An explanation of the problems with the banking system.

[Teeninvestor]

Which is why the loans will be called in, once the banks are able to pay them back and are able to resume normal lending activity amongst themselves.

The Fed's #1 mission in normal economic times is to keep inflation low, and they have been very good at doing this over the last 25+ years. After this crisis is over, they can return to that mission. Right now they are the bank of last resort, backstopping the rest of the banking system while the economy attempts a recovery.

If things keep getting worse over the next few months, and banks like Citi and BAC continue to face insolvency, they may need to be nationalized completely and broken up. That would be incredibly complicated and costly, according to many of the things I have read. Hopefully it doesn't happen.

Unless Obama's stimulus package is able to revive the real economy, it will be very difficult NOT to nationalize the banks, as asset prices continue to deterioriate.

Great- we have a choice between deflation and hyperinflation. I choose deflation.

 

[Cutlass]

you choose wrong. but then as there is no real risk of hyperinflation, you're twice as wrong.

 

[Gogf]

As an investor, I find that people talk about the banking system and why it is in trouble. Here I will try to explain the whole issue of the trouble and what I think should be done.

Out of curiosity, how old are you?

 

[Integral]

Financial Crisis Balance Sheet

Government Entity Sum in Billions of Dollars
Federal Reserve
(TAF) Term Auction Facility 900
Discount Window Lending
Commercial Banks 99.2
Investment Banks 56.7
Loans to buy ABCP 76.5
AIG 112.5
Bear Stearns 29.5
(TSLF) Term Securities Lending Facility 225
Swap Lines 613
(MMIFF) Money Market Investor Funding Facility 540
Commercial Paper Funding Facility 1800
TALF 200
(TARP) Treasury Asset Relief Program 700
Other:
Automakers 25
(FHA) Federal Housing Administration 300
Fannie Mae/Freddie Mac 350
TARRA - The American Recovery and Reinvestment Act 787

Total $6,814.5
And this is as of 2008.

Fair enough???

Note that about half of Fed's interventions were sterilized and had no effect on the monetary base. Overstating the problem doesn't do anyone any good.

 

[Whomp]

Teen--I appreciate your enthusiasm but the numbers you post are dubious at best. In some cases you don't seem to have a grasp on what's the difference is on things like "notional value", "pledges", "guarantees", "TARP bailouts" = "5% preferred (no write off which is quite punitive)"

having caused the crash of 1987

Are you saying arbitrage between the cash and futures market is bad?

The size of the derivative market grew heavily. As of now it stands at $300 TRILLION.

I suggest you re-read Bigfatron's post. Do you actually know what this represents?

US Lehman Brothers bank used 60X Leverage, which meant a 1% move was a 60% move for Lehman. Citigroup used 26X Leverage

I think you need to check your work here. Lehman was overlevered but never 60x.

If the bond became worthless, the bank you bought the CDS from would pay you. As of 2008, the CDS market stood at $50 trillion.

Do you know from whom and why this market was created? Whether it should be regulated is a whole other story.

Not only do the banks have most of their money tied up in the subprime debt

I think you need to go back and see who owned the "equity" and "mezzanine" tranches to understand who was wiped out. In fact, Blackrock has pointed out that some of the Bear Stearns high end tranches are cash flowing above their Bear Stearns mark to market values. So you may want to take a deeper look into your claims.

 

[Teeninvestor]

I suggest you re-read Bigfatron's post. Do you actually know what this represents?

This represents the notional value of these derivatives, I believe?

From wikipedia:

Tailor-made derivatives traded on a futures exchange, are traded on over-the-counter markets, also known as the OTC market. These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, etc. The total notional amount of all the outstanding positions at the end of June 2004 stood at $220 trillion. (source: BIS: [3]). By the end of 2007 this figure had risen to $596 trillion

I believe the portion in the USA is about 300 trillion.

I think you need to check your work here. Lehman was overlevered but never 60x.

You are right and I am wrong.

Lehman on Monday said asset sales during the quarter reduced its gross leverage to 25 times equity and its net leverage was down to 12.5 times at the end of May.

Of course, I believe their bond division was leveraged at 60X. Remember, this is after they reduced Leverage. So normal leverage would be around 30X(still a lot)

Do you know from whom and why this market was created? Whether it should be regulated is a whole other story.

I believe this market was created to insure debt products. Am I not correct???

I think you need to go back and see who owned the "equity" and "mezzanine" tranches to understand who was wiped out. In fact, Blackrock has pointed out that some of the Bear Stearns high end tranches are cash flowing above their Bear Stearns mark to market values. So you may want to take a deeper look into your claims.

My point is that the Banks were hit by a double whammy of both losing their money in the subprime mess and being the counterparties of many CDS's, which led to heavy losses.

