cheap money into the markets. Nor did it offer a defibrillator to financiers who have been complaining that money markets have suffered a heart attack.

The key passage in yesterday's announcement was: "These measures are not intended, nor can be expected, to narrow the spread at which commercial banks can borrow from each other at longer maturities (for example, the three-month interbank rate)."

A small dose of extra liquidity will help, but overnight rates are not the big problem. The pain lies with three-month loans, where the Bank can do little directly because rates are set by the market. Yesterday, the three-month rate was 6.8% where, in "normal" conditions, a figure of about 6% might be expected.

The realisation that the Bank is sticking to its policy of "tough love" dawned slowly yesterday. But by the close of trading, the penny had dropped. Shares in Northern Rock - which, as a mortgage lender with a relatively small deposit base, is especially exposed to rates in the money markets - fell 5.3%. Alliance & Leicester was down 4.4% and Bradford & Bingley 5.6% lower.

There is a natural limit, in other words, to how much medicine can be delivered by central banks via operations in the money markets. Confidence is the key and central banks cannot simply make banks less fearful about lending to each other.

Time is a better cure. Markets must work out what the SIVs, conduits and US mortgages are really worth. Moody's, the credit rating agency, yesterday said it might take six months for such a "price consensus" to emerge

[?...!]

"This is a liquidity crunch caused by the provision of excess liquidity in the system"

This sounds counter-intuitive - too much money is causing too little money. So, in the interests of continuing my education, could someone explain it to me, please (I think that this might also be relevant to the inflation discussion in the "Edgy" topic but that has now been moved off-forum).

As I understand things: interest rates have been set low, money is easy to come by and even dodgy ventures get funded. However, too many dodgy ventures get funded and they don’t produce the returns and suddenly, we have a liquidity crisis. The money that’s supposed to be coming back from the investments isn’t.

So, where has it gone? We had too much money and now we don’t have enough. Where has the previous excess disappeared to? And why has it done so?

Peter.

Its sitting quietly as equity tucked up neatly into all the assets the world over.

Imagine the path of money during an economic expansion.

Central Banks -> Comercial Banks -> Business Ventures -> Personal Wealth.

The idea is that good ventures create growth, and bad ventures waste capital and resource.

In a climate of lots of good ventures the central bank lets the money flow down the chain.

In a climate of bad ventures the central bank is supposed to throttle back the supply preventing bad ventures from wasting capital, resources and causing inflation by taking resources from good ventures.

The reason the central bank must throttle the supply is that;

any economy only has so many good ventures, lower rates too far and you create greater liquidity than the good ventures can absorb, much of this excess liquidity flows into bad ventures, which bid up prices and waste capital and resources by producing little or no growth.

What we have seen is some central banks trying to throttle supply (the fed with 17 hikes) as they believe they have utilised all the good ventures, but to no avail, as financing can be found elsewhere (Japan).

So the money flowed from Japan into bad US ventures, driving up US prices and creating unsustainably high asset prices (noteably in property).

What we have seen is not the central banks throttling the supply to stop this waste but the commercial banks. The commercial underwriters have stopped proving money to underwrite the risk. This means that money has continued to flow from the commercial banks into ventures and into personal wealth. Creating a vacuum of money between the commercial banks and business ventures (Albeit a very blurry place).

Central Banks -> Comercial Banks - **VACUUM** > Business Ventures -> Personal Wealth.

This Vacuum plays havoc.

It means spreads widen and transactions grind to a halt. There is not enough money to facilitate trade.

The central banks are trying to pass money to the commerial banks to help them fill the vacuum but it is not enough. Because there are still too many bad ventures sucking up the extra capital and wasting it.

What needs to happen is...

The bad ventures are allowed to collapse removing them from the system.

Equity contracts allowing money to flow from personal wealth into the vacuum via higher prices.

This will allow the vacuum to gradually close up. But means a recession and many businesses going bust.

Edited September 6, 2007 by ?...!

