Afinal havia outra [desalavancagem]

[hermes]

Começo a desconfiar se não estará aqui a razão para o Bernanke ter panicado quase em cima da meta não estará aqui neste atigo:

The (other) deleveraging: What economists need to know about the modern money creation process

Manmohan Singh, Peter Stella
2 July 2012

http://voxeu.org/article/other-deleveraging-what-economists-need-know-about-modern-money-creation-process

The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.

One of the financial system’s chief roles is to provide credit for worthy investments. Some very deep changes are happening to this system – changes that surprisingly few people are aware of. This column presents a quick sketch of the modern credit creation and then discusses the deep changes are that are affecting it – what we call the ‘other deleveraging’.

Modern credit creation without central bank reserves

In the simple textbook view, savers deposit their money with banks and banks make loans to investors (Mankiw 2010). The textbook view, however, is no longer a sufficient description of the credit creation process. A great deal of credit is created through so-called ‘collateral chains’.

We start from two principles: credit creation is money creation, and short-term credit is generally extended by private agents against collateral. Money creation and collateral are thus joined at the hip, so to speak. In the traditional money creation process, collateral consists of central bank reserves; in the modern private money creation process, collateral is in the eye of the beholder. Here is an example.

A Hong Kong hedge fund may get financing from UBS secured by collateral pledged to the UBS bank’s UK affiliate – say, Indonesian bonds. Naturally, there will be a haircut on the pledged collateral (i.e. each borrower, the hedge fund in this example, will have to pledge more than $1 of collateral for each $1 of credit).

These bonds are ‘pledged collateral’ as far as UBS is concerned and under modern legal practices, they can be ‘re-used’. This is the part that may strike non-specialists as novel; collateral that backs one loan can in turn be used as collateral against further loans, so the same underlying asset ends up as securing loans worth multiples of its value. Of course the re-pledging cannot go on forever as haircuts progressively reduce the credit-raising potential of the underlying asset, but ultimately, several lenders are counting on the underlying assets as backup in case things go wrong.

To take an example of re-pledging, there may be demand for the Indonesia bonds from a pension fund in Chile. As since these credit-for-collateral deals are intermediated by the large global banks, the demand and supply can meet only if UBS trusts the Chilean pension fund’s global bank, say Santander as a reliable counterparty till the tenor of the onward pledge.

Plainly this re-use of pledged collateral creates credit in a way that is analogous to the traditional money-creation process, i.e. the lending-deposit-relending process based on central bank reserves. Specifically in this analogy, the Indonesian bonds are like high-powered money, the haircut is like the reserve ratio, and the number of re-pledgings (the ‘length’ of the collateral chain) is like the money multiplier.

To get an idea on magnitudes, at the end of 2007 the world’s large banks received about $10 trillion in pledged collateral; since this is pledged for credit, the volume of pledged assets is a good measure of the private credit creation. For the same period, the primary source collateral (from hedge funds and custodians on behalf of their clients) that was intermediated by the same banks was about $3.4 trillion. So the ratio (or re-use rate of collateral) was around 3 times as of end-2007. For comparison to the $10 trillion figure, the US M2 was about $7 trillion in 2007, so this credit-creation-via-collateral-chains is a major source of credit in today’s financial system. Figure 1 shows the amounts for big banks in the US and Europe.

Figure 1. Pledged collateral that can be re-used with large European and US banks




An example

As this process is unfamiliar to many non-specialists, consider another example. Figure 2 illustrates how a piece of collateral (e.g., US Treasury bond) may be used by a hedge fund to get financing from a prime-broker (say, Goldman Sachs). The same collateral may be used by Goldman to pay Credit Suisse on an OTC derivative position where Goldman was ‘out-of-the-money’ to Credit Suisse. And then Credit Suisse may finally pass the US Treasury bond to a money market fund that will hold it for a short tenor (or till maturity). Notice that the same Treasury bond has been used twice three times as collateral for extensions of credit – from the original hedge-fund owner to the money market fund.

Figure 2. An example of a collateral chain



The other deleveraging

Comparing private and traditional money creation, a critical difference is that private credit creation turns on banks’ trust of each other. New credit gets created only if the onward pledging occurs and this depends, for example, on UBS’s trust in Santander as a counterparty in the first example. Due to heightened counterparty risk, onward pledging may not occur and the collateral thus remains idle in the sense that it creates no extra credit.

To put it differently, a key difference between the trade and pledge-collateral credit creation processes is the role of governments. The traditional textbook money multiplier is based on insured deposits and thus largely a creature of government regulation and the central bank’s lender of last resort assurance. The collateral multiplier is very much a creature of the market.1 The multiplier – which essentially measures how efficient illiquid assets can be converted into liquid collateral and thus credit – varies with the extent to which markets views a given asset classes as ‘liquid’ in normal and stressed markets.

This brings us to the key policy point. The ‘other’ deleveraging. In this new private-money-creation process, there are three distinct ways of reducing credit.

• Increase the haircut (like raising the reserve requirement);
• Reduce the supply of assets that can be used for pledging; and
• Reduce the re-pledging of pledged collateral (shortening the collateral chain).

Most recent research has focused on the first. Balance sheet shrinkage due to ‘price declines’ (i.e., increased haircuts) has been studied extensively – including the recent April 2012 Global Financial Stability Report of the IMF and the European Banking Association recapitalisation study (2011).

In this column we raise the flag on the second and (more importantly) the third way. When market tensions rise – especially when the health of banks comes under a shadow – holders of pledged collateral may not want to onward pledge to other banks.

• With fewer trusted counterparties in the market owing to elevated counterparty risk, this leads to stranded liquidity pools, incomplete markets, idle collateral and shorter collateral chains, missed trades and deleveraging.
• In practical terms, the ratio of pledged-collateral (which is a measure of the credit thus created) to underlying assets falls as this onward pledging, or interconnectedness, of the banking system shrinks.

This ratio decreased from about 3 to about 2.4 as of end 2010 – largely due to heightened counterparty risk within the financial system in the present environment. These figures are not rebounding as per end 2011 financial statements of banks – see Table 1 and Figure 1. Indeed, anecdotal evidence suggests even more collateral constraints recently.

Table 1. Sources of pledged collateral, re-use and overall collateral 



Source: Velocity of Pledged Collateral – update, Singh (2011)

Consequences of the other deleveraging: The cost of credit

Reduced market interconnectedness, or the trend toward ‘fortress’ balance sheets, may be viewed positively from a financial stability perspective if one simply views each institution in isolation. However, the vulnerabilities that have resulted from the weakened fabric of the market may yet to have become fully evident. Since the end of 2007, the loss in collateral flow is estimated at $4-$5 trillion, stemming from both shorter collateral chains and increased ‘idle’ collateral due to institutional ring-fencing; the knock-on impact is higher credit costs for the economy.

Relative to mid-2007, the primary indices that measure aggregate borrowing cost (e.g., BBB index) are well over 2.5 times in the US and 4 times in the Eurozone. This is after adjusting for the central bank rate cuts, which have lowered the total cost of borrowing for similar corporates (e.g., in the US, from about 6% in 2006 to about 4% at present). Figure 3 shows that for the past three decades, the cost of borrowing for financials has been below that for non-financials; however this has changed post-Lehman. Since much of the real economy resorts to banks to borrow (aside from the large industrials), the higher borrowing cost for banks is then passed on the real economy.

Figure 3. Post-Lehman, borrowing cost for financials are higher than non-financials 


Source: Barclays Intermediate, investment grade spreads (1983-2012)

Collateral and monetary policy

Since cross-border funding is important for large banks, the state of the global pledged collateral market may need to be considered when setting monetary policy.

Overall financial lubrication in the US, UK, and the Eurozone, exceeded $30 trillion before Lehman’s bankruptcy (of which 1/3rd came via pledged collateral). Certain central bank actions, such as the ECB’s LTRO, the US Federal Reserve’s quantitative easing and the Bank of England’s asset purchase facility have been effective in alleviating collateral constraints. However, these ‘conventional’ actions, to the extent they merely exchange bank reserves for collateral of prime standing (such as US Treasuries), do not address the issue credit creation via collateral re-pledging (Singh and Stella 2012).

