The Fed increases swap lines to $620 Billion!!!!

OMFG

The Fed increased swap lines with other central bank in a move to avert the credit squeeze. This frankly is a very big cheque. And short term rates have barely budged.

26 thoughts on “The Fed increases swap lines to $620 Billion!!!!

  1. Note that the Fed release says, “financing will be available against good collateral.” The central banks are continuing to flood the markets with cash, in an effort to calm LENDERS, not debtors. The credit squeeze in the U.S. is becoming systematic; all lenders are becomin misers, waiting for the other fellow to go first.

    So, what is “good collateral”? Normally, risk/reward valuations in the open market determines what is good collateral. But what if your ‘good’ collateral includes risk-free lending that turned into a fire sale of falling values? In a seller’s spiraling market, what is ‘good’?

    The Congress has turned down the bailout, until another vote later this week. No one is cheering, but the Members who voted against the nationalization of mortgage lending are grimly determined to avoid a trip down, as one called it, “the slippery slope of socialism.” For the bailout to pass, major concessions are going to have to be made in 1). the unprecedented dictatorial powers given to the executive, and 2). considering funding insurance against default instead of purchasing non-performing assets.

    Fortunately, the proposed bailout included language meekly asking the regulators to reconsider their change in accountng standards that did so much to propel the meltdown; much stronger language might be in the re-vote. With the return to former accounting standards, the free-fall in asset values will come to a halt and a bottom will be reached. Why the language to the regulators (the SEC) is so timid is mystifying to anyone who is not a politician.

    This melt-down likely assures the election of Senator Obama as our next president in five weeks, under the asumption that the crisis occurred during Mr. Bush’s administration and the conservatives should be punished.

    They should be punished; but so should the socialist world-view that originally created this mess.

  2. Mark my words.

    This is the worst possible thing the congress has done in a generation. I hope the GOP gets ape raped at the polls for this.

  3. JC,

    The US banking system has not collapsed and there is no run on banks. How will this package materially change (if passed tomorrow) the banking sector and US economy, besides changing who pays for the $700 bln black hole?

  4. And you say you guys aren’t doomsdayers?

    Funnily enough, I asked in the other thread where I should put my money, and in nearly 80 comments, nobody actually answered by question (aside from Pommy, I suppose, though I’m sceptical of his answer)

    If bank failures are a risk, then logically, should you not have your money spread over several banks (amongst other investments)?

  5. Re Duoist-
    I wonder if the current administration will suddenly ‘find’ Osama, just in time to help the Republicanters to win the election? I wouldn’t be surprised if they know where he is, but don’t know the best way to handle him. If they try to take him and he escapes, he’s a hero again. If they kill him in a raid, he’s a martyr for the jihadi cause. But capturing him alive might be very difficult.
    Still, to help the Republicans out…..

  6. Pommy – of course there will be bank failures in Australia so long as you specify no particular timeframe. For some fun what odds will you give me on a bet about whether any Australian owned bank goes bankrupt (or into administration) between now and 1 January 2010?

    I’ll take the following list as authorative on the question of which banks are Australian owned.

    http://en.wikipedia.org/w/index.php?title=List_of_banks_in_Australia&oldid=216573125

  7. Mark – there will be bank failures in Australia because the banks are heavily exposed to the property market. and property in Australia has just started to come off from a 12 year bubble.

    There will also be bank failures here because people on the street will see what is happening abroad and they will move their money to the ‘safest’ banks (the Big 4 and the highly rated foreign banks that operate here such as Rabo, ING and HSBC). This is also the smart thing to do.

    Terje – 50:50

    Fleeced – correct. i have accounts with Westpac, CBA and Rabobank

  8. Mark – take a look at the share price of Fortescue or BHP. or the comments from the head of China’s Sinosteel, that China’s steel industry has just entered a ‘severe recession’. what do you think this will do to property prices in Perth and QLD?

    property prices currently trade at 7x median wages. the long term average is 3x. and forget the arguments about immigration – the UK property market demonstrates that the immigration argument in support of property is now irrelevant. it’s all about jobs and funding.