[dstars]

From the Guardian (quite a good summary):

"The Bank of England did not go soft yesterday. It did not splash vast sums of cheap money into the markets. Nor did it offer a defibrillator to financiers who have been complaining that money markets have suffered a heart attack.

The key passage in yesterday's announcement was: "These measures are not intended, nor can be expected, to narrow the spread at which commercial banks can borrow from each other at longer maturities (for example, the three-month interbank rate)."

A small dose of extra liquidity will help, but overnight rates are not the big problem. The pain lies with three-month loans, where the Bank can do little directly because rates are set by the market. Yesterday, the three-month rate was 6.8% where, in "normal" conditions, a figure of about 6% might be expected.

The realisation that the Bank is sticking to its policy of "tough love" dawned slowly yesterday. But by the close of trading, the penny had dropped. Shares in Northern Rock - which, as a mortgage lender with a relatively small deposit base, is especially exposed to rates in the money markets - fell 5.3%. Alliance & Leicester was down 4.4% and Bradford & Bingley 5.6% lower.

There is a natural limit, in other words, to how much medicine can be delivered by central banks via operations in the money markets. Confidence is the key and central banks cannot simply make banks less fearful about lending to each other.

Time is a better cure. Markets must work out what the SIVs, conduits and US mortgages are really worth. Moody's, the credit rating agency, yesterday said it might take six months for such a "price consensus" to emerge

But this is not about absolutes. It is not even about relative percentage points. It is about trends. Journalists are at pains to point out that this is not a free-for-all simply because the money is overnight or short-term.

Indeed the BOE have not offered lottery wins to anyone in trouble but niether are they allowing free market forces to propogate through the system.

The BOE are interfering like well-meaning Aunties and they are most certainly making the situation worse; albeit that the combined forces of our media are incapable of grasping that simple truth.

Time is no cure for this problem and hitting a button that seems like it slows time down (which is their strategy, to date) will alter neither time itself nor reality itself.

They (journos) are publishng to the limits of their knowledge. Indeed, one might imagine that there are 'natural limits to how much medicine can be delivered by central banks via operations in the money markets' but of course while there will be proven to be limits on 'medicine' (inasmuch as such a thing does some good) there is no limit to how much they can lend or print because in a free market central banks are an anomally. They printed too much bloody money and now they're giving it away but our journos are too thick and scared to get it.

It only looks like medicine today. In three months even the media will know it is the same poison they have been pumping for six years.

Edited September 6, 2007 by dstars

[@contradevian]

**bump** Its a "must read" thread!

[Blue Peter]

Thanks, that's very useful.

Its (excess money) sitting quietly as equity tucked up neatly into all the assets the world over.

....

Equity contracts allowing money to flow from personal wealth into the vacuum via higher prices.

When the equity contracts, why will money flow from personal wealth to the vacuum? I buy a house for 200K, it becomes worth 300K (100K equity). We have a HPC and the house is now only worth 220K, my equity has contracted, but I don't see that any of my money has flowed anywhere.

To relate it to inflation/deflation concerns, growth of money supply, etc., I again buy a house for 200K, all of which I borrow, and by spending it to buy the house, let it loose in the economy. HPC again, and the house is now worth 150K. I lose my job, can't afford to pay the mortgage, get repossessed and the house is sold for 150K. So, 150K goes back to my lender. What happens to the missing 50K? Is it still out in the economy? is it destroyed?

What we have seen is not the central banks throttling the supply to stop this waste but the commercial banks. The commercial underwriters have stopped proving money to underwrite the risk. This means that money has continued to flow from the commercial banks into ventures and into personal wealth. Creating a vacuum of money between the commercial banks and business ventures (Albeit a very blurry place).

Should it read: This means that money has NOTcontinued to flow from the commercial banks into ventures and into personal wealth.

Peter.

Edited September 6, 2007 by Blue Peter

[?...!]

Thanks, that's very useful.