The ‘kinks’ in the red line (Figure 4) M2 expansion due to QE but much of the ‘easing’ for good collateral is deposited with the central banks and is not available to fund lending. As of end-2011, the overall financial lubrication is back over $30 trillion but the ‘mix’ is in favour of money which not only has lower re-use than pledged collateral but much of it ‘sits’ in central banks.

Figure 4. Overall financial lubrication – M2 and pledged collateral 



Policy issues

As the ‘other’ deleveraging continues, the financial system remains short of high-grade collateral that can be re-pledged. Recent official sector efforts such as ECB’s ‘flexibility’ (and the ELA programs of national central banks in the Eurozone) in accepting ‘bad’ collateral attempts to keep the good/bad collateral ratio in the market higher than otherwise. But, if such moves become part of the central banker’s standard toolkit, the fiscal aspects and risks associated with such policies cannot be ignored. By so doing, the central banks have interposed themselves as risk-taking intermediaries with the potential to bring significant unintended consequences.

Authors' note: Views expressed are of the authors only and not of the International Monetary Fund.

References

Copeland, A, A Martin, and M Walker (2010), “The Tri-party Repo Market Before the 2010 Reforms”, Federal Reserve Bank of New York Staff Report No. 477.

EBA (2011), 2011 EU-wide stress test results.

IMF (2012), Global Financial Stability Report, April.

Mankiw, Greg (2010), Macroeconomics, Worth Publishers; Seventh Edition. Shin, Hyun. S (2009), “Collateral Shortage and Debt Capacity” (unpublished note).

Singh, Manmohan (2011), “Velocity of Pledged Collateral – Analysis and Implications”, IMF Working Paper 11/256.

Singh, Manmohan and Peter Stella (2012), “Money and Collateral”, IMF Working Paper No. 12/95.

[hermes]

Um pouco na mesma linha do artigo anterior, segue-se este um pouco mais antigo. Entre outras coisas, há uma parte mais interessante que explica um pouco as cadeias de colateral do shadow banking:

Hayman Capital Management Letter to Investors Dec 2011

By: J. Kyle Bass
December 14, 2011

http://www.scribd.com/doc/75718413/Hayman-Capital-Management-Letter-to-Investors-Dec-2011

The Hidden Bank Run Across Europe

The spectacle on display this past weekend in Latvia[1] is a reminder that old-fashion bank runs are not entirely a thing of  the past. The reality, however, is that modern bank runs often take the form of deposit flight from one institution to  another – which begs the question: if you were a Spaniard, a Portuguese, a Frenchman, a Latvian, a Greek, or an Italian, why  on earth would you leave your euros deposited in your home country's banks (that are most likely insolvent)? If there was any risk of your deposits being redenominated into pesetas, escudos, francs, un-pegged lats, drachmas, or lira, why not move them immediately to a more stable banking environment? With the current mobility of capital, why not open accounts in Switzerland, Canada, Norway, or at the very least in Germany? Why take the risk that you end up like the Argentines who were restricted to withdrawing a pittance per week after the authorities changed the rules regarding the mobility and the value of the peso?
Just as Latvians ran to the ATMs this weekend, so will depositors all over peripheral Europe in the months ahead. Below is a chart of the most recently published data regarding bank withdrawals in the PIIGS. As you can see, deposits are now declining at an accelerated pace. What’s surprising is that it hasn't happened much sooner.



Capital mobility is an essential precondition to default as capital rushes out of a problem jurisdiction in the final phases of a sovereign spiral. Professors Reinhart and Rogoff, whose work we have referenced many times in the past, assessed the correlation between the liberalization of capital mobility and the incidence of banking crises across the globe. They concluded that "periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990's, but historically."[2] We note that their data set, which begins in 1800, only covers through 2007 (this paper was published in April 2008). At that time, capital mobility was at its highest point ever and we all know how that turned out.

Capital Mobility and the Incidence of Banking Crisis: 1800-2007


Source: Reinhart and Rogoff (2008); Obstfeld and Taylor (2004).

Collateral Chains Shortening – Prima Facie Evidence of Distrust

The IMF released a working paper in November highlighting the significant decline in source collateral for large dealers in the Post-Lehman world.[3] In other words, dealers’ clients (sovereign wealth funds, asset managers, etc.), are not making their excess collateral available for use and re-use by their prime brokers for securities lending or repo activities. The author, Manmohan Singh, is particularly insightful with regard to the length of the collateral chains and how they have shortened over the last few years. This shortening effectively reduces the amount of “grease” needed to keep a highly-levered financial system operating smoothly and is undoubtedly closely connected to the de-leveraging that is beginning in the European banks. Basically, participants no longer trust dealers (which is not surprising, considering the behavior of players like MF Global?) to re-hypothecate collateral. The chart below neatly displays the new paradigm with regard to collateral movements and the increasing awareness by financial markets participants that their excess collateral is safer in the hands of a third-party custodian than in the hands of their prime brokers. This is quite a statement given that up to an incremental 200 bps can be earned on excess collateral kept at a prime broker. Some large European funds are even beginning to shun European banks in the OTC marketplace. This pre-emptive action by asset managers is, in part, a natural response to the European Banking Association’s failure to conducted truly robust stress tests. Case in point: Dexia, a Franco-Belgian bank, passed a prior stress test with flying colors and approximately 90 days later failed miserably. In fact, 190 billion euros was needed for Dexia's bad bank alone. The most recent stress tests proved to be meaningless even sooner than last year’s tests.

Below is an illustration provided in the IMF paper which shows the traditional flow of collateral (on the left) versus the structure currently employed by many large market participants. The reference to “churn” in the chart refers to a dealers’ ability to re-use (i.e. risk) excess collateral to generate positive yield for themselves.

Large Banks’ Use of Investors’ Collateral



The recent announcement of a coordinated G7 central bank action to increase the availability of currency swap lines at cheaper rates was an attempt to put into place facilities that will act as airbags for a marketplace that will likely disintegrate into a formless void of investor action once multiple sovereign defaults begin. We believe the timing of the swap facilities announcement was specifically designed to forestall the impending failure of a large Eurozone bank facing a funding crisis. The announcement provided temporary relief to the funding markets, and the mini-crisis was seemingly averted. However, this sort of relief simply allows Europe’s banks to continue to pick the flowers while allowing the weeds to grow, by preventing any failure and restructuring but forcing ongoing deleveraging across the system. The majority of "good" collateral is already posted at the ECB for repo funding, so facing a dearth of available collateral, what would you expect the ECB to do? Naturally, they announced an expansion of eligible or “Tiffany” collateral and provided some relief on the cost of the repo transactions. The constant lowering of collateral requirements has encouraged European banks to pledge lower and lower quality collateral to the ECB which, over time, has seen its balance sheet expand to provide more than half a trillion euros of loans; placing the ECB's tiny capital sliver of 5 billion euros at ever greater risk.

As European leaders press forward with failed attempt after failed attempt to suppress borrowing costs, control spending, reduce deficits and prop up what the markets have already told us is a broken monetary system, the data tells us that the citizens of the most troubled and profligate nations are losing confidence in the Euro dream. Trust has been lost, confidence in the system is being lost, and the ultimate consequence of this break down - sovereign defaults – are imminent.

We continue to move ever closer to a great restructuring of sovereign debt.

• "Latvian Banks Fight Off Deposit Run," The Boston Globe, 12/12/2011. http://www.boston.com/business/articles/2011/12/12/latvian_bank_fights_off_deposit_run/
• Carmen M. Reinhart and Kenneth S. Rogoff, "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises", pg. 7. http://www.nber.org/~wbuiter/cr1.pdf
• Manmohan Singh, IMF Working Paper: “Velocity of Pledged Collateral: Analysis and Implications,” November 2011. http://www.imf.org/external/pubs/ft/wp/2011/wp11256.pdf

[hermes]

Engraçado que uma das unintended consequences dos vários QEs tenha sido a de criar uma corrida aos shadows banks devida à remoção do colateral [incluído o de boa qualidade] e a consequente eliminação do crédito que este gerava.

