Thursday, February 18, 2010

Bernanke Hikes the Discount Rate: zzzzzzzzzzz...

I described in my post on Feb 10  Link, why Bernanke will do nothing more than bluff about draining liquidity from the system and raising short term rates.  I mentioned that raising the discount rate was his loudest toothless tiger in this regard.  Well, Banana Ben raised the discount rate, the rate which banks borrow directly from the Fed.  Here's my description of why this act is meaningless, useless and ineffective - which means he really does not want to do anything other than give the impression to our massive foreign creditors that he's not really a fiat currency main-lining drug addict: 
Bernanke's first proposal would be to raise the discount rate. The discount rate is the rate charged by the Fed when banks borrow directly from the Fed. Raising the discount rate is meaningless right now as a tool to regulate systemic liquidity because the banks have plenty of money to lend out in the form of excess reserves. Excess reserves are bank deposits kept at the Fed in excess of reserve requirements. As of 12/31/09, banks had around $1.1 trillion in excess reserves. The banks thus have no need to borrow money from the Fed - and thus will not be affected at all by a rising discount rate. As of Feb 3, Discount Window loans were an insignificant $14.7 billion. As you can see, the discount window is not even a source of bank liquidity in comparison to the liquidity the banks already have on deposit at the Fed. Raising the discount rate would be about as useful as taking away ice machines in Antartica. In Banana Ben's own words today (Feb 10): raising the discount rate is “not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy." So why even bother mentioning this unless Banana Ben's intent is to remain consistent with his unstated policy of blowing smoke?
The fact of the matter is that Bernanke has two choices:  he can raise real rates and try to drain liquidity from the system, which will lead to a rapid collapse our economy, OR he can play "poker" with the market and send out false signals. Judging from his inability to hide lies from his facial expressions when he's in front of Congress, he's a crappy poker player. He knows full well the consequences of both alternatives, but why not try to kick the can down the road and let his successor deal with it or hope for Moses to come down from Mt. Sinai and deliver another miracle?  In the meantime expect Banana Ben to keep delivering a series of empty threats.

17 comments:

  1. Yes, it's nothing but a rubbish gesture, and the tell will be that the market, which is down after hours, will bounce back after this brief flurry of selling, and gold will, likewise, manage to hold up as well. We'll see.

    My view has been that the equity sell off-a controlled sell off if ever there was one- has been about scaring the locals into bonds as the government's funding requirements are enormous. The Greece brouhaha was the first tactic used, and now they have resorted to the "hiking the discount rate" maneuver. Well, they got about 8% off the top from the Greece story, let's see what they can get from The Discount Rate hike.

    ReplyDelete
  2. What a non-event, but the timing is so FED like.

    ReplyDelete
  3. Yup. Also got the dollar to pop over 81. Perfect prelude ahead of next week's MASSIVE Treasury auctions

    ReplyDelete
  4. The IMF Gold sell announcement and then the rate raise, all at the time Gold is showing a breakout. These criminals are good.

    Joe M.

    ReplyDelete
  5. 2 days in a row after overt smash attempts by the Govt, silver and gold pop at the Comex open. in fact, starting about an hour before the Comex open, gold and silver were quite a bit higher than the where they were yesterday at the same time of day. Tells me that market participants are starting to catch on to the game being played, are buying obvious manipulation dips, and the bullion banks are getting more desperate to cover their shorts, OF WHICH we only know the magnitude of the Comex/GLD/SLV short interest - we have NO idea as the real magnitude of the off-balance-sheet OTC derivatives short OR how those shorts are structured, other than an only slightly transparent quarterly BIS international bank review filings.

    The 1-2 IMF/Fed punch was designed to take down gold, prop up the dollar AND try to force equity money into the bond market, to help finance the glaringly massive $126 billion in new Treasury bond issuance.

    ReplyDelete
  6. Please take note that BOTH the IMF and Fed announcements were issued AFTER the Tuesday cut-off date for COT reporting. Coincidence? You can decide for yourself. But if you believe the timing of these announcements was random coincidence, may I interest you in buying a nice bridge that connects 59th Street in Manhattan on the east side with Queens?

    ReplyDelete
  7. Found the link about suspending the BLS-- it's actually just the foreign comparisons but it is a pretty good source and likely a precursor of things to come!
    http://www.whitehouse.gov/omb/budget/fy2011/assets/trs.pdf
    I've posted a few times before and hate using anonymous!

    ReplyDelete
  8. Thanks for the link. You can post under any name you want.

    Looks like they are going to "tweak" the labor statistics model to get rid of what I would bet is a more statistically accurate grass-roots survey - the LPS Locality Pay Survey - and use a more general survey that they then "model."

    Sounds to me like an implementation of the garbage-in/garbage-out method.

    ReplyDelete
  9. Tim Iacono (The Mess That Greenspan Made) has found an issue with the CPI today and that it maybe should have been -0.5% due to miscalculation/rebalancing that was not disclosed. Very interesting.