  9. TerjeP – i’ll buy your children some new shoes (if you insist on leaving your hard won cash in a BBB rated bank such as Adelaide or Queensland) 🙂

  10. Hi Mark:

    Look, there hasn’t been runs on banks because the FDIC has stepped in before that happened. There are bank failures but they’re not happening in the old traditional sense of banks simply running out of cash.

    The problem as I see it is that now that the stock market is in free fall what happens to the US budget in term of having to carry old the old baby boomers that were reliant on stock gains and dividends to fund their retirement. These people suddenly come on the roll. That’s one reason why I always thought it was important that the stock market held up. We can’t stop market forces , but the package could have give the fed time to expand the money supply and then we hope to god that things would catch up.

    I’m new at this. I’ve never seen these events happen in such scale.

  11. And mark

    The banking system hasn’t collpased, but to all intents and purposes the wholesale part has basically seized up.

  12. Fleeced:
    Funnily enough, I asked in the other thread where I should put my money, and in nearly 80 comments, nobody actually answered by question (aside from Pommy, I suppose, though I’m sceptical of his answer)

    I thought that was just a rhetorical question.

    Ok, Cash. Cash, cash.

    Leave it with Westpac as it seems like it’s a safe bank. Leave some with CBA as it’s also reasonable safe.

    Buy some gold as the only way out of this for the US is to reflate. Once you see heavy duty reflation.. and it will come buy hard assets, say stocks with boring business lines and having no borrowings to speak of.

    The point is that you can’t really make money in this game, the objective is to lose less relative to other people in real dollar terms.

  13. Fucking farmers are another group that are running up working capital debt. If the credit market remains seized where the fuck are they going to get money for planting etc.

    Some of you guys think this is doom mongering, but it isn’t as all you have to do is follow the credit trail and see where it leads to.

    There could be other bank failures this week in the US.

  14. Good move by the fed. Good move by congress.

    Now we’ll see stock markets fall (as they should) and presumably we’ll see the US go into recession, perhaps taking down a few other countries with them. As they say in the Matrix, this was inevitable.

    I think Australia will do relatively better than many other developed countries.

    And I do think that JC & pommy are doom-mongering. Help! We’re being invaded by a carbon-emmitting short-selling terrorist! 🙂

  15. John H;

    If the world is having a credit crisis who on earth are we going to be doing better than others with a very leveraged economy and a C/A deficit of around 6% of GDP.

    That’s not going to happen. Yes, we will go into recession and it will be deeper than what people think.

  16. Temujin

    we may well be doom-mongering 😉 but we have just experienced the third worst month for stocks since 1945.

    i.e. shit is happening.

    my point about moving your money to safe banks is not doom-mongering but just common sense. the likes of Macquarie and Bk Queensland don’t pay you any extra than say CBA or NAB anyway – ie its a no downside trade.

    btw – if you want exposure to one year senior unsecured (ie a term deposit) Macquarie risk in the markets, they will pay you 20%.

    alternatively you could accept the 8% on offer direct from Macquarie.

  17. Pommy – Australian banks will always be exposed to property – they are largely retail banks and the mortgage market still makes up the bulk of business. But what banks failed in 1991?

    Australian banking and even more so morgage lending is based on income qualifications, not collateral. The asset quality is based on the debtor’s ability to service the loan.

    If the property market crashes, then we might end up with a heap of pissed off people paying credit card rates on shitbox homes. But if we have continued economic growth and they keep their jobs….

    What evidence is there that the US credit crisis will materially impact Australian economic growth any further?

    Australian porperty is crazy – I agree. Immigration actually makes houses cheaper (increased specialisation lowers costs of commodities used to build). We have a multifactorial explanation – cheap credit, subsidies, supply restrictions. If we took these away tomorrow, property prices would fall as well. I don’t expect a fall in property prices to engender a crisis because they fall due to a crisis.

    As for the banks – Australia has the big four/five and five to seven smaller banks and some bigger foreign competitors. Rightly or wrongly, Australians hate the big four. As long as Bendigo, Suncorp or Bankwest market well and are more conservative on lending, why would there be any chance they would collapse or see a run?

    Goldman Sachs for example predicted a US recession earlier this year. Except that their definition of a recession was “slow economic growth”. The definition changing game continues.