Interest on Excess Reserves: An Illustrated Investigation

By: Yichuan Wang
Sunday, August 26, 2012

http://synthenomics.blogspot.pt/2012/08/interest-on-excess-reserves-illustrated.html

The Federal Reserve's policy response to the latest financial crisis can be summed up in one word: unconventional. Between interest on excess reserves (IOER), quantitative easing (QE), and purchases of mortgage backed securities (MBS), the Fed has deployed a wide range of instruments to avoid deflation while preserving financial stability. However, although it is clear the Fed has acted in many ways, what is still unclear is how these policies impact the financial sector and the economy at large. Is interest on excess reserves expansionary or contractionary? Are large scale asset purchases expansionary or contractionary? A rapidly growing and evolving shadow banking sector has only worsened this confusion, and this post is an attempt to make some sense of these arguments in an illustrated form.

First, an introduction to the major players. Interest on Excess Reserves (IOER) originally was a policy implemented by the Federal Reserve in the depths of the financial crisis to expand the Fed's balance sheet to ease liquidity needs. It authorized the Federal Reserve to pay banks interest on their reserves that were in excess of the required amount, and thus gave all commercial banks a risk free return of 0.25% on any extra available cash. However, as a side effect, it meant that banks were unwilling to invest in any security that had a nominal yield of less than 0.25%, as they could just plow that money into excess reserves instead.

IOER was especially important in limiting the inflationary effects of the Fed's Large Scale Asset Purchases. In these programs, the Fed massively expanded its balance sheet by purchasing either long-term treasuries (QEI, QEII), or mortgage backed securities. These purchases have more than tripled the Fed's stock of treasuries from about $480 billion in August of 2008 to $1.64 trillion in August of 2012, raising the monetary base from $884 billion to about $2.61 trillion in the same time period.

These purchases of treasuries have been problematic for the shadow banking sector, notably the oft maligned money market funds, as the purchases have drained the financial system of safe collateral. Money market funds offer a liquid, yet interest bearing fund for large deposits by taking the deposited cash and entering into repurchase agreements, or repos. Repo is a sort of rental arrangement in which the money market fund "rents" out its cash to firms who need liquidity but who do not want to sell their assets. A typical repo involves the money market fund giving another investor cash in exchange for an asset, then after a certain period of time, the investor repurchases the asset and the money market fund gets its cash back with an interest payment. However, the lower the yield on the underlying asset, the smaller the interest rate payment. As a result of the financial crisis' effect on the perceived riskiness of "unsafe" assets, treasuries have become the asset of choice for repos. However, the shortage of safe collateral has pushed down yields on treasuries. As a result, money market funds are surviving on smaller and smaller spreads, putting them in a precarious position and threatening a contraction of collateral chains. The fear is that if this continues, money market funds will collapse and a (shadow) bank run will cause a liquidity and solvency crisis.

This new element of shadow banking makes evaluating monetary policy a headache. Traditionally, expansionary monetary policy in the form of asset purchases works like in the diagram below. When the Fed buys assets, the money that it injects into the market goes to commercial banks who can then lend out the money and make a yield. Also, the market for treasuries doesn't shift that much as banks can also sell their holdings of treasuries, preserving the model of the shadow banks as they can still make some yield off the repo agreement.

However, in the current crisis position, the situation is very different. Because of the safe asset shortage, commercial banks pile into treasuries as a way of getting some yield for their depositors. This is happening at the same time as the central bank buys large stocks of treasuries, thereby contracting the supply of treasuries even further. As a result of high treasury prices, shadow banks struggle as they can no longer provide a sufficient yield. Commercial banks are in a better position than shadow banks because commercial banks can still park their excess reserves at the Fed and earn IOER. They can limit their purchases of treasuries, thus maintaining what is left of the treasury market.

The key question that David Beckworth and Cardiff Garcia are trying to settle is what would removing IOER from the system do? David Beckworth focuses on the money side, and argues that a removal of IOER would be seen as a permanent expansion of the monetary base, thereby rapidly boosting inflation expectations. In response, banks sell off treasuries and invest in riskier assets which keeps shadow banks safe. His world looks much like the following picture:

On the other hand, Garcia focuses on credit, and argues that IOER is the only thing keeping treasury interest rates positive. Therefore a removal of IOER would lead to massive expansion of commercial bank purchases of treasuries in search of yield, thereby collapsing the shadow banking sector as the system is drained of safe collateral. His world looks much like the picture below:

The critical difference between the two scenarios is how IOER affects commercial bank purchases of treasuries. Beckworth seems to believe a removal of IOER would push banks into riskier assets, thus causing banks to sell treasuries and keep shadow banks safe. On the other hand, Garcia seems to believe a removal of IOER would not be enough to compensate for the perceived riskiness of non-treasury assets, so banks would purchase treasuries in response to a cut in IOER. This would contract the supply of treasuries, destroying the shadow banking sector.

So which one is correct? To be honest, I don't know for sure, and I'm not sure if either Garcia or Beckworth can be certain about the whole story. But Dan Carrol mentions an interesting option that would perform well in spite of this model uncertainty: sterilized lowering of IOER. In this case, the Fed removes IOER, but then partially compensates for the treasuries bought by commercial banks by selling its own stock of treasuries. The drawing looks something like this:

This might seem counter intuitive as the central bank appears to be doing two actions that seem to contradict each other. Yet if we consider the role of expectations, such a policy becomes much more logical. Given that the monetary base has more than tripled since 2008, it should be clear that the market does not expect that expansion to be permanent. According to Krugman, a fully credible expansion of the monetary base in this period and all future periods should directly lead to inflation. Therefore, since prices have not tripled in response to the change in the base, markets must be pricing in the fact that the base expansion will be sterilized by the Fed in the future.

To raise inflation expectations, the Fed must credibly commit to a future base expansion, and, paradoxically, it cannot do so if the monetary base is too large. Therefore, if sterilized IOER reduction is seen as a move to hitting a nominal target, such as higher NGDP, it can still be part of a credible package that restores the nominal target while preserving the shadow banking sector. In the case of NGDP, a rough estimate of pre-crisis trend growth puts desired NGDP at about $17.3 trillion, about $1.7 trillion dollars above where we are now. Because the average NGDP to Monetary Base ratio over the Great Moderation was about 16.3, a reasonable monetary base would be about $1.06 trillion, $1.59 trillion less than the current monetary base. This means as long as the Fed can credibly commit to permanently expanding the monetary base to around $1.06 trillion, the Fed has room to unwind about $1.59 trillion of treasuries. This would expand the supply of safe collateral and address Garcia's concerns. In addition, giving up on IOER and credibly committing to a permanent base expansion would address Beckworth's call for a regime shift that would restore trend NGDP growth.

A sterilized reduction in IOER would have other advantages as well. First, because its mechanism is not dependent on central bank treasury purchases, there's no risk that shadow banking troubles would lower NGDP growth. Since there's uncertainty about which of Garcia's or Beckworth's scenario would play out, an unsterilized reduction in IOER would translate into uncertainty about whether future NGDP growth should go up or down. Markets would still be uncertain on the status of the shadow banking sector, thus holding back growth.

Second, sterilized cuts in IOER directly commit to a modest increase in the monetary base instead of relying on small monetary frictions. One argument for LSAP's effects on expectations is that an increase in the Fed's balance sheet increases the fraction of its balance sheet expansion that markets expect to be permanent. In other words, the expected future monetary base is convex with respect to the current monetary base. But this approach is fraught with uncertainty and a lack of precision, which may be an issue holding back further monetary easing. If the set of possible inflation rates are {1, 1,2, 1.4, 1.8, 2, 10, 100}, this may change whether the central bank is willing to ease or not. Unwinding the balance sheet while cutting IOER would increase the Fed's precision, improving monetary credibility.

