Friday, August 17, 2007

Can you say Moral Hazard?

Fed Cuts Discount Rate to 5.75 Percent to Ease Credit Crunch

The speculator's best friend has just stepped in to pull their bacon from the fire. Say goodbye to the value of the dollar.

Posted by richc @ 01:36 PM (2284 views)
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37 thoughts on “Can you say Moral Hazard?

  • From a trader mate:

    “they’ve extended the system repo period to 30 days and broadened the range of securities they will accept as a re-purchase for Federal Funds to include ‘ home mortgages and related assets’ which basically means that any US bank with subprime debt can pawn it for cheap funding with the Fed. Dow futures show +150 at opening but I’d be a payer at +250.”

    What happens when the Fed ends up lumbered with a load of worthless assets that people have pawned against? I have a suspicion that this is going to cost the US tax payer a very very large amount of money.

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  • Phew, that was a close call. Just closed my short position just before the annoucement got out.

    Market will no doubt rally short term, but long term I think it means that the fed might be less likely to cut interest rates to the general public.

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  • Surely this can’t be right! On July 13th we read (below) : “Lehman, Bank of America, Barclays Say Rout Is Over (Update3)”, on Bloomberg.

    Could they have made a mistake? They are experts, after all…..!

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a34LhnV4inKw&refer=home

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  • Stoatgobbler says:

    GBP calls still good value, it appears. The Bernanke put exists.

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  • tyrellcorporation says:

    Astonishing! This is a big green flag to all those Champaign Charlies in the City. Continue your reckless behaviour ‘cos we’ll bail you out when things aren’t going so well.

    Well if things take off again now I might as well wade in and buy a house asap because we do seem to be in a new paradigm where Western governments will protect house prices and try and feed consumers cheap credit at any cost. I’m feeling a bit low…

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  • waitingfor hpc says:

    me too….

    this is the most ridiculous situation I have ever seen. The problem has not gone away.

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  • tyrellcorporation says:

    …The ‘fundamental’ problem has just been compounded!

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  • This is just an indication of how bad things are, this may keep the markets going for another day but what about next week.

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  • dohousescrashinthewoods says:

    Well, at least the Tories want to abolish inheritance tax. I might as well vote them in, they can’t be any worse than this lot and at least, if I ever buy a house, I won’t have to hand the lion’s share over to a slathering sweatty Brown when I cark it.

    Either way, all we own will probably be worthless. Maybe I can start an economic protest (the only language understood by the sustainability-deaf elite) by promoting and bublicising legal tax avoidance schemes to the masses..

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  • I am glad that the words “discount rate” appear in the heading of this article

    the discount rate reflects the interest charged by the FED to it’s member banks to lend them funds

    this is not the same of the FED funds rate, the rate at which member banks lend to each other

    where did these funds originate from?

    why, the printing press of course, no sorry, a figure on a computer screen, why waste the ink

    the ultimate disgusting fraud, and a grotesque insult to fairness and the free market

    foreign creditors will have a lot to say about this, the dollar is bound to fall

    expect Paulson on a “trade mission” to Beijing in the near future

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  • Keep your nerve guys, this is really short termism from the Fed. At least the BoE was trying to front it out this morning by babbling on about ‘fundatmentals’ again. The bottom line is the western world’s credit cards are maxed out… The really funny stuff is still to come…

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  • Germany – early nineteen thirties. Printing presses operational round the clock. Meltdown to follow.

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  • I really do not know what to think anymore, thousands of people who can’t afford to get onto the property ladder will desert the UK.

    Our country has an amazing industrial past, but now all we seem to be able to do is move move money from A to B and “build” with ever increasing credit. I am currently living abroad for 12 months in a country with a wide range of financial and industrial companies, with a stable economy and can see the benefits.

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  • sold 2 rent 1 says:

    Calm down guys

    tyrellcorporation – STEP AWAY FROM THE ESTAGE AGENT’S WINDOW

    “The central bank reduced the rate at which the Fed makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent”

    This will not help “Johnny sub-prime homeowner”.

    This liquidity crisis is not going to be solved by a single rate cut (or even 2 or 3 rate cuts).
    The bad debts are still out there.

    We should have some hefty stock falls towards the end of next week that will see this correction back on track.

    Gold jumped 11 USD on the news. Still too early to pile in though.

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  • This is simply JPMorgan et al voting to give themselves short-term cheap money to allow them time to get their own cash out before everyone else wants theirs back. No change to the basic problem i.e. excess leverage and zero regulation in the derivatives markets. FTSE target – 5,500 by autumn. House price falls of 40% by 2010.