Note that about half of Fed's interventions were sterilized and had no effect on the monetary base. Overstating the problem doesn't do anyone any good.

you choose wrong. but then as there is no real risk of hyperinflation, you're twice as wrong.

So you think that printing 10 trillion doesn't cause inflation???? If there's one thing we've learned from this it is that the Federal Reserve is inept at knowing when to get liquidity out/in of the market. It will be a miracle if they can put all that liquidity out in time. Imagine tens of trillions of dollars flowing into the monetary system....

Also, hyperinflation is much worse than deflation. US and Britain were slightly deflationary for much of the 19th century, and that did not affect their economic performance. Hyperinflation, on the other hand, wipes out all the liquid wealth of a country--- something the US will need desperately to stem the credit crunch.

 

[Cutlass]

You keep inventing the idea that the Fed has printed $10 trillion. Until you stop inventing "facts" it's hard to have a rational conversation.

 

[Teeninvestor]

You keep inventing the idea that the Fed has printed $10 trillion. Until you stop inventing "facts" it's hard to have a rational conversation.

Really? that's why it is quoted by every media. The fact is that the money spent is 10 trillion and eventually it will have to be printed to reflect its presence in the economy.

http://www.google.ca/search?hl=en&q=Total+cost+of+US+bailout&meta=
see this google search

Financial Crisis Balance Sheet
Government Entity Amount Allocated in Millions of Dollars Spent/Lent In Millions of Dollars
Federal Reserve:
(TAF) Term Auction Credit (allocated) 900000 415302
Discount Window Lending 139256
Banks (other loans primary credit) 92645
Investment Banks (other loans Primary dealer and other broker-dealer credit) 46611
Loans to buy ABCP (other loans Asset-backed commercial paper money market mutual fund liquidity facility) 661923
AIG (allocated minus Treasury 40B) 112500 87397
Bear Stearns (initial loan to JPMorgan) 29500 26919
(TSLF) Term Securities Lending Facility 225000 200524
Swap Lines (other federal reserve assets) 601963
(MMIFF) Money Market Investor Funding Facility (allocated) 540000
(CPFF) Commercial Paper Funding Facility *upper limit from Reuters 1800000 270879
(TALF) Term Asset-Backed Securities Loan Facility 200000 200000
GSE MBS NO NAME Program 600000 600000

Treasury:
(TARP) Treasury Asset Relief Program 700000 330000
Exchange Stabilization Fund to guarantee principal in money market mutual funds 50000
Treasury direct purchases of MBS since Sept. 26570
Citigroup (Treasury+FDIC guarantees) 238500

FDIC:
Guarantees for Banks 1900000

Other:
Automakers 25000
(FHA) Federal Housing Administration 300000
Fannie Mae/Freddie Mac 350000

TOTAL 7361917
Note: Figures as of Nov. 28, 2008

http://www.cnbc.com/id/27719011
And this is in November.

It could have easily exceeded $10 trillion by now.

 

[Cutlass]

And you have been told how many times that that is not accurate?

You're new here. So let me clue you in. You have 2 working economists and a variety of people with a varied level of and interest and education in economics all telling you that you are wrong. There are people with several different ideologies and beliefs telling you that you are wrong. If you keep repeating the same things over and over again despite the fact that everyone, of all levels of education and beliefs tell you that you are wrong, then people are simply not going to respond seriously to you.

 

[Teeninvestor]

You're new here. So let me clue you in. You have 2 working economists and a variety of people with a varied level of and interest and education in economics all telling you that you are wrong. There are people with several different ideologies and beliefs telling you that you are wrong. If you keep repeating the same things over and over again despite the fact that everyone, of all levels of education and beliefs tell you that you are wrong, then people are simply not going to respond seriously to you.

So kindly explain to me why all the media reports cited 10 trillion as their figure????
Also, what do you think is the true figure???

Also, kindly explain to me how we're going to get trillions of dollars out of the banking system, after the velocity of money returns to normal??? as you know the circulating currency of the US is only 7.7 trillion...

 

[Cutlass]

First, the media in the US really isn't very good these days. Second, they tend to go for sensationalism and the worst case to be scary. 3rd, it's outstanding rare for a reporter to have any education or background in the subject they are covering. 4th, they rely far too much on what people with an agenda tell them. 5th, they often have an agenda themselves. 6th, a promise to pay out to a certain amount does not equal that that amount of money has already been paid out. 7th, some of that bailout money went to companies that the government took partial ownership of, and we will get much of that back when the companies are resold.

I could go on, but others have already done it better. And you ignored them, so I'm confident I won't be getting through to you either.

