Tuesday, January 08, 2008
Greenspan - wizard of bubbleland pts 1-4 2005
monetary diarrhea that manifests itself in run-away asset price inflation mistaken for growth
In plain language, central banking sees as its prime function the management of the money supply to fit the transactional needs of the economy, instead of fixing the amount of money in circulation by the amount of gold held by the money-issuing authority. Thus central bankers believe in sound money, but not too sound please, lest the economy should falter. Their mantra is borrowed from the Confessions of St Augustine: “God, give me chastity and continence - but not just now.”
Greenspan’s formula of reducing market regulation by substituting it with post-crisis intervention is merely buying borrowed extensions of the boom with amplified severity of the inevitable bust down the road.
Greenspan’s monetary approach has been when in doubt, ease. This means injecting more money into the banking system whenever the economy shows signs of faltering, even if caused by structural imbalances rather than monetary tightness.
Greenspan’s measured-paced interest rate policy is a reversal back to the Fed’s tradition of gradualism
All economists agree that when money growth slows, market interest rates go up. Yet the emergence of unregulated credit markets has cast doubt of the reverse causal effect. Rising interest rates no longer necessarily slow money growth. Often it merely makes money growth more costly to accelerate asset price appreciation, curiously defined by economists as growth, not inflation.
The long boom fueled by securitization
The growth of capital markets was responsible for the long boom that began with the Greenspan era in 1987, rather than bank lending. Banks’ share of net credit markets, according Fed data on flow of funds, dropped from a peak of over 62% in 1975 to 27.5% in 2004 while securitization’s share rose from negligible in 1975 to over 60% in 2004. Securitization now stands at over $3 trillion up from $375 billion in 1985
Systemic problem of asset bubble mania
Consumer spending has been holding up the US economy in recent years, while most of the supply-side investment has gone overseas. This has caused a separation between the dollar economy and the US economy. The dollar economy expands from global dollar hegemony while the US economy is hollowed out of manufacturing. Dollar hegemony has deprived the US economy of real productivity from manufacturing and forced it into virtual productivity from finance manipulation
The Repo time bomb
In plain language, central banking sees as its prime function the management of the money supply to fit the transactional needs of the economy, instead of fixing the amount of money in circulation by the amount of gold held by the money-issuing authority. Thus central bankers believe in sound money, but not too sound please, lest the economy should falter. Their mantra is borrowed from the Confessions of St Augustine: “God, give me chastity and continence - but not just now.”
Greenspan’s formula of reducing market regulation by substituting it with post-crisis intervention is merely buying borrowed extensions of the boom with amplified severity of the inevitable bust down the road.
Greenspan’s monetary approach has been when in doubt, ease. This means injecting more money into the banking system whenever the economy shows signs of faltering, even if caused by structural imbalances rather than monetary tightness.
Greenspan’s measured-paced interest rate policy is a reversal back to the Fed’s tradition of gradualism
All economists agree that when money growth slows, market interest rates go up. Yet the emergence of unregulated credit markets has cast doubt of the reverse causal effect. Rising interest rates no longer necessarily slow money growth. Often it merely makes money growth more costly to accelerate asset price appreciation, curiously defined by economists as growth, not inflation.