    ReplyDelete
  10. I misread the analysis, maybe the CPI will be revised UP as hotel rates were over weighted. Sorry about that, hey it's friday! In any case yet another data "my bad!" from the crew running the biggest economy in the universe. I am not worried at all.

    ReplyDelete
  11. I read three or four years ago in the BIS statistics that of the total deivatives of $1.4 t (equity and debt) 92% had a USD leg and 52% had an implied gold leg. The outside price on the gold confidence levels was a maximum of $1,000 and the price on the USDX was 82. These contracts have been rolled over in the mark to model rewrites at the original model prices or so we are led to believe. So we can assume that the banks have some degree of exposure today, whether it really runs into a $15 b loss in these contracts which these numbers suggest as the absolute low ball minimum is anybody's guess.

    What we do know is that as all of these contracts are completely outside of the scope of the statistical models used to price them then chaos theory dictates a corrosive systemic collapse.

    What do we mean by that. Well not all the losses and profits will be held evenly across the system. One of the parties statistically speaking will have all or a signifiant portion of the losing contracts way outside of it's ability to pay. Not all of the parties will have an exposure to that losing entity.

    Game theory predicts that eventually the balance sheet pressure will be so large that one of the parties will succumb to a credit squeeze and collapse. When this happens a chain of defaults will be initiated across the whole system.

    Why hasn't the default already happened? Well countries like China haven't yet got their assets out of collapse classes like the USD as they do so this collapse sequence will start. this may take some time and could be controllable in a controlled implosion.

    More likely it will come from the Gulf which has for years prepared for total default. Every cent coming out the Gulf has been held on deposit and invested in external assets. While every cent going into the Gulf has been on the basis of project or sovereign loans. Go figure why the Arabs wnat to pay 100 bp over LIBOR for investment unless they have been preparing their own little Ponzi scheme on a country basis.

    The deal in Saudi with the US is that the thugs in Saudi have the keys to the bank as long as the US gives them militiary protection. The moment the US protection goes it's all over and they Prince's will have to run or the population will start hanging them from lamp posts. The US presence is hanging by a thread in Iraq and Afghanistan how much longer will the militiary be credible in Gulf?

    This is why Wylie witters on about Dubai. Dubai is not important but if that goes so goes Saudi. It's not just the US you know it's all over.

    ReplyDelete
  12. Sorry figures wrong are derivatives are $1.4 q and losses are minimum $15 t.

    ReplyDelete
  13. Thanks for the post Anonymous. I think the total derivatives # is now a bit under 1q since the first credit crisis we just went thru. Part of the analysis needs to include to what extent can contracts ultimately be cancelled out vs. which ones are dependent on ultimate counterparty fulfillment. I don't think anyone knows. In my mind, we've been seeing a whole series of chain-reacted derivatives blow-ups, starting with Long Term Capital, then Enron, then Refco and Amaranth then Bear and Lehman and then AIG. The amount of time between explosions is getting shorter and the hosting entity is quickly vaporized. They really should have let AIG fail despite the related collateral damage that would have occurred. Also, I think the $23 trillion in direct cash injections and guarantees have provided a temporary relief from the derivatives bomb. Agree that Dubai may have re-lit the "fuse" and Greece is adding gunpowder to unlit sections of the fuse....

    ReplyDelete
  14. LOL gyc. No problem. I've stopped paying attention to PPI/CPI numbers. They're so manipulated. Hotel rate overweighting is just one form manipulation. People don't even talk about the degree hedonic adjustments are used to understate the real rate of inflation.

    ReplyDelete
  15. I like hedonism, oh you said hedonic, my bad!!!

    ReplyDelete
  16. Surely the AIG collapse was not a failure of capitalism but a triumph of capitalism. Ever since the establishment of the Fed the owners have been planning it's collapse. This time around they are playing for all the marbles. These failures don't lose money they make money. Look at GS and Greece $2.3b in trading in under 3 weeks. The coming collapse in the USD is going to leave the wealth in the hands of under 13 families.

    These things are triumphs not failures for the families that run the system. They are only failures if you are reduced to serfdom and abject poverty by what these guys are doing. To expect them to do anything different is like asking a scorpion not to bite you, it is the nature of the beast.

    ReplyDelete
  17. LOL gyc

    Anonymous - actually the argument would be that AIG was the failure of true free market capitalism. Broadly speaking, in a system that is free from Central Bank control of the money supply - AND IN WHICH THE MONEY SUPPLY IS "ANCHORED" BY SOMETHING OUTSIDE THE CONTROL OF CENTRAL BANK INTERVENTION LIKE GOLD, AS IT HAS BEEN FOR THE BETTER PART OF 5000 YEARS - and free from Government regulations that are skewed toward the benefit of large corporate formation, the free market would have never allowed a beast like AIG to become what it became.

    ReplyDelete