Saturday, January 5, 2008

Can you believe this – Fortnightly auctions will continue for as long as necessary, the Fed has said.

Fed ups credit auction offering

The US Federal Reserve has increased the amount of money available to banks as it seeks to help financial markets hit by the global lending squeeze. It said that banks could bid for $60bn worth of credit this month, instead of the $40bn it had earlier promised. So how long will it take before the Banks trust oneanother enough to begin lending each other money?

Posted by jack c @ 02:39 PM (1010 views)
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9 thoughts on “Can you believe this – Fortnightly auctions will continue for as long as necessary, the Fed has said.

  • more money after bad… how does the old saying go??

    I wonder if they will auction money to the local plumbers or corner shops when they look like they are in dire straits!!!!!

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  • happyrenterz says:

    I read somewhere that this is about banks needing to hoard cash. Banking regulation mean they need $1 capital for every $10 of debt security. Now that there are mortgage problems no investors want these securities so the banks need to take them back on their books. This means they need to keep borrowing from the Fed to cover their capital requirements. But of course they are losing money doing this and have little incentive to write more mortgages. So the crunch continues unless they find a way of off-loading these securities. There is a good article in the FT here on this. There is also a bit more on this point about “banks feeling more comfortable with these auctions ” here.

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  • @ hr – not true effectively there is zero percent needed . That changed some time ago . The ten percent is restricted to checking accounts .

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  • Printing money won’t make any difference! It’s funny how central banks never learn from history!

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  • happyrenterz says:

    @tm i read time and time again that banks capital requirements are going up because they have to take SIVs back on their books, so it cant be zero percent?

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  • @hr

    i said effectively zero percent…

    “That’s the theory. But a change came in the 1970s with the emergence of money market funds, which require no reserve requirements. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits. At present, reserve requirements apply only to “transactions deposits” – essentially checking accounts. The vast majority of funding sources used by banks to create loans have nothing – nothing – to do with bank reserves.” – see http://www.hussmanfunds.com/html/fedirrel.htm.

    Indeed thats the whole point isnt it – a giant credit bubble that got reflated by this very move!!!

    . I’m not disagreeing with you because the (normal eg people’s / company’s) deposits are in effect liabilities and i assume that they have to equalise these other liabilities – CDOs / SIVs etc. back onto their books. In other words you are probably right but probably not for the reason you state. I’m not a banking expert but i am pretty sure about the federal reserve move in the 90s – now it may be that that has recently been superseeded by more current legislation that reverses the Feds move in the 90s – if thats the case i stand corrected!!! :-).

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  • From the horses mouth!!

    “Reserve Requirements and Money Creation
    Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

    In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States. ”

    http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html

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  • happyrenterz says:

    thanks for the explanation tm

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  • yea but @hr – i think the issue may be that the deposits are liabilities and the CDOs etc. are assets. The issue (again i think and i must admit ive not really looked into this) is that if you have an asset marked to market and that asset isnt as valuable as you thought you then have to bolster your (other) assets or decrease your liabilities to compensate. As loans are assets i think you basically have to contract the LTV on the loan book (or at least not expand it) or somewhole mincrease the collateral. Again i could be talking complete tosh here but this explanation means we are both “right”!! As i said bankings not really my thing but i did know about the Banks / Feds ability to create in effect unlimited money through this multiplier with zero reserve requirements. Having said all that i think it might be interesting to see how much the reserve %s actually are – but i dont understand enough of the categories of assets / liabilities to know if we are being hoodwinked! No doubt all will be revealed later or someone oelse on this site will know.

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