When the equity contracts, why will money flow from personal wealth to the vacuum? I buy a house for 200K, it becomes worth 300K (100K equity). We have a HPC and the house is now only worth 220K, my equity has contracted, but I don't see that any of my money has flowed anywhere.

Sorry I find it very hard to always get my wording spot on. No proof reading and such. Excuses, excuses.

Equity contracts because of money flowing from personal wealth into the vacuum. Market participation requires capital, and many people must resort to forced sales to find that capital. Forced sales drive down prices etc...

There is a global sell off to raise capital, price fall during the sell off.

Equity disapears as prices fall.

To relate it to inflation/deflation concerns, growth of money supply, etc., I again buy a house for 200K, all of which I borrow, and by spending it to buy the house, let it loose in the economy. HPC again, and the house is now worth 150K. I lose my job, can't afford to pay the mortgage, get repossessed and the house is sold for 150K. So, 150K goes back to my lender. What happens to the missing 50K? Is it still out in the economy? is it destroyed?

Should it read: This means that money has NOTcontinued to flow from the commercial banks into ventures and into personal wealth.

Peter.

You still owe your lender 50K. You must create 50K of goods or services by working, in order to return 50K to your lender to clear the debt.

The 50K exists in your ability to do 50K of work. The outstanding debt means you are now legally obliged to do that work.

[Ash4781]

But this is not about absolutes. It is not even about relative percentage points. It is about trends. Journalists are at pains to point out that this is not a free-for-all simply because the money is overnight or short-term.

Indeed the BOE have not offered lottery wins to anyone in trouble but niether are they allowing free market forces to propogate through the system.

The BOE are interfering like well-meaning Aunties and they are most certainly making the situation worse; albeit that the combined forces of our media are incapable of grasping that simple truth.

Time is no cure for this problem and hitting a button that seems like it slows time down (which is their strategy, to date) will alter neither time itself nor reality itself.

They (journos) are publishng to the limits of their knowledge. Indeed, one might imagine that there are 'natural limits to how much medicine can be delivered by central banks via operations in the money markets' but of course while there will be proven to be limits on 'medicine' (inasmuch as such a thing does some good) there is no limit to how much they can lend or print because in a free market central banks are an anomally. They printed too much bloody money and now they're giving it away but our journos are too thick and scared to get it.

It only looks like medicine today. In three months even the media will know it is the same poison they have been pumping for six years.

I'm worried about food price inflation.

What happens if they start cutting rates ?

2 pound loaf of bread ?

[Goldfinger]

I'm worried about food price inflation.

What happens if they start cutting rates ?

2 pound loaf of bread ?

[Guest]

I'm worried about food price inflation.

What happens if they start cutting rates ?

2 pound loaf of bread ?

Ash, your Price Of Mistrust graph is amazing.

That outlines the nature of this crisis.

This guy used to update his very same chart:

http://web.onetel.net.uk/~wstanners/Bank%20Monitor.htm

He has a theory that central banks do sod all except follow the 3 month rate. Unfortunately, just as things got interesting he seems to have given up.

Anyhow, the bread price might be because of hungry indians and chinese spending their new prosperity what with their 10% economic growth and that, and or because of drought and water shortages, or low crop yield, and not because of any alleged money printing by Mr Bernanke.

I wish I knew more about the wheat market to know where to find these things out.

Edited September 6, 2007 by megaflop

[Ash4781]

Ash, your Price Of Mistrust graph is amazing.

That outlines the nature of this crisis.

This guy used to update his very same chart:

http://web.onetel.net.uk/~wstanners/Bank%20Monitor.htm

He has a theory that central banks do sod all except follow the 3 month rate. Unfortunately, just as things got interesting he seems to have given up.

Anyhow, the bread price might be because of hungry indians and chinese spending their new prosperity what with their 10% economic growth and that, and or because of drought and water shortages, or low crop yield, and not because of any alleged money printing by Mr Bernanke.

I wish I knew more about the wheat market to know where to find these things out.

