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Tuesday, March 17, 2009


TALF not working as hoped

via bloomberg.

This week’s FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed’s existing programs. One top consideration is an increase in the pace and size of a $600 billion program to buy bonds issued and backed by U.S. housing agencies such as Fannie Mae, analysts said.

Other measures could include everything from purchases of Treasuries to corporate bonds, Tilton said. The Fed has already agreed to work with the Treasury on implementing a program to revive consumer and business loans, which the Obama administration has said could reach $1 trillion. ...

Investors demand an average of 6 percentage points more than corresponding U.S. Treasuries to buy investment-grade U.S. corporate bonds, according to data compiled by Merrill Lynch & Co. That’s up from 5.40 percentage points when the FOMC met Jan. 28.

Consumer borrowing costs are also elevated. The rate on 60- month loans for new cars climbed to 7.32 percent, close to a seven-year high, as of March 13 from 7.08 percent when central bankers last gathered
. ...

Bernanke calls the Fed’s policies “credit easing” to contrast with the “quantitative easing” used by the Bank of Japan earlier this decade, which targeted reserves injected into the banking system.

The Fed’s current focus is on purchases of mortgage securities and a program designed to boost consumer lending called the Term Asset-Backed Securities Loan Facility, known as TALF, which could grow to $1 trillion.

Bernanke’s view is if the Fed provides liquidity, credit will flow and lower the price of loans, feeding pent-up demand for homes, cars, credit-card borrowing and capital expenditures by business in the depths of the worst recession in a generation.

Analysts are skeptical
. “The concern about the TALF is not so much the investor interest in it, but the availability of eligible” securities to buy, given lack of consumer demand for new debt, said Tilton of Goldman Sachs.

Consumers will borrow if they see solid job prospects and rising wealth, economists said. Right now, neither condition is in place. The unemployment rate in February was 8.1 percent, up almost 2 percentage points in the past six months. Household wealth fell by a record $5.1 trillion last quarter. Personal savings as a percent of disposable income has risen every month since August.

A less effective TALF would lead the Fed to use its authority to purchase assets and expand the supply of money, some Fed watchers said.

“I would be surprised if they didn’t continue buying another $500 billion of mortgage-backed securities in the second half given the downside risks to the economy and the fact that the mortgage market is still in a shambles,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

the bernanke plan of "qualitative easing" or "credit easing", with its emphasis on managing the asset composition of the fed balance sheet rather than concentrating on its liabilties (that is, expanding cash in circulation) is failing. if the fed is going to monetize government debt in a true quantitative easing, it should get on with it now -- and find out for itself that that won't work either.

UPDATE: ed harrison points to an ft piece on the TALF as the vehicle for recapitalizing the shadow banking system -- what fortress is calling "the great liquidation".

Financial service companies in the shadow banking system like Fortress are now able to rid themselves of a good portion of their Level-3 hard-to-price, so-called toxic assets. Now, mind you, these assets must be rated AAA and will be taken on as collateral for a haircut. But, I sense the Fed will be stuck with these assets for quite some time as the loans they are giving for them are non-recourse.

What was once ‘You Walk Away‘ for home owners on their non-recourse mortgages is now you walk away for hedge funds and broker-dealers.

Quoting a good friend, this is “a huge windfall for the hedge fund industry. This whole exercise is designed as much as possible to restore the status quo ante. That’s the real scandal.”

so while it may not unjam credit markets, it could very well work "as hoped".

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from perrone: god, I'm so sick of these fuckers getting their palms greased, after they've robbed us all. oh, the obscenity, the loathsomeness of it --

I'll retire to hell.

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it's nutty, isn't it perrone? hedge funds being bailed out on johnny taxpayer's dime. amazing.

why can the fed not let the assets go and let the treasury concentrate on managing demand? i suppose it would be an admission of powerlessness on bernanke's part.

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from perrone: that, and because what you suggest might actually _begin_ to effectively transfer wealth from "investors" to working people. can't have that, for fuck's sake. that might build a healthy economy. rule number one would seem to be: can't let rich folks lose money.

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they're certainly working for a different constituency than is widely believed, even now.

i wonder how they plan to deal with the pensions and insurers, who are stuffed with bank debt and securitizations. my wife's dad has a pile in whole life equity -- mid-six figures -- and he realized for the first time yesterday as we talked that he might not see it again.

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