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  • European-bear says:

    Once house prices start goin down, they can cut rates as much as they want…they will still keepo going down. Rate cuts willnot stop a HPC once started. It did not in the early 1990s. Once prices start going down, every buyer will wait to get it even cheaper … its the reverse psycology of must buy now before it is too late in a rising market….watch the US house prices go down for the next 2 years….

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  • I must admit my first thought at hearing this new was exactly what sovietuk has said. Trying to get my poor little brain around the implications of what is happening. Thinking about holding more gold as this sort of news just makes me lose faith in fiat currency, and it does appear that it is reacting less badly than other metals, which gives me some confidence that if things went truly pear shaped it would break away from industrial metals – then again, I could be horribly wrong. One thing does seem certain though; at the end of this mess we aren’t going to see as much easy lending in the high street. Certainly risk premiums are going to go up on “subprime” BTL loans in this country (not that there are any in this country mind you…), which can only mean a HPC, provided rates aren’t dropped through the floor. But that would mean the pound dropping and inflation taking off. If that happens I’ll be asking the comptroller to stop the planet so I can get off.

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  • at least i made some good money today in shares….

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  • All the ground that the dollar has made up recently will be wiped off by this move. All those that have been piling into treasuries over the past few days will be opening the champagne.
    I did expect an eventual cut, but this has taken me completely by surprise. The markets may all be up today, but will it stabilise them? Economic hair of the dog does not work in the long run.

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  • Yes, calm down muchachos.

    As I understand it (will admit to not being an expert if someone wants to put me right), the discount rate is used for very short-term, emergency borrowing by banks from the Fed itself. Sure, this will help keep some institutions solvent (they will be able to keep their reserves above the mandatory minimum, for now), but this isn’t money they are going to then lend on to others for corporate buyouts or mortgages, etc. The equivalent to our BoE base-rate (if I have this right) is the federal funds rate, which you can see they are leaving unchanged.

    So, federal funds rate is not being cut even though growth is slowing (because consumer spending is slowing), unemployment is increasing, house prices are continuing to fall, defaults are continuing to be high, and the DOW is zig-zagging hugely on an overall downward trend. What does that tell you! Rock and a hard place anyone? The BoE should realise they’re in no better a position, so this market turmoil is not likely to cause a cut in base-rates and so won’t kick the boom off again. We’d need rates to go down and employment to stay high and lending criteria to stay loose, for the boom to be able to carry on. None of these events is likely with things in the state they are, let alone all of them happening together, so as Corporal Jones would say, “Don’t panic Captain Manwaring!!!”

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  • Hey – has anyone noticed that Royston hasn’t been around? Is he on holiday or did he really know this was going to happen so soon and is rather busy at work?

    I still can’t help but think that this ‘blip’ will settle down and the really ‘big one’ will happen in the Autumn….

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  • A brief History of Money – read downwards:

    c 9000 – 6000 BC Domestication of cattle and cultivation of crops
    Subsequently both livestock, particularly cattle, and plant products such as grain, come to be used as money in many different societies at different periods. Cattle are probably the oldest of all forms of money, as domestication of animals tended to precede the cultivation of crops, and were still used for that purpose in parts of Africa in the middle of the 20th century.

    ? – c. 3100 BC Writing invented in Mesopotamia
    The main use, and probable motivation for its development, is for keeping accounts.

    c. 3000 – c. 2000 BC Development of Banking in Mesopotamia
    Banking originates in Babylonia out of the activities of temples and palaces which provided safe places for the storage of valuables. Initially deposits of grain are accepted and later other goods including cattle, agricultural implements, and precious metals.

    c. 2575 BC Construction of the Great Pyramid at Giza
    Given the limited range of uses of money in certain ancient civilizations, the completion of large-scale and long-term projects was usually based on detailed state planning, often involving slavery. Similarly, the much later but rigidly hierarchical civilization of the Incas in Peru managed without money at all.

    c. 2250- c. 2150 BC Cappadocian rulers guarantee quality of silver ingots
    The state guarantee, probably of both the weight and the purity of her silver ingots, helps their wider acceptance as money.

    c. 1792 – c. 1750 BC Reign of Hammurabi in Babylon
    The Code of Hammurabi includes laws governing banking operations.

    c. 1200 BC Cowries used as money in China
    The Chinese character for “money” originally represented a cowrie shell. Cowries have been used as money in many different places at different periods. In parts of Africa they were used for this purpose as recently as the middle of the 20th century.

    c. 1000-500 BC Tool currencies adopted in China
    These were metal models of valuable implements that had previously been accepted in commercial exchanges, e.g. spades, hoes and knives.

    c. 950 BC Queen of Sheba visits Solomon and they exchange gifts
    The Biblical account of their encounter is probably the best known example of competitive gift exchange.

    687 BC Crude “coins” invented in Lydia (according to Herodotus)
    Herodotus criticises the gross commercialism of the Lydians who are not only the first people to coin money but also the first to open permanent retail shops.