 

[JerichoHill]

I'll take your experience into account. Right now I am playing with a small real account(summer job savings). Am up 14%, but was up 31% three days ago(weep). My feeling is that I might do better because I was investing in the SECOND GREAT DEPRESSION.

This isn't the 2nd great depression. And if you have that kind of swing in your portfolio, you aren't investing alot, or you're not diversified. You are not an investor. An investor isn't going to look at his day to day fluctuations. And I'm not saying being a speculator is bad, I'm just pointing out that you are using the wrong term.

I have been an investor since 1998. That was when I bought 1 share of BERK/A at 13K with my summer job money after some careful research. Even in this bad market I believe its still a 7-bagger for me. That's pretty good. I am a contrarian investor,so I made big buys after the crash in 01 and I am making them again now, but only into companies that I believe have a structural advantage in their market (appropriate cash flow etc).

I don't know where my stocks/bonds/TIPS/etc are right now. I don't care. I bought all of them with a 5-10 year horizon. That's investing. Okay, that's not true. I know that Netflix recently became a 4-bagger for me. Yay. But I don't really care about where they are any particular day. I'm not planning on selling them anytime soon. You HAVE to have a long term perspective to be an investor. Any 1 year, 2 year or 5 year cycle of the SP500, DOW, etc, shows that losses can be substantial in a short time horizon. But when you move out to 10 years, losses are not typical. Losses barely exist that far out in any index. That's good.

FWIW, pay heed to Whomp as he's in the industry. Integral knows his economy too, and well, I'm an economist so I better know a bit...

 

[Neomega]

you choose wrong. but then as there is no real risk of hyperinflation, you're twice as wrong.

You are gonna eat those words.

 

[Cutlass]

You are gonna eat those words.

Bring it on.

 

[Teeninvestor]

First, the media in the US really isn't very good these days. Second, they tend to go for sensationalism and the worst case to be scary. 3rd, it's outstanding rare for a reporter to have any education or background in the subject they are covering. 4th, they rely far too much on what people with an agenda tell them. 5th, they often have an agenda themselves. 6th, a promise to pay out to a certain amount does not equal that that amount of money has already been paid out. 7th, some of that bailout money went to companies that the government took partial ownership of, and we will get much of that back when the companies are resold.

I could go on, but others have already done it better. And you ignored them, so I'm confident I won't be getting through to you either.

I agree with the media is not a very reliable source, but care to tell me what you think is the true figure???? As in which part is "false" and which part is "truly" spent.
Can a real economist help do so????
I think one thing that no body would be debating is that massive amounts of liquidity have been pumped into the system and it will be difficult to get them out.

For any real economist, I have a question: How do you keep inflation out of the system, if you just doubled the money supply(or something similar, considering the scale of intervention in the system).

This isn't the second Great Depression

You wish it was the great depression. A week again, we were down more than we were in the great depression at the same time(as in number of trading days after the high). We were donw 56%, Great Depression was 53%.

I don't know where my stocks/bonds/TIPS/etc are right now. I don't care. I bought all of them with a 5-10 year horizon. That's investing. Okay, that's not true. I know that Netflix recently became a 4-bagger for me. Yay. But I don't really care about where they are any particular day. I'm not planning on selling them anytime soon. You HAVE to have a long term perspective to be an investor. Any 1 year, 2 year or 5 year cycle of the SP500, DOW, etc, shows that losses can be substantial in a short time horizon. But when you move out to 10 years, losses are not typical. Losses barely exist that far out in any index. That's good.

Remember the effects of inflation....

 

[Cutlass]

I'm not sure what has been spent, because most of what may potentially be spent either hasn't, or won't be for years. But I do know that there has not been $10 trillion spent. That's something everyone should know.

 

[Teeninvestor]

Financial Crisis Balance Sheet
Government Entity Amount Allocated in Millions of Dollars Spent/Lent In Millions of Dollars
Federal Reserve:
(TAF) Term Auction Credit (allocated) 900000 415302
Discount Window Lending 139256
Banks (other loans primary credit) 92645
Investment Banks (other loans Primary dealer and other broker-dealer credit) 46611
Loans to buy ABCP (other loans Asset-backed commercial paper money market mutual fund liquidity facility) 661923
AIG (allocated minus Treasury 40B) 112500 87397
Bear Stearns (initial loan to JPMorgan) 29500 26919
(TSLF) Term Securities Lending Facility 225000 200524
Swap Lines (other federal reserve assets) 601963
(MMIFF) Money Market Investor Funding Facility (allocated) 540000
(CPFF) Commercial Paper Funding Facility *upper limit from Reuters 1800000 270879
(TALF) Term Asset-Backed Securities Loan Facility 200000 200000
GSE MBS NO NAME Program 600000 600000

Treasury:
(TARP) Treasury Asset Relief Program 700000 330000
Exchange Stabilization Fund to guarantee principal in money market mutual funds 50000
Treasury direct purchases of MBS since Sept. 26570
Citigroup (Treasury+FDIC guarantees) 238500

FDIC:
Guarantees for Banks 1900000

Other:
Automakers 25000
(FHA) Federal Housing Administration 300000
Fannie Mae/Freddie Mac 350000

TOTAL 7361917
Note: Figures as of Nov. 28, 2008

Can we put which parts of these figures are wrong and which parts are right.
Also, remember to add 2-5 trillion to the end as that amount has been spent since November.