Graph from article at link.

http://www.economist.com/world/britain/dis...tory_id=9769629

[dstars]

"This is a liquidity crunch caused by the provision of excess liquidity in the system"

This sounds counter-intuitive - too much money is causing too little money. So, in the interests of continuing my education, could someone explain it to me, please (I think that this might also be relevant to the inflation discussion in the "Edgy" topic but that has now been moved off-forum).

As I understand things: interest rates have been set low, money is easy to come by and even dodgy ventures get funded. However, too many dodgy ventures get funded and they don’t produce the returns and suddenly, we have a liquidity crisis. The money that’s supposed to be coming back from the investments isn’t.

So, where has it gone? We had too much money and now we don’t have enough. Where has the previous excess disappeared to? And why has it done so?

Peter.

It simply disapeared. It should never have existed in the first place. If an asset sells for 100,000 and later can only be sold for 50,000 then where is the money? It is gone.

The reason we entered a bubble was because of excess liquidity and nothing else. It had nothing to do with tight supply for if indeed the supply is tight as many would claim then it was thus before the bubble grew, and will continue in its tightness after the bubble bursts.

Many years ago a friend of mine worked in a motorcycle shop. He told me that kids would come in and ask how much the bike of their dreams cost. He would tell them and they would stare back blankly and ask how much it cost a month. All he had to do to sell it was set the monthly price according to their ability to pay. His actual words, somewhat playfully were "that'll be 40 pounds a month for the next three million years sir." They always bought as soon as the monthly amount became possible.

This is exactly what happened here; not just in the US (as the media is constantly at pains to claim; for they know not what they say).

Except now it was quite literally with any amount of money. Imagine how insane this is going to look in the future? Banks, who normally take umbrage at things such as robbery, said to us "Have as much as you want. I'll tell you what, I'll turn my back and you write down any salary you please and we'll pork it up by six or seven or more times. As long as we don't actually collude in your lies, in a way that a court might perceive as collusion, then you can buy that three-million quid two-bed in Clapham."

The trick was that the banks, given that ratings agencies had cleared the way by offering looney ratings on the instruments (and thus hooking the idiot pension fund managers who'll buy anything with the right label), quickly offloaded the stuff into the 'wider market' by packaging all the debt up into what many describe as complex and clever ways, but really it isn't that complex and it is certainly not clever.

But what many in the media are missing is that the banks did not hoik this stuff a million miles away into what we call America when we talk about this market; mostly what they did was create what they called 'hedge funds' specifically to hold this stuff. In a very real sense many of them them seem to have sold this stuff to themselves. This is why we see big banks 'closing' hedge funds. And the debt isn't just the 100 down to 50, it's 100 down to zero. And it's down to zero because there are no buyers. And we all know that anything is only worth that which the market will pay and if the market won't pay at all then it's worth zero.

Now, the reason that we have a credit crunch is because they're all out there and they have no idea who 'owns' what. Meaning they have no idea whether say Barclays, for example, will be able to pay back any money that they lend to them, so they won't lend.

Nobody will lend. Everyone is sitting on their hands hoping that it'll all get better and the central banks are playing at Big Baddy and 'providing liquidity'. (I love that expression and I wish banks would provide me with liquidity for liquidity is money.)

You see, at the core, money is spontaneously combusting, because it shouldn't have existed in the first place. This is why I like to call it 'the undead' or Zombie, rather than Toxic. Toxic implies it is poisonous but I believe it is even worse than that. At first it looked as if small tranches of toxic debt were poisoning the pools (debt instruments known as bonds or securitized mortgages or derivatives thereof or insurance policies based on those instruments) but this stuff was flatlining out of the bank. It was all a big kid on. Pretty soon, all the people who believe that the housing market cannot fall will be wondering how they ever thought en ex-council rat trap ever sold at all, never mind for serious six figures.