    2007 AD Fed Cuts Discount Rate to 5.75 Percent to Ease Credit Crunch
    A brief future of money read upwards – suddenly cattle and grain are starting to look more attractive than $ and £’s

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  • C'mon Correction says:

    Wow, this shows how serious the problem is. I think we’re entering a long period of turmoil. All those reports stating blindly that stock markets, house prices etc won’t go down can think again !

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  • When I say don’t panic, I’m saying don’t panic that HPC will still happen, of course.

    Panicking that we’re about to slip into a dystopian nightmare straight out of hollywood movies, with looting, armed gangs and the return of fuedal warlords, well that’s another matter…

    Still, musn’t grumble. 🙂

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  • dugmug – Not an expert either, but I think the issue is not what has been done specifically in this case, but what it indicates about the likely reactions to problems in the future. There does not appear to be any hazard in borrowing money (institutionally). They will do their best to stop financial institutions from paying for their bad deals because they don’t know how serious the knockon effects will be. In the end, this must mean that savers will be punished. Although stuck between a rock and a hard place, they will have to chose at some stage and my guess is that the direction of choice will be an inflationary one – until that is no longer possible.

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  • Yup, let’s all keep our nerve here, for this is not the time to think we have entered any new paradigm or that the Fed / ECB, etc., can print their way out of this mess. And remember too, that this scenario of financial meltdown wont happen over a 2 week period; it will take years, and like the dot.com boom prices will just whither away over time and never recover – or at least not before 2015-2017. So sit back, stay liquid and enjoy the ride, ‘cos it’s sure going to be interesting.

    The Fed only said a couple of days ago that short of a catastrophe they wouldn’t intervene – so what happened? Plunge Protection Team working overtime yesterday to swing the fall back? What exactly do they know that we don’t for this action to be taken? The fact that the Fed have done this should give us all comfort that there’s a metaphorical French farmer with a muck spreader heading to Wall St (actually a whole bunch of them) and beyond…

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  • ps. my concern is not that a HPC will be averted, but maintaining /increasing the value of my savings.

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  • sold 2 rent 1 says:

    d’oh,

    “Thinking about holding more gold as this sort of news just makes me lose faith in fiat currency”

    There are 2 reasons to buy gold.
    A. As a hedge against inflation / money supply growth
    B. To protect from a deflationary depression. When all asset classes are falling and you don’t trust the bank and want a liquid asset.

    People are buying gold today because of (A).
    IMHO the gold mania that will hit around 2012 will be based on (B)

    At some point the gold buying reasons will switch from (A) to (B).

    The big question is when will this happen and how much will gold fall in the switch over.
    My guess is this will happen after the credit crunch later this autumn.
    How much will gold fall to? 600? 550? 500? Anybody care to have an input.

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  • C'mon Correction says:

    Dollars will be worth less than toilet paper soon !

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  • You guys are all starting to scare me… After selling my house last Christmas the equity has been sitting pretty gathering interest, but now I am worried that I should be spreading it around a number of accounts or better still buying gold. What would people advise? Economics is a new field to me and I do not claim to be an expert but I can’t understand how anyone with half a brain doesn’t think that we are heading for ‘Interesting Times’. How best to protect yourself and your investments, however takes a little more insight than I have at the moment.

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  • Matt_the_hat says:

    How do you buy gold and where do you store it does anyone have any suggestions. (i.e. minimal amounts bar/coins)

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  • tyrellcorporation says:

    Afrobaggie, just make sure yoyu have no more than about £30k in any one account ‘cos that’s the amount of cash that is guaranteed in the event of a bank/building soc collapse. I recommend Icesave and Sainsburys online at the moment.

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  • Dollars will be worth less than toilet paper soon !

    Soon? What would they be worth today without ‘ free floating’ currencies and Forex manipulation, sorry, of course I mean Forex intervention.

    People often refer to ‘paper’ or ‘fiat’ money and ‘running the printing presses’ etc. but (IMHO) I think this underestimates to power of ‘digital’ currency & just what power is wielded by limitless funding aimed at ‘adjusting’ prices to whatever best suits at whatever particular time.

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  • voiceofreason says:

    This is the Fed avoiding collateral damage while we wait for the debt re-financing to work through over the next 2 months or so.
    Only then will we see who is really sitting on the $300bn losses. They are still there somewhere, waiting to be unearthed, causing all this volatility.
    I wish I knew a bit more about how often these bonds come up for refinancing….

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  • Re: buying gold.
    Try goldmoney.com. I have around eight grand’s worth of gold and silver with them. James Turk is a highly respected guy, not an internet cowboy. You’ll pay a few percent premium to cover the storage costs of the metals.

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  • Thank you S12R and Tyrell… Time to move some cash…

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