Another framework in which sterilized IOER makes sense is DeLong's law, a modification of Say's law and Walras' law. Say's Law originally said that excess demands for all goods must add up to zero, so there cannot be a general glut.
Say

(equations from Mark Thoma)

However, Walras pointed out that we needed to include money in this model, therefore there can be a general glut in goods if there is excess demand for money. This opens up a role for monetary policy to reduce that excess demand.



DeLong then argues that another factor we need to be aware of in the recent recession is excess demand for safe assets. So Walras' Law should be expanded further:



This framework clearly delineates between what Beckworth, Garcia, and Carrol are proposing. Beckworth argues that lowering IOER directly solves excess demand for money, and therefore goes on to solve excess demand for safe assets. But Garcia argues lowering IOER directly increases excess demand for safe assets to such an extent that it overwhelms any reduction in excess demand for money. So while directly cutting IOER reduces excess demand for money, it's ambiguous whether it reduces the general glut for goods. Carrol's proposal then comes in the middle, as cutting IOER reduces excess demand in money while sterilization reduces excess demand for safe assets.

In the end, this debate shows not only why the market monetarist focus on expectations is important, but also why an analysis of mechanisms cannot be ignored. All of these arguments for sterilized IOER depend on a credible commitment expansion of the monetary base, so if the market expects the Fed to maintain a 2% inflation ceiling the policy change would still be useless. However, changing the target without being aware of the collateralized world we live in would also be a failure, as we would be twisting the dials in all the wrong directions, endangering monetary credibility.

[aos_pouquinhos]

Hermes....
interessante artigo de como o mundo financeiro funciona (ou deixa de funcionar), pela utilização abusiva ou não de garantias, confianças, governos e emitentes.

Uma pergunta prática:
1 - Será esta a "guerra" pretendida preferencialmente pelos EUA, e também China Europa e afins?

2 - Qual o verdadeiro impacto das agências de rating nesta história, sendo elas também intervenientes no processo de crédito vs garantias?

3 - Portugal tem gente capaz para perceber estes mecanismos?

Cumprimentos
 

[Lark]

Mark Thoma, deLong, Krugman

estes não são todos uns desacreditados e lunáticos?

o facto é que a economia actual é muito mais complexa do que há 20 anos. E o que dizer de há 100 anos (para os amigos austríacos tão simplificadores que chegam a parecer simplórios).
e a leitura que melhor explica até agora esta realidade económica é do krugman et al. ( krugman e outros, nomeadamente Mark Thoma e Brad deLong).

[Incognitus]

A economia não é muito diferente de há 10000 anos para cá. Produção e troca de excedentes.
 
Quando se complica muito para lá disso, o resultado geralmente são tentativas de obter produçáo dos outros sem lhes dar nada em troca. Algo extremamente aliciante mas que sistematicamente acaba mal.

[Lark]

A economia não é muito diferente de há 10000 anos para cá. Produção e troca de excedentes.
 
Quando se complica muito para lá disso, o resultado geralmente são tentativas de obter produçáo dos outros sem lhes dar nada em troca. Algo extremamente aliciante mas que sistematicamente acaba mal.

há dez mil anos era a mesma coisa, sim. sem dúvida.

[Incognitus]

O esquema era o mesmo, pelo meio até o crédito nasceu. A complexidade hoje é obviamente muito mais elevada, mas a base continua a mesma e por isso é que tens os problemas actuais - porque isso não mudou e no final tens que adaptar o teu consumo à produção que consegues fazer para os outros.
 
Quando se tenta dar a volta a isso, falha.
 

[hermes]

Hermes....
interessante artigo de como o mundo financeiro funciona (ou deixa de funcionar), pela utilização abusiva ou não de garantias, confianças, governos e emitentes.

Uma pergunta prática:
1 - Será esta a "guerra" pretendida preferencialmente pelos EUA, e também China Europa e afins?

2 - Qual o verdadeiro impacto das agências de rating nesta história, sendo elas também intervenientes no processo de crédito vs garantias?

3 - Portugal tem gente capaz para perceber estes mecanismos?

Cumprimentos

aos_pouquinhos, acho que posso dizer alguma coisa relativamente ao 1º ponto comparando a dimensão do shadow banking na Europa e nos EUA.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2027007[/url]]The main results are that, in 2010Q4, the shadow banking sector represented around USD 13 trillion in Europe and USD 15.8 trillion in the U.S.. While it has collapsed in the U.S., it has remained broadly stable in Europe because i) it was less reliant on ABCPs in Europe, and ii) the ECB monetary policy framework has sustained the issuance of ABS during the crisis as issuers were able to use them as collateral for refinancing operations.

An important difference between Europe and the U.S. is that the shadow banking sector has experienced a 20% decline in the U.S., while it has remained roughly stable in Europe.

As shown in Table 5 and Table 6, there are several differences between the U.S. and the European shadow banking sector:

• In the U.S., the shadow banking sector represents around 120% of banks’ liabilities, while in Europe, the corresponding figure is 22%. This fact can be partially accounted for by the importance of market-based finance in the U.S. as opposed to a more bank-based financial system in Europe. Looking at traditional banks’ liabilities (deposits), the shadow banking sector represents 200% of banks deposits in the U.S. vs. 46% for Europe.
• In the U.S., the shadow banking sector performs mainly credit transformation (63%), while in Europe, this activity accounts for 22% of the total. This could be explained by the specific role played by GSEs in the mortgage market in the U.S., as well as by the importance of covered bonds market in Europe as an alternative to ABS.
• Credit transformation is mostly done by the repo market in Europe (79%), while in the U.S. MMFs play a larger role (48%).

Conclusions

This paper aims at starting to fill a gap related to the absence of an estimate of the shadow banking sector in Europe. According to our estimates, the shadow banking sector amounted to around EUR9.5 trillion in 2010Q4 (USD 13 trillion), a sizeable figure and roughly similar to the size of the U.S. shadow banking sector (around USD 15.8 trillion). However, there are at least two striking differences:

• while the U.S. shadow banking sector has declined during the financial crisis, the European shadow banking sector has remained broadly stable. A potential explanation may be that the ECB operational monetary policy framework may have played a role as it allowed the use of ABS for repo operations, effectively sustaining the ABS market. However, given that ABS stands for one quarter of the shadow banking system, other explanations may be needed to explain the evolution of the European shadow banking sector.
• In Europe, the shadow banking sector performs mainly maturity transformation rather than credit transformation as in the U.S., that stems from the specific role played by GSEs in the U.S..
  

Assim sendo, não só a Europa parece estar melhor em termos relativos, com tb o BCE soube ser um Banco Central de último recurso.

[aos_pouquinhos]

Hermes, obrigado pela disertação.

Li a questão referida da Europa vs EUA.

Então nos EUA prodeceu-se a um "secar" via diminuição da banca, enquanto na Europa as coisas estabilizaram em termos da banca existente.
Não seria preferivel como medida complementar e para uma maior "confiabilidde" na Europa, a concentração de banca tradicional de (crédito vs depositos) separada da parte do mercado de investimento financeiro e monetário?
É que nas últimas decadas assistimos a um proliferar de banca não especializada nos mercados a entrar no negócio dos mercados financeiros, fazendo alavancar o sistema e forçando os BCE's a ginásticas inimagináveis.

O que quero dizer simplesmente é que no final de contas que perde com tudo isto é a economia real através das empresas e familiar, que com os seus parcos recursos (que são garantias) proporcionaram a criação de uma "coisa económica invisivel", diria mesmo virtual que nada traz à economia real, mas que a seca pela sua sede sobre as suas garantias.

Como é que o sistema da "nublosa" consegue afectar milhões de pessoas que o que querem é simplesmente sobreviver?