The housing market became my old pal's bike shop and buyers were snapping up anything as long as it was only forty quid a month, and the banks told everyone that it would never go up; and if it did they would simply magic the deal all over again. They would take more commission and unload the Zombie into their hedge fund, where it would accrue value as long as dimwits from the The Royal Bank of Scotland (for example) took small payment to undewrite it.

I am amazed that apparently sensible commentators don't think it's that important that banks won't lend to each other. There's a run on the banks... by the banks. But don't worry, the experts say it's okay; only loonies could think anything else.

What central banks do not appear to know about themselves is that the market doesn't give a rat's arrse about them. Now, I want to be clear here. I'm kind of mildly mad and I believe that 'the market' is a thing of itself, not simply a collective term for posh white men in suits. Sometimes when I use the word 'market' I mean the white men in suits but other times I mean something much deeper and out of their hands. I have observed strange things in 'the market' for I worked in a market where the liquidity is so great that money itself seems to act very strangely. (I didn't want to get in a beef about this but I've been at a lecture where where our leading 'expert' in currencies, from the central banks, was pelted with after-snack debris for he was trying to tell people who worked in currencies about 'the market' and frankly, he was showing what a tit he was and how little he knew. (This did not and does not stop him from being referred to and paid as an an expert in the field.))

Anyway, the market will out. Central banks will continue to pump excess mush into the system to try to grease the wheels but it will not get very far, and it will accentuate the problem, and even worse for them, it may even expose them as little more than tiny parasites on the back of a great white whale that is about to crush us.

But the market (white men in suits) is a bit thick and definitely an optimist, so don't expect this to happen for a wee while yet.

But it cannot not happen. Current action, (fake money pumping) cannot work. This may be novel market behaviour, but unlike the experts on telly who are telling us what will happen even though it has been a giant surprise to them. It is not a surprise to me. I have been thinking about this for quite some time and I don't care what the Economist says or what Channel 4 or the Beeb says (although Channel 4 at least have a wag who sees the downside).

It's like watching a car crash in slow-mo. It is beyond astonishing that there are still people who think this thing can be contained.

It cannot be contained any more than reality itself can be contained. They think they're sitting on top watching and directing; a bit like religious types that think humans are watching the cosmos rather than the reality that humans are the cosmos perceiving itself according to limits beyond their ken.

Pouring a cup of water on a landside probably won't stop the landlside although at the start, if one stays very still, it might seem a bit like that.

Edited September 7, 2007 by dstars

[Captain Coma]

Music to me ears. I hope you're getting on with the book ...

In fact, literary agent hat on (was one for a time), try thinking about editing and combining your posts over this summer and autumn into a "crash diary" - could well be in demand as a crash [sic] tutorial when the proverbial hits the fan in a month or two.

Ahoy-hoy

[Methinkshe]

Excellent post, dstars - thanks. What I can't understand is why the stock market is not collapsing. What's going on there?

[dstars]

Excellent post, dstars - thanks. What I can't understand is why the stock market is not collapsing. What's going on there?

Ever seen a monkey examine a watch?

[Fancypants]

Pouring a cup of water on a landside probably won't stop the landlside although at the start, if one stays very still, it might seem a bit like that.

I also like: liquidity pumping in these circumstances is like trying to stop a hurricane by farting at it.

[Heavily Armed Gorilla]

It simply disapeared. It should never have existed in the first place. If an asset sells for 100,000 and later can only be sold for 50,000 then where is the money? It is gone.

...

Great summary. When explaining this stuff, discussion of 'zombie debt' and 'NINJA loans' is essential - people I know tend to switch off if I babble on about securitization and CDOs (I see where they're coming from), but the image of 'no income, no job or assets' and 'lie to buy' mortages tends to engage people much better.

NINJA loans + easy credit + banks chopping up and selling on the debt to idiots + dodgy ratings agencies = a complete nightmare should rates go up to control inflationary pressures

[mfp123]

i wouldnt say money has disappeared as such - more its stopped moving.

if you imagine how an economy works.

person A has £5000. he uses it to buys something off person B.