The long boom fueled by securitization
The growth of capital markets was responsible for the long boom that began with the Greenspan era in 1987, rather than bank lending. Banks’ share of net credit markets, according Fed data on flow of funds, dropped from a peak of over 62% in 1975 to 27.5% in 2004 while securitization’s share rose from negligible in 1975 to over 60% in 2004. Securitization now stands at over $3 trillion up from $375 billion in 1985
Systemic problem of asset bubble mania
Consumer spending has been holding up the US economy in recent years, while most of the supply-side investment has gone overseas. This has caused a separation between the dollar economy and the US economy. The dollar economy expands from global dollar hegemony while the US economy is hollowed out of manufacturing. Dollar hegemony has deprived the US economy of real productivity from manufacturing and forced it into virtual productivity from finance manipulation
The Repo time bomb
A repurchase agreement (repo) is a loan, often for as short as overnight, typically backed by top-rated US Treasury, agency, or mortgage-backed securities. Repos are contracts for the sale and future repurchase of a top-rated financial asset. On termination date, the seller must repurchase the asset at the same price at which he sold it, pay interest for the use of the funds, and if the asset was borrowed, the borrowed assets will be returned to the lending owner who also receives a fee for lending. If the repoed security pays a dividend, coupon or partial redemptions during the repo, this is returned to the original owner. Institutions with excess assets routinely avoid holding unproductive idle assets by lending them for a fee to institutions in need of more assets. A well defined legal framework has developed to facilitate repo transactions
A key distinguishing feature of repos is that they can be used either to obtain funds or to obtain securities. The former feature is useful to market participant who wish to acquire other assets that provide arbitrage opportunities against the collateralized assets. The latter feature is useful to market participants because it allows them to obtain the securities they need to meet other contractual obligations, such as to make delivery for a futures contract. In addition, repos can be used for leverage, to fund long positions in securities and to fund short positions for hedging interest rate risks. As repos are short-maturity collateralized instruments, repo markets have strong linkages with securities markets, derivatives markets and other short-term markets such as interbank and money markets. Securities dealers use repos to finance their securities inventories. Counterparties may be institutions, such as money market funds which have funds to invest short-term. Or they may be parties who wish to briefly obtain the use of a particular security by doing a reverse repo. For example, a party may want to sell the security short, or they may need to deliver the security to settle a trade with a third party. Accordingly, there are two possible motives for entering into a reverse repo:1) short-term investment of funds, or GC (general collateral) repos; and2) to obtain temporary use of a particular security, or special repos.
Because repos are essentially secured loans, their interest rates do not depend upon the respective counterparties’ credit ratings. For GC repos, the same rates apply for all counterparties. Accordingly, GC repo rates, or simply repo rates, are benchmark short-term interest rates that are widely quoted in the marketplace. They differ from LIBOR (London Interbank offered rate) in that repo rates are for secured loans whereas LIBOR are for unsecured loans based on the credit worthiness of the borrower.
Repos are useful to central banks both as a monetary policy instrument and as a source of information on market expectations. Repos are attractive as a monetary policy instrument because they carry a low credit risk while serving as a flexible instrument for liquidity management. In addition, they can serve as an effective mechanism for signaling the stance of monetary policy. Repos have also been widely used as a monetary policy instrument among European central banks and with the start of EMU (European Monetary Union) in January 1999, the Eurosystem adopted repos as a key instrument. Repo markets can also provide central banks with information on very short-term interest rate expectations that is relatively accurate since the credit risk premium in repo rates is typically small. In this respect, they complement information on expectations over a longer horizon derived from securities with longer maturities
As with other financial markets, repo markets are also subject to credit risk, operational risk and liquidity risk. However, what distinguishes the credit risk on repos from that associated with uncollateralized instruments is that repo credit exposures arise from volatility (or market risk) in the value of collateral. For example, a decline in the price of securities serving as collateral can result in an under-collateralization of the repo. Liquidity risk arises from the possibility that a loss of liquidity in collateralized markets will force liquidation of collateral at a discount in the event of a counterparty default, or even a fire sale in the event of systemic panic. Leverage that is built up using repos can exponentially increase these risks when the market turns.
Bernanke and the Dollar Savings Glut Symptom of global stress
While Bernanke accurately describes the conditions, he obscures the causal dynamics. The so-called global savings glut is hardly the result of voluntary behavior on the part of foreign central banks. It is the coercive effect of dollar hegemony which has left the trading partners of the US without a choice. The US trade deficit is denominated in dollars which can only be recycled into dollar assets. Local currency debts are issued by foreign treasuries to soak up the current account surplus dollars so that foreign central banks end up holding larger dollar reserves that can hardly be viewed as national savings
US current account deficit exporting inflation
The exporting economies ship real wealth to the US in exchange for fiat dollars which cannot be spent in their own economies without first being converted into local currencies. If the local central banks exchange the trade surplus dollars with local currencies, local inflation will result from an expansion of the money supply while the wealth behind the new money has been shipped to the US. Thus when most foreign governments issue sovereign debts in local currencies to soak up the dollars and turn them over to their central banks as foreign exchange reserves, the local sovereign debt is equal to the loss of real wealth from export to the US.
Labels: global savings glut, Greenspan, repos
# posted by MobyGrape : 7:24 PM
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