Se esta for a solução encontrada para a resolução dos atuais males, temo que de facto se manifestem os piores valores da raça humana.

Cumprimentos   

[hermes]

aos_pouquinhos,

Não creio que haja muito a preocupar com a separação destes dois tipos de banca. A razão é esta: depois de casa assaltada, trancas à porta.

Naturalmente que os políticos chegaram mesmo a tempo para começar a resolver o problema e as medidas previsíveis são mais regulamentação e menor alavancagem. Exactamente as palavras mágicas que o shadow banking precisava para continuar a encolher.

Caso ainda tenhas dúvidas, vê o documento em anexo.

[hermes]

Segue-se agora a principal motivação desta thread.

O seguinte artigo do Tyler é bastante interessante por duas razões:

• O segundo gráfico tem-se revelado um bom previsor do montante dos Quantitative Qualitative Easings [não é a quantidade da moeda que está a ser alterada, mas sim a sua qualidade de crédito para base, Goebbels sentir-se-ia orgulhoso em cunhar tal termo] e já em 2010 o Tyler tinha reparado nisso.
• É interessante tb como num ambiente de desalavancagem os shadow banks funcionam como um tampão contra a inflação, pois os colaterais do shadow banking, ao contrário do numerário dos bancos "normais", não pode ser trocado directamente por produtos e serviços, apenas pode ser usado teoricamente para obter crédito para comprar produtos e serviços. Na prática a capacidade de extração de crédito desses colaterais secou, pois não só a maior parte dos colaterais tem azedado [i.e. vale menos], como ainda os shadow bankers estão muito menos meigos a cortar o cabelo.

A previsão do Tyler sobre o QE3 acabou por se confirmar.

Na minha opinião, o cruzamento das duas curvas do 2º gráfico marca a transição da noite para o dia da importância [i.e. quem mais ordena] destes dois tipos de banca. Como a banca "normal" deve estar toda enleada no shadow banking, prevejo que as pressões inflacionistas só começarão a manifestarem-se quando a desalavancagem do shadow banking começar a estabilizar, altura em que Mefistófeles começará a cobrar sua parte da troca do crédito por base.

On The Verge Of A Historic Inversion In Shadow Banking

by Tyler Durden
on 06/25/2012 16:02 -0400

http://www.zerohedge.com/news/verge-historic-inversion-shadow-banking

While everyone's attention was focused on details surrounding the household sector in the recently released Q1 Flow of Funds report (ours included), something much more important happened in the US economy from a flow perspective, something which, in fact, has not happened since December of 1995, when liabilities in the deposit-free US Shadow Banking system for the first time ever became larger than liabilities held by traditional financial institutions, or those whose funding comes primarily from deposits. As a reminder, Zero Hedge has been covering the topic of Shadow Banking for over two years, as it is our contention that this massive, and virtually undiscussed component of the US real economy (that which is never covered by hobby economists' three letter economic theories used to validate socialism, or even any version of (neo-)Keynesianism as shadow banking in its proper, virulent form did not exist until the late 1990s and yet is the same size as total US GDP!), is, on the margin, the most important one: in fact one that defines, or at least should, monetary policy more than most imagine, and also explains why despite trillions in new money having been created out of thin air, the flow through into the general economy has been negligible.

Before we get into the nuances, here, courtesy of Zoltan Pozsar is a reminder of the nebulous entity under discussion which is the definition of "baffle them with bullshit." We recommend only Intel chip technicians try to make any sense of this schematic.

As another reminder, US Shadow Banking liabilities - a combination of Money Market funds, GSE and Agency paper, Asset-Backed paper, Funding Corporations, Open market paper and of course, Repos - hit a gargantuan $21 trillion in March 2008. They have tumbled ever since, printing at just under $15 trillion at the end of March 2012, the lowest number since March 2005 when shadow banking liabilities were soaring. This is an epic $6 trillion in flow being taken out of credit-money circulation, with a $143 billion drop in Q1 alone! (blue line on the chart below).

In fact over the past 16 quarters there has not been a single increase in the total notional contained within shadow liabilities.The chart below shows perfectly just where the credit bubble popped: a bubble which has affected shadow banking far more than normal credit transformational conduits.

It is precisely this ongoing contraction that the Fed does all it can, via traditional financial means, to plug as continued declines in Shadow Banking notionals lead to precisely where we are now - a sideways "Austrian" market, in which no new credit-money money comes in or leaves.

In fact, as the chart below shows, while the collapse in shadow banking has been somewhat offset by increasing liabilities at traditional banks solely courtesy of the Fed, the reality is that for two years in a row, consolidated US financial liabilities amount to just shy of $30 trillion and have barely budged. As long as this number is not increasing (or decreasing) substantially, the US stock market has virtually no chance of moving higher (or lower) materially.

What is worse is that even when accounting for offsetting traditional bank liabilities, on a consolidated basis, the US total financial sector is still an epic $3.8 trillion below its all time highs, just above $33 trillion. Unless and until this $3.8 trillion hole is plugged, one thing is certain: risk is not going anywhere (also notable is that consolidated liabilities in Q1 declined by $86.2 billion at a time when the Fed was engaged in Twist but that is for Ben Bernanke to worry about, not us).

So what is this "historic inversion" referenced in the title?

As some may have noticed looking at Chart 1, as shadow banking continues to collapse, it has to be offset by increasing conventional bank liabilities: for the most part real cash (technically electronic) deposits. And as of March 31, the spread between Shadow Banking and traditional financial liabilities has collapsed to just $206 billion, after hitting a record $8.7 trillion in March 2008. It is also important because the last time shadow banking as notional overtook the conventional banking system was back in December of 1995. Next time we update this chart, the blue line will be below the red one for the first time in 17 years.

Here it is again in chart format:

(At this point it may be worth noting that the only reason why we are so close to this critical inflection point is because this past quarter the Fed shifted $2 trillion in liabilities away from the household sector and dumped them in the US depository sector; for the time being this reclassification is not relevant but may require some clarification down the line).

Why is any of this relevant?

Simple.

What shadow banking has been for America is nothing short of an inflation buffer. Recall what the primary characteristic of shadow banking is: it performs all the traditional credit intermediation transformations that conventional banking entities do: Maturity, Credit and Liquidity.

However, unlike traditional banks, shadow banking has one huge deficiency: it has no deposits! In other words, the entire rickety shadow banking system is based simply on the good faith and credit that rehypothecated assets, converted into liabilities, and so on (think repos and reverse repos) courtesy of fractional reserve credit formation (recall rehypothecation), are valid and credible sources of liquidity. While that may be the case in a leveraging environment, i.e., in the expansionary phase of the ponzi, it no longer works when systematically deleveraging, i.e., where we are now.

It also explains why with collapsing shadow banking system it is purely up to traditional banks to grow if not to create additional credit-money instruments, then simply to plug the hole that is created every quarter with the expiration of more shadow liabilities. Because, once again, these are not of the Federal Reserve note variety, but credit instruments themselves, which in time maturity, and effectively take money out of the system all else equal.

Most importantly, it also explains why Goldman IS right, and the Fed has no choice but to shift to a "flow" reserve creation format, at least until such time as the balance of shadow liabilities is offset by generic liabilities: i.e., deposits.

However, there is a rub. As we noted previously, shadow banking is simply an inflation buffer: since there are no deposits, there is little risk of the "money" contained in the banking system from furiously vacating and be used to spur purchases of everything from 1,000x P/E/ stocks, to overvalued housing, to just being packed away safely in a mattress. In other words, the Shadow Banking system is circular as the money contained therein is self-contained.

Not so for deposits. Just ask any banker, central or otherwise, especially in Europe, who has had to deal with the threat of bank runs.

The biggest paradox is that as the US financial system takes more and more steps back, and reverts to a more conventional system (look at Europe as a paradigm of what is coming), the risk that incremental money creation by the Fed will eventually spur inflation rises exponentially, as more and more "money" ends up residing within conventional bank deposit accounts.