    Besides wholesale banking seizing up (perhaps it should considering there is regulation forcing it to package non performing assets such as “NINJA” mortgages) how would America and the banking system materially benefit from a 700 billion bailout package?

    I would be paticularly worried even if I was guaranteed on the soundness of such an idea, considering the US BOP position, and the already worrisome US Government deficit impact on this.

    A Chinese recession may have been long coming. 10% inflation? Forced savings have to come from somewhere. Inflation like this leads to credit misallocation, non performing assets and the inevitable fall in produvtity and liquidiation/cleanout.

    But. Does this mean that FMG (or BHP, RIO or GBG) can’t sell 40-200Mt of iron ore at historically high prices for the next 20-40 years?

    Maybe your answer is yes. I just want to know why if it is.

    Why would the position of these companies be better off if Bush’s package lead to moral hazard problems ala 1990s Japan?

    $700 billion is a lot of crowding out. Money gets cheaper but the private sector pays for the forced savings through productivity losses, dissaving or an increase in the real (long term, through inflation) cost of borrowing.

    I would be very worried about such a situation since Pommy already inferred that part of the reason why Australia’s property market is crazy is due to the explanation of the credit cycle made by the Austrian school.

    I guess I fail to see the necessity of this. I am unconvinced that failing to bail out failed businesses stops recessions. I do sympathise with these firms – they had to operate under the regulation that demanded non-discrimination in lending. Clearly it is time to end this.

  18. Mr. Gray:

    If OBL is killed just before the national election, Senator Obama will still be elected. But if he is captured by some dimwit who doesn’t know better, Senator McCain will be elected as the Middle East explodes into kidnappings of Americans, bombings of American properties, American embassy riots, etc.

    I’d bet in CIA incompetence before I’d adopt any conspiracy theory.

  19. The ASX isn’t in freefall. The low point for the banks was a couple of weeks ago when a couple of them came out and announced bad debt provisions. They have gone up since then. Today they dropped on open, but they regained and pretty much went sideways. All the losses have been already been factored in, all the nervous investors who were going to sell have already sold. When congress eventually does sign a bailout package later this week, stocks will surge, until then they will just go sideways while they wait for direction.

    However, when the Aus housing bubble well and trully pops, the banks are screwed. It will be a little while before that happens.

  20. JC wrote:

    I thought that was just a rhetorical question.

    lol, no… that’s why I devoted a whole thread to the question… naive, perhaps, but not rhetorical. Most of us here aren’t traders or economists. You talk of “swap lines” and whatnot, but most of us have no idea what this is, nor what it means (even after Googling). Setting up multiple bank accounts? I can do that. Buying gold? Wouldn’t have a clue how that’s done…

  21. You wanna know about swap lines?

    the central banks have set up multilateral agreements to lend money in each others currency to assist in the provision of liquidity.

    nearly all large international loans are done in US dollars so international banks have a good part of their assets and liabilities based in US dollars. The Fed say doesn’t have a relationship with UBS , a swiss bank. So in order to ease up the credit blockage the Fed lends US dollars to the Swiss national bank (central bank) who in turn lends the dollars to UBS.

    that a swap line in a nutshell

    Sorry, i assumed people knew and didn’t realize.

  22. Buying or selling gold:

    there is now an exchange traded contract on the ASX that lets you do that.

    You can trade paper gold but that a little more complex and unless you were in it full time there’s not point in worrying about it. However firms like CMC cater to individuals that wanna buy and sell gold to speculate.

  23. Why on earth would you assume the average person knows what a swap line is? That would be like assuming that the average Mongolian knew the difference between a half-back and a 5/8th in rugby league. This isn’t a financial blog, so financial terms should be explained when they are used.

    Pommy — nobody is denying that we have a financial problem. The issue is whether this is going to devistate the real economy, or just inconvenience a bunch of boffins who drive computers all day. I accept that the market will go down. I accept that we’re probably looking at a recession. That happens sometimes… but it’s not really that dramatic. My point is that we’re not looking at another great depression.

    At least, not unless the govt & fed manage to screw things up massively. The govt is trying to screw things up with their bail-out package, but luckily we managed to dodge that bullet for a few more days.

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