Friday, August 10, 2007
UPDATE 1: The run on cash continues, unabated:
According to Berkeley economist Brad DeLong, it is highly unusual for the Federal Reserve to depart from its practice of accepting high quality Federal debt as collateral for funds, and insist upon mortgage backed securities instead.
The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.
The Fed accepted only mortgage-backed debt as collateral for this morning's weekend repurchase agreement. Losses in U.S. subprime mortgage investments have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed also added $24 billion yesterday, the most since April, as demand for cash increased.
The New York Fed's additions lowered the Federal funds rate to 5.375 percent, according to ICAP Plc, after it began trading at 6 percent, the highest opening rate since January 2001. The Fed's benchmark overnight rate is currently 5.25 percent.
``It looks like this will be enough to address the problem today because of the pace at which the funds rate moved down,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``It's not an extraordinary amount but large.''
Fed funds traded above the central bank's target for a second straight day.
So, we have two things happening here, the injection of more liquidity into the system, and, possibly more importantly, a specific effort by the Fed to intervene in the mortgage backed securities market by accepting them as collateral for funds released to financial institutions through the discount window. Given the notoriously poor quality of these instruments, it appears to be an unprecedent, extraordinary action.
INITIAL POST: From The Independent:
Yesterday, there was an actual run on cash. When was the last time that such a thing happened? After 9/11? Or, back then, did the global banking system release funds because they merely feared one? As it did on Black Monday in 1987? Now, the Bank of Japan has followed suit.
The European Central Bank released nearly €100bn (£68bn) in emergency funds into the banking system yesterday in an effort to kick-start the crippled credit markets, but its move only sparked panic selling on stock markets across the world.
The sudden cash injection was the largest since 12 September 2001, when the central bank released billions to stabilise the market after the terrorist attacks in New York.
The trigger for the €98bn package was a major overnight spike in inter-bank lending rates that if unremedied threatened to disrupt the normal functioning and stability of Europe's financial system.
As with the other market upheavals in the last month, the root cause was traced to America where the fallout from the meltdown of the market for risky, or sub-prime, loans continues to widen. "This is a reflection of the fact that the sub-prime issues will not be constrained to the US financial sector. As the financial sector across Europe shows its hand over the next weeks and months we will see where the exposure exists," said Ian Richards, European equity strategist at ABN Amro. "The ECB is acting as the lender of last resort. The scale of intervention we have seen today is quite large."
Meanwhile, popular, high traffic liberal blogs, like firedoglake, Daily Kos, David Sirota and Crooks and Liars are totally oblivious, running posts on their usual obssessions, the presidential campaign, wiretapping, and the invariable helpless handwringing about the war in Iraq. Have they swallowed the kool aid of the new economy, ridiculing concerns about credit and financial markets as a manifestation of membership in the cult of precious metals?
One need not be a card carrying member in the gold standard society, with a pedantic fascination in the works of obscure Austrian economists, to believe that credit is the lifeblood of capitalism, and that the disruption of it can be turbulent, if not catastrophic. As already described here last week, the probable consequences of this credit crunch will be dire for millions of Americans, driving them out of their homes and communities into lives of permanent insecurity (click on the Housing Bubble label below), and, the liberals are not only silent, they don't even realize that it's happening!
Perhaps, I just don't get it. Perhaps, we are only living through the common ups and downs of financial markets, and I am attributing a significance to the events of recent weeks that doesn't exist. But, try telling that to the Bay Area homebuyers described in this article. Or, these, back in DC. And, this is only the beginning, as soon as business reporters start contacting small businesses, credit card companies and farmers, they will discover that the credit crunch is working its way remorselessly throughout the entire economy.
Alexander Cockburn once ascerbically said, back in 2000, that Al Gore's only constituency were people that made over $100,000 a year. There was a lot of truth to this cutting remark. You get a similar impression encountering the social and economic tone deafness of the liberal blogosphere, an impression of people disconnected from the realities of everyday life. At least, Jim Cramer knows that millions of Americans are about to lose their homes. Even so, you'd think that some of the wealthier ones must have gotten a margin call from their brokers this week to break through the fog of separation.