That currently there are just shy of $10 trillion give or take in consolidated deposits across the US financial system, on total liabilities of $30 trillion, is the only reason why the Fed has still be unable to spawn the kind of "virtuous" inflation that Bernanke dreams about every night but is unable to create.

Said inflation buffer, however, is getting smaller and smaller every quarter, and at this rate, shadow banking as a transformational conduit will completely disappear in a few short years, at which point everything will be in the hands of fickle depositors.

It is then, that America will finally figure out why Germany and the Bundesbank, are so leery of runaway printing. Because while the US still has the benefit of shadow liabilities, Europe does not. And Schauble, Merkel, and Weidmann, not to mention the German population (at least subconsciously) all know this.

In a few years, when traditional bank liabilities have soared by another $10 trillion (think doubling of the current depositor base), and when shadow banking is essentially non-existent, and when the stock market is still where it is, then, and only then, will all those three-letter economic theories, which on purpose ignore the impact of shadow banking, be finally put to the test. We can only hope that by then the market still has some discounting capacity left in it, and can prevent the kind of final outcome that tens of trillions in deposits shifting from Point A to Point B on a whim will certainly create. Alas, with encroaching central planning having made discounting virtually meaningless and impossible, we wouldn't be surprised if once again the "capital markets" don't understand what has just happened before it is too late.

Appendix A:

Historical components of shadow liabilities.

Sequential change in the historical components of shadow liabilities.

Source of all the data used in this article: Fed's Flow of Funds, which for some reason no other financial analyst, let alone journalist, wants to touch with a ten foot pole.

Finally, anyone who wishes to learn some more, here is some additional info from Deloitte (generically correct perspective, but incomplete).

Finally, those who wish to learn the details of logic behind this analysis can do so courtesy of Zoltan Pozsar's latest report on Shadow Banking.

[hermes]

Segue-se um interessante artigo, que dá a primeira boa explicação para o timing do QE3 que até agora encontrei.

O primeiro gráfico é particularmente interessante pela a anomalia invisível a olho nu. Tb bastante interessante é o terceiro gráfico, que mostra de forma eloquente quem é que agora está a suportar o dólar standard.

Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair with its Banks and Mortgage Bonds: Levitating The Black Hole

by Economics Voodoo
October 22, 2012 at 12:00 UTC

http://www.economicsvoodoo.com/quantitative-easing-0-1-2-3-and-federal-reserve-banks-love-affair-with-its-member-banks-and-mortgage-bonds-levitating-the-black-hole/

“A black hole is a region of spacetime where gravity prevents anything, including light, from escaping… Around a black hole there is a mathematically defined surface called an event horizon that marks the point of no return.”—Wikipedia

When Did QE Stop?

To much frenzied media coverage, the Federal Reserve Bank announced a third round of quantitative easing “QE 3∞“on September 13, 2012. The Federal Reserve will essentially print unlimited quantities of dollars to purchase agency mortgage bonds and maintain nominal interest rates targeted at 0% (“ZIRP”) to keep borrowing costs reasonable for its member banks, among others.

“QE 3∞” in 2012 is the unlimited version of “QE 1” in 2009 following the banking and financial system crisis in September 2008. What does this mean?

QE is simply the printing of dollars in paper or digital form by the quasi-private Federal Reserve Bank, as the Federal Reserve does not have this money. In QE 1, the Federal Reserve Bank printed $1.25 trillion to purchase agency mortgage-backed securities (MBSs). Agency MBSs are mortgage bonds (akin to a mutual fund filled with mortgages, peoples’ homes) issued and guaranteed or held by the quasi-private Fannie Mae and Freddie Mac.

On a practical level this means the Federal Reserve Bank printed $1.25 trillion with a computer stroke and became the owner or recipient of homeowners’ mortgage payments.  The Federal Reserve will do this on an unlimited basis in QE 3 going forward, as it states ‘to foster maximum employment and price stability’.

What is it about the Federal Reserve Bank’s love affair with mortgage bonds that the media and the Federal Reserve will not speak of?

I.  QE0: Insolvency of the Largest Banks in the Federal Reserve System

Let’s pause for a moment. The most significant QE was not even called QE. It was the suspension of the Financial Accounting Standards Board’s (FASB) mark-to-market accounting rule 157 in April 2009. The rule required banks to value assets on their balance sheets at current market price or fair value, but since 2009, became what the banks hope it is worth or what they paid for it.

Doing so helps insolvent banks avoid the appearance of insolvency by not having to write-down the amount of losses on assets, such as mortgage bonds, assuming there is a willing buyer (There isn’t really). Private sector financing for the housing market through demand for private label MBSs, which are mortgage bonds backed by mostly subprime mortgages reincarnated as prime issued and sold by the largest banks, collapsed since fall 2008.

Let’s give this FASB suspension of mark-to-market accounting event a name, QE0 , to mark the point of no return in April 2009 about six months after the banking and financial collapse in September 2008.

Following the collapse, lawmakers in the U.S. House of Representatives lined up to threaten FASB in a series of hearings to suspend mark-to-market accounting, as Representative Michael E. Capuano (D-Mass.) warned FASB’s chairman in March 2009: “Do not make us tell you what you have to do.” (Transcript of the U.S. House of Representatives Mark-to-Market Hearing, March 12, 2009). The American Bankers Association, Citigroup, and the Bank of New York Mellon Corp., the world’s largest custodian of financial assets, also pressured for the rule change.

[On a side note:  MIT finance professor-CBO chief economist revised my memo to say that assets may already fully reflect market values. After I was fired I learned that MIT professor called by the U.S. President to CBO in 2009 has a CBO economist sit on FASB. This CBO economist and CBO Director Elmendorf are part of the Hamilton Project at the Brookings Institution. Robert Rubin is the project’s founder and Dr. Lawrence Summers, once chief advisor to the U.S. President, sits on its Advisory Council to promote economic growth and health care. Former Federal Reserve Bank Chairman Alan Greenspan, Robert Rubin, and Lawrence Summers were instrumental in the proliferation of derivatives in the late 1990s. ]

Let’s look at a few simple charts. What does QE0 FASB look like for the largest banks?

Voodoo Assets and Liabilities Chart 1:

From Voodoo Chart 1, was there a banking and financial crisis in 2008 that froze global markets? From the crisis in fall 2008 to 2009, there is no change between assets and liabilities! No change, for what has been considered the worst banking and financial crisis in a century (a few?).

Bank assets net of liabilities or net worth look incredible during a time when home prices dropped 25% to 65% (e.g. Arizona, Nevada, California, Florida) nationwide, the labor force participation rate set back 30 years coupled with an unprecedented rise in foreclosures, whose mortgages back $7 trillion or so mortgage bonds of the largest banks and Fannie Mae and Freddie Mac that failed in fall 2008. (The LFPR is another basic, standard measure of the employment picture that is less prone to voodoo adjustments. The LFPR is the number of people in the workforce between 16-65 years old divided by the total 16-65 year old population count. It excludes the military and the institutionalized population, i.e. people in prison.)

Let’s take this further for a bird’s eye proxy view of how voodoo the numbers may be. The Federal Reserve Bank data shows the residual “equity” or net worth of banks after all liabilities are paid to be a positive $1.5 trillion in its latest release as shown in the chart. Suppose we compare the banks’ numbers to the market or public consensus of the banks’ equity value. This would be the market capitalization, a measure heavily dependent on the market price of the bank stock that is almost always higher than the equity value. The largest handful of banks hold about three-quarters of the nation’s banking assets, but let’s expand that to the10 largest banks.

The Federal Reserve Bank reports a positive $1.5 trillion in residual banks equity or positive net worth – the largest banks account for most of this – but the market consensus (market capitalization) indicates that figure to be about $800 billion or roughly 50% lower. This percentage falls in the ballpark of asset overvaluation or understatement of liabilities found among banks that have been allowed to fail.