So far the only figure questioned is the commercial paper market. Even eliminating that and tacking Obama's stimulus+ lending+ 2nd/3rd rounds of bailouts the total money spent is over 10 trillion, guaranteed.

You're new here. So let me clue you in. You have 2 working economists and a variety of people with a varied level of and interest and education in economics all telling you that you are wrong. There are people with several different ideologies and beliefs telling you that you are wrong. If you keep repeating the same things over and over again despite the fact that everyone, of all levels of education and beliefs tell you that you are wrong, then people are simply not going to respond seriously to you.

If you can show me what is wrong about these figures, I will stop using them.

 

[Neomega]

And you have been told how many times that that is not accurate?

You're new here. So let me clue you in. You have 2 working economists and a variety of people with a varied level of and interest and education in economics all telling you that you are wrong. There are people with several different ideologies and beliefs telling you that you are wrong. If you keep repeating the same things over and over again despite the fact that everyone, of all levels of education and beliefs tell you that you are wrong, then people are simply not going to respond seriously to you.

economist =/= science. Who cares.

First, the media in the US really isn't very good these days.

BS

Second, they tend to go for sensationalism and the worst case to be scary.

It is scary, it is also true.

3rd, it's outstanding rare for a reporter to have any education or background in the subject they are covering.

Yeah, we already went through this once. I contacted John Virgin and asked his credentials because people like you were doubting his credentials. Turns out he wrote me back, and what do you know, he did have a degree in economics, as well as having been an economic reporter for many years.

But no, says cutlass, just trust our resident economists here at CFC.

4th, they rely far too much on what people with an agenda tell them.

eveyrbody has an agenda.

5th, they often have an agenda themselves.

see above

7th, some of that bailout money went to companies that the government took partial ownership of, and we will get much of that back when the companies are resold.

Yes, yes, lets buy more debt. The solution to getting out of debt is acquiring more, that's the American way.


And you hiding behind Whomp's and JH's coattails, sniping at TI is pretty much worthless. They can handle themselves, I am sure.

 

[JerichoHill]

For any real economist, I have a question: How do you keep inflation out of the system, if you just doubled the money supply(or something similar, considering the scale of intervention in the system).

You wish it was the great depression. A week again, we were down more than we were in the great depression at the same time(as in number of trading days after the high). We were donw 56%, Great Depression was 53%.

Hi. I am a real economist. I work for the US Government. Welcome to CFC.

For the latter statement, you're comparing the stock market in two different time periods with a much different cohort acting upon it. Further, you are only using the stock market as a metric, the sole metric, of comparison between now, and TGD. To base your assessment on 1 metric, and a highly flawed, time-sensitive metric is exercising very poor judgment. There are a plethora of other metrics and statistics that we can compare recessionary periods with. By all metrics, we are now about even with the 1979-1981 recession, though we are without the high inflation and unemployment. So no, we're not at TGD levels, not even close. Further, because the government is not restricting the money supply, we're liable not to get anywhere close to TGD levels (that was a critical mistake of the Fed in 1929, its basic economics that the money supply should not be constricted in a recessionary period).

Further, you are worried about inflation. I pointed out previously that there is not a perfect correlation between an increase in government spending and subsequent inflation. If you are not familiar with some of Lucas' work, I suggest you bone up on it.

 

[Neomega]

Further, you are worried about inflation. I pointed out previously that there is not a perfect correlation between an increase in government spending and subsequent inflation. If you are not familiar with some of Lucas' work, I suggest you bone up on it.

Wishful thinking. And this isn't just government spending, that's just a small portion of it. A vast majority of it is outright money printing, no matter what fancy little doublespeak people try to attach to it.

This isn't the 2nd great depression.

Not yet.

Further, you are only using the stock market as a metric, the sole metric, of comparison between now, and TGD

Why do you constantly say this to intelligent people that mention the fact the market has dropped? We are not using the market as the only metric. You should not insult our intelligence by assuming that because we mention the market, we haven't considered other things, like unemployment, and production loss. Taking those into consideration, no it isn't the second great depression... yet.