Person B buys something off person C for £5000.

person C buys something from person D for £5000.

that £5000 is creating an economy because it is circulating. everyone is getting what they want e.g Persons B, C and D could consider themselves to have a income of £5000.

now imagine if person A decides to hold onto his cash. theres no money in the system. person B needs the money to buy stuff. person C needs the money of person B to buy stuff. but the chain has stopped dead.

if we all sat on our arses tomorrow our economy would collapse, our wealth wouldnt have actually gone anywhere, however money that isnt moving is worthless.. when an economy is strong basically its because there is high demand and money is moving around quickly.

[Jason]

i wouldnt say money has disappeared as such - more its stopped moving.

if you imagine how an economy works.

person A has £5000. he uses it to buys something off person B.

Person B buys something off person C for £5000.

person C buys something from person D for £5000.

that £5000 is creating an economy because it is circulating. everyone is getting what they want e.g Persons B, C and D could consider themselves to have a income of £5000.

now imagine if person A decides to hold onto his cash. theres no money in the system. person B needs the money to buy stuff. person C needs the money of person B to buy stuff. but the chain has stopped dead.

if we all sat on our arses tomorrow our economy would collapse, our wealth wouldnt have actually gone anywhere, however money that isnt moving is worthless.. when an economy is strong basically its because there is high demand and money is moving around quickly.

All you've done is explained the Gross Domestic Product (GDP), not the issue of the loans that backed the initial £5000 and what is happening to that.

Edit: Excellent post dstars.

Edited September 7, 2007 by Jason

[dstars]

i wouldnt say money has disappeared as such - more its stopped moving.

if you imagine how an economy works.

person A has £5000. he uses it to buys something off person B.

Person B buys something off person C for £5000.

person C buys something from person D for £5000.

that £5000 is creating an economy because it is circulating. everyone is getting what they want e.g Persons B, C and D could consider themselves to have a income of £5000.

now imagine if person A decides to hold onto his cash. theres no money in the system. person B needs the money to buy stuff. person C needs the money of person B to buy stuff. but the chain has stopped dead.

if we all sat on our arses tomorrow our economy would collapse, our wealth wouldnt have actually gone anywhere, however money that isnt moving is worthless.. when an economy is strong basically its because there is high demand and money is moving around quickly.

Yes, and what happens when person D can't sell it for a pound?

Money is not energy. It only exists when we wish it to exist or wish it to existence.

(Edited for panache. )

Edited September 7, 2007 by dstars

[dstars]

It is a currency. A medium of transfer. It can vanish.

[Heavily Armed Gorilla]

Yes, and what happens when person D can't sell it for a pound?

Money is not energy. It only exists when we wish it to exist or wish it to existence.

(Edited for panache. )

Flash git

[Blue Peter]

It is a currency. A medium of transfer. It can vanish.

In the interests of my education, etc., could we look at the following scenarios:

A borrows 100K from Bank B. So, A has +100K and B has -100K.

A buys a house for 100K from C. So A has 0 (and a house), B has -100K and C has +100K.

25 years later. A pays off his loan to the Bank. A has -100K (and a house) B has 0 (and some interest I) and C has +100K.

So, net, we are back where we were at year 0, except that B now has some interest and A has a house. And, this is where we were all along. So, no money has vanished.

If we repeat the scenario except after 25 years, but A can only afford to pay back 50K. A has -50K (and a house), B has -50K (and some interest) and C has +100K.

Net, that's still 0, some interest and a house. However, A can't pay back the other 50K. If the debt is written off, then, A is back to 0, B has -50K and C +100K, so we seem to have +50K riding around free in the economy. ?...! says that really A should work to get hold of that 50K to pay B back. But if he doesn't (and don't the bankruptcy laws allow this), then we seem to actually have excess money in the system, rather than it vanishing. I must admit, that I find it rather hard to see how money is destroyed once it has been created,

Peter.