The ‘market consensus’ market capitalization figure is assisted by a levitated stock market (ex. 401k(s)/retirement plans) that rose after the FASB mark-to-market rule was suspended and remains in place since April 2009. It is unclear if the system can withstand a return to reality-based accounting, as a few hundred billion dollars or trillion dollar difference will be rather modest compared what happens when over $1,000 trillion in notional derivatives are set off. This notional money does not exist until it becomes real when banks and financial institutions fail. (There is a small fraction of derivatives that is used to hedge or mitigate risk with real assets and capital behind them.) For reference, world GDP was about $70 trillion in 2011.

What does QE0 FASB look like for the Equities-Stock Market?

In future posts, we will look at how these derivatives and other mechanisms are used to suspend free market forces; a finite factor is time. But there is more to the Federal Reserve’s love affair with mortgage bonds, because the crater left by insolvency has to be filled.

II. Who Has Been Hoarding U.S. Treasuries

The chart below shows a simple year to year change in the largest banks’ holdings of U.S. Treasuries and other securities. Since the banking and financial crisis in 2008, the largest banks added incrementally more U.S. Treasuries holdings to their balance sheets in four years than the past 20 years combined.  This serves the dual purpose of helping to capitalize the banks and as the few remaining buyers of U.S. Treasuries as the Federal Reserve “monetizes” or prints dollars to make up the rest. If the past four years is any indication, 2013 looks to be a bigger year as the few seeking safety in U.S. Treasuries may be found at the largest banks.

Voodoo Parking Lot Chart 2:

From a different perspective, if we look broadly to the currency composition of foreign central banks (IMF COFER), relative holdings of U.S. dollars and U.S. Treasuries to total foreign exchange reserves have dropped by over 60% from the height in 2000 of 56% to 34% in 2012.  The often-cited 62% of central bank foreign exchange holdings being in U.S. dollars overlooks nearly half of currency holdings that are unreported, the growth of which has been driven by emerging and developing economies – presumably led by China.

Emerging and developing economies have grown to account for about two-thirds of the world’s central bank holdings of foreign exchange reserves as their relative holdings of U.S. dollars have quietly gone in the opposite direction… and some portion quietly into accumulating gold. Increasingly, bi-lateral trade agreements among other nations exclude the use of the U.S. dollar as payment for international trade, once the domain of the U.S. dollar as the world reserve currency. Other countries see what is unfolding in this country but it is unclear if the American public sees it.

The Federal Reserve Bank is printing trillions of dollars (and euros through currency swaps) to levitate its member banks and the financial system in concert with the suspension of accounting rules after the systemic collapse of derivatives built around the housing market. Why mortgage bonds from Fannie Mae and Freddie Mac?
 
III. The Front End and Back End of Quantitative Easing – Fannie Mae, Freddie Mac, MERS, and the Federal Reserve’s Largest Member Banks

We return to the center of the banking and financial system collapse in 2008. On the front end, Fannie Mae and Freddie Mac guarantee the equivalent of one-third of U.S. GDP in mortgages, making them perhaps the largest financial institutions in the world. During the crisis in September 2008, Fannie Mae and Freddie Mac were taken under conservatorship by the U.S. Department of the Treasury, which stepped in to guarantee unlimited capital infusions to ensure the solvency of these agencies, lifting the $400 billion cap on December 24, 2009.

The unlimited part of the capital infusions by the U.S. Treasury comes to an end on December 31, 2012. Coincidentally on September 13, 2012 the Federal Reserve announced QE 3 that it will print essentially unlimited dollars to purchase Fannie Mae and Freddie Mac mortgage bonds for as long as it takes. There is a 2-3 months overlap, in case the idea was to ensure a smooth transfusion for the Federal Reserve to pick up where the U.S. Treasury leaves off.

There are a few things happening on the back end to help understand the quasi-private Federal Reserve Bank’s love affair with its member banks and its quasi-private kin Fannie Mae and Freddie Mac, which have a direct lifeline into the largest public Treasury on the planet.

Since the collapse in 2008 and remains today, Congress quietly raised Fannie Mae and Freddie Mac’s loan purchase limits to allow the banks to transfer or offload their loans made in “high-cost” areas onto Fannie Mae, where house prices are three times the national median, rose the fastest and fell the hardest (e.g.,CA, AZ, FL). If there is an indication of the loan quality that banks offloaded, Fannie Mae from 2009 to 2011 repurchased in the ballpark of what could be gleaned from the data, $450 billion in delinquent mortgage returns from its guarantees on mortgages in its MBS trusts. The sales price to Fannie Mae likely reflects the price banks hope it is worth after the U.S. House of Representatives threatened unknown consequences to FASB. Perhaps that in itself says a lot about The Black Hole.

The “Straw Man” Problem Fannie Mae and Freddie Mac collaborated with the Federal Reserve’s largest member banks – including Bank of America, Citigroup, JP Morgan Chase,Wells Fargo – to create their private title registry database called the Mortgage Electronic Registration System (MERS) in 1995. MERS was the mechanism that made possible the rapid securitization or packaging of home mortgages into mortgage bonds by its creators and other members. MERS was housed inside a mostly unknown, what some would describe as a shell company that supplanted public county property recordings for its creators to securitize the equivalent of about two-thirds of U.S. GDP’s worth of mortgages in the privacy of their MERS title registry database. Once a mortgage was inside MERS, no further recordings are done and MERS’s name is identified as the lender, as mortgages enter and exit, are pooled or packaged and mortgage bonds are sliced, sold and resold.

Back in 1995 the largest banks, Fannie Mae and Freddie Mac went to the former law firm of the U.S. Department of Justice’s Attorney General to obtain the legal framework for creating MERS.  In February 2012, the Justice Department’s Attorney General-then partner at the law firm, negotiated the national foreclosure settlement on behalf of these same MERS founders. Both the law firm and the Justice Department declined to say if U.S. Attorney General had worked directly on MERS/MERSCORP.

The Washington State Supreme Court recently invalidated MERS while a decision is forthcoming from the Oregon State Supreme Court as the Oregon state legislature works to validate MERS.  This was preceded by efforts from both the U.S. House and Senate passing HR 3808 that would have made it more difficult for homeowners to challenge foreclosure with forged or defective documents. More than half a dozen other state supreme courts have invalidated MERS as some others have upheld its legal standing to foreclose.

MERS and The Credit Event of 2008 The conservatorship of Fannie Mae and Freddie Mac under the U.S. Department of Treasury was defined by ISDA as a ‘credit event’ (a default) that triggered payment on the credit default swaps (insurance payoffs) on Fannie Mae and Freddie Mac, the largest CDS payout in history on the largest financial institutions in the world. Some net of $23 trillion in notional credit default swaps were settled end-2008 to 2009 as the U.S. Treasury (taxpayers) stepped in to provide unlimited funding to Fannie Mae and Freddie Mac and ensure payment on the CDSs.

ISDA stands for the International Swaps and Derivatives Association whose committee determines whether there is a credit event (default) on derivatives contracts, whether it be in the U.S. or Greece. Global voting members include Barclays, Credit Suisse, UBS, Deutsche Bank AG, Goldman Sachs, Morgan Stanley, JPMorgan Chase Bank, and Bank of America; the latter are co-founders of MERS and the largest sellers and issuers of mortgages and mortgage bonds after bond issuers Fannie Mae and Freddie Mac. Perhaps it may have been helpful to know the contents the mortgage bonds having created MERS as these entities wrapped $62 trillion in notional credit default swaps (“insurance”) against their default and called their default in September 2008.

After the CDS payout collapsed the largest financial institutions, what emerged was called by the media as “sloppy mistakes” “errors” from the MERS securitization black box  that the Kansas State Supreme Court called MERS a “straw man”. A New York State Supreme Court judge in January 2012 said , “It appears that every MERS mortgage is defective, a piece of crap.” (Somehow that should not discourage the New York Attorney General from postponing “indefinitely” the lawsuit against MERS in February 2012). Some indications of what was done in MERS:

• Robo-signing foreclosures emerged across the nation in fall 2010 as the largest banks (who are also the largest servicers), Fannie Mae and Freddie Mac foreclosed with forged or defective mortgage documents across the nation. RT Capital Account provides a good description of MERS.
• Deutsche Bank tried to foreclose on a mortgage it had already sold to Goldman Sachs.
• Lawsuit against the Bank of New York Mellon trustee for overseeing the Chicago police’s $30 billion pension investment in MBS trusts that were missing a few mortgages and experienced $9 billion in losses. (Were the Chicago police whacking the right knees during the protests in Chicago? )
• Perhaps the largest banks and Fannie Mae and Freddie Mac ran out of homes to bundle-securitize, as homeowners who have already paid-off their mortgages are foreclosed upon (Here, here, here, here, here).
• The Massachusetts Supreme Judicial Court voided two foreclosures from Wells Fargo (MERS co-creator) and U.S. Bank as they could not show which MBS trust held the mortgages to establish legal standing to foreclose. (Did those mortgages collateralize another MBS owned by another investor?)
• There is also the question of whether an MBS trust exists.

An early hint of trouble may be seen in MERSCORP (MERS holding company) commissioning a legal opinion in 2004 on the validity of MERS electronic records from the Justice  Department Attorney General’s former law firm where he was partner. Voodoo Chart 2 shows a striking jump in banks’ holdings of U.S. Treasuries in 2003. Fannie Mae was aware of foreclosure problems in 2006.

In the background, on May 5, 2006 the U.S President gave intelligence czar, John Negroponte, broad authority in the name of national security to exempt publicly traded companies from accounting and securities disclosure obligations. This was the first time presidential authority was delegated outside the Oval Office.

In mid-2010 MERS acknowledged its “securitization crisis” in a letter to the Securities Exchange Commission (SEC). By 2011, Fannie Mae acknowledged that legal “challenges to the MERS System could pose counterparty…, operational, reputational and legal risks for us.”

On April 13, 2011, the Federal Reserve Bank, the U.S. Department of Treasury and agencies entrusted with maintaining the stability and confidence in the nation’s financial system – FDIC, Office of Thrift Supervision (OTS), and Federal Housing Finance Agency (Fannie Mae and Freddie Mac’s regulator) – and MERSCORP (MERS’s holding company) agreed to a Consent Order. The Federal Reserve et al agreed “MERS and MERSCORP neither admit nor deny… engaged in unsafe or unsound practices that expose them…to unacceptable operational, compliance, legal, and reputational risks.” And essentially to hire a few employees and set up a management board to oversee the equivalent of two-thirds of U.S. GDP in mortgages in their private title registry.

On December 31, 2012, the U.S. Department of Treasury hands off the torch of unlimited taxpayer funding of Fannie Mae and Freddie Mac. The remaining buyer is the Federal Reserve stepping in to print unlimited quantities of dollars to gobble up Fannie Mae and Freddie Mac mortgage bonds and park U.S. Treasuries at the largest banks. Any MERS, non-mortgage or duplicated mortgages fall out may be an issue among friends as they pass into the Federal Reserve. Concerns about the Federal Reserve’s holdings of trillions in agency mortgage bonds are taken care of by Fannie Mae and Freddie Mac, on behalf of taxpayers, that will insure against defaults.

That is why in looking at the big picture the problems are of such magnitude that it has gone beyond housing and is about the entire system that has to be suspended from the black hole on faith-based accounting and printing money. We will look at the mechanisms being used to suspend free-market forces and more broadly, what consequences they bring.

[hermes]

O evento previsto pelo Tyler Durden finalmente aconteceu: a banca tradicional e o shadow banking trocaram de lugares. Observamos isto juntos, sim?

The Historic Inversion In Shadow Banking Is Now Complete

by Tyler Durden
on 12/09/2012 16:36 -0500

http://www.zerohedge.com/news/2012-12-09/historic-inversion-shadow-banking-now-complete

Back in June, we wrote an article titled "On The Verge Of A Historic Inversion In Shadow Banking" in which we showed that for the first time since December 1995, the total "shadow liabilities" in the United States - the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) - were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.

In other words, in Q3 total shadow liabilities, using the Zoltan Poszar definition, and excluding hedge fund repo-funded, collateral-chain explicit leverage, declined to $14.8 trillion, a drop of $104 billion in the quarter. When one considers that this is a decline of $6.2 trillion since the all time peak of $21 trillion in Q1 2008, it becomes immediately obvious what the true source of deleveraging in the modern financial system is, and why the Fed continues to have no choice but to offset the shadow deleveraging by injecting new Flow via traditional pathways, i.e. engaging in virtually endless QE.

What is more important, the ongoing deleveraging in shadow banking, now in its 18th consecutive quarter, dwarfs any deleveraging that may have happened in the financial non-corporate sector, or even in the household sector (credit cards, net of the surge in student and car loans of course) and is the biggest flow drain in the fungible credit market system in which the only real source of new credit continues to be either the Fed (via QE following repo transformations courtesy of the custodial banks), or the Treasury of course,via direct government-guaranteed loans.

And while the chart that is the topic of this post is the following, which shows that the red line - traditional bank liabilities - have once again overtaken shadow...



... The most important chart of the modern monetary system, and hence the one which you will see nowhere else, continues to be the one below, showing that on a blended notional basis, total traditional and shadow liabilities have not budged at all in the last three years despite the massive injections from the Fed!

Translated, the Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging - be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits - in the shadow banking system.



And a notable tangent continues to be that between the peak of the credit bubble and the most recent data, there continues to be a $3.7 trillion credit hole on a consolidated financial credit basis, which is precisely the reason for the ongoing Economic Depression from a simple Austrian money supply perspective, why the Fed and the government are forced to misrepresent the true state of the economy (far worse than current economic "data" represent), and why should the Fed ever halt its monthly flow into markets which is now $85 billion each month, there will be a dramatic stock market crash... and Bernanke knows it.

However, the bigger problem as more and more deposit-based liabilities take place of deposit-free shadow equivalents, is that the systemic propensity for runaway inflation rises with every quarter in which Fed reserve conceived deposits -prone to spilling over into the broader market based on the irrationality of individual psychology -serve to offset delevering shadow conduits. As explained in July, shadow banking was nothing more than a massive inflation buffer whose historic build up allowed the Fed to inject trillions without this money leading to a collapse in the USD value, now that it is actively deleveraging. But with every "shadow dollar" that is taken out of the system, said buffer gets smaller and smaller...

Finally, those curious which components in the shadow banking system were responsible for the most recent deleveraging in Q3, the chart below sums it up:



And the shadow deleveraging on a consolidated quarterly basis in all its glory:



To summarize, the Q3 change in shadow liabilities:

• GSE & Agency Mortgage Pools: ($16.2) billion
• Asset Backed Securities issuers: (39.3) billion
• Funding Corporations: ($49.5) billion
• Repos: ($33) billion
• Open Market Paper ($4.8) billion
• Money Markets: +$39 billion: the only net addition in Q3

How was this drop offset? Simple - by a $177 billion increase in the liabilities of U.S.-Chartered Depository Institutions, which rose to a record $12.224 trillion in Q3, primarily due to a rise of $140 billion in Small time and Saving Deposits, a topic discussed previously here.

In summary: the shadow banking collapse continues, and is offset via the Fed "excess reserve" injection pathway entering M2 thanks to the ~4.5x M1 to M2 conversion pathway. Remember Fed's excess reserves are a component of M1: these then get "fractionally reserved" into M2 as per the multiplier shown below:



To summarize: all hope abandon ye who think the Fed will stop monetizing debt, and thus injecting flow, at some point in the next several years.

[Incognitus]

A satisfação das necessidades básicas já é uma remuneração. Se for em troca de coisa nenhuma mas produzir algo a que outros dão valor, é possível que alguém se lembre de o contabilizar e considerar que existe produção. Se for em troca de coisa nenhuma e produzir algo a que outros não dão valor, não existe produção nenhuma.