"Regardless of the risks of deflation, the FOMC
will do all that it can to ensure continuation of the economic recovery."
Ben Bernanke, Chairman of the Board of Governor of the Federal Reserve System at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 27, 2010.
Translation: Over the past three years or so, I have led the Federal Reserve in throwing everything it can against the wall to see what would stick. I will continue to do so in the future!
May I quote my post of August 12 (http://seekingalpha.com/article/220224-does-the-fed-even-know-what-it-s-doing-anymore).
"The Federal Reserve has two basic problems right now. First, those running the Fed don’t seem to know what they are doing. Second, they are doing a terrible job explaining this to the world.
Never have I seen such confusion in such an important institution. Never have I seen such inadequate leadership.
We have experienced the end of the Fed’s exit strategy, the effort undertaken by the Fed to reduce the size of the Fed’s balance sheet. The exit strategy was designed to reduce the massive amounts of reserves pumped into the financial system by the Fed so that a period of hyper-inflation would not result. That exit strategy saw the Fed’s balance sheet grow by $331 billion over the twelve-month period the “exit” strategy was in place. Excess reserves held by the banking system rose by 38% during the same time period. (Details here.)"
I see nothing from the current speech to clarify the situation!
Showing posts with label Federal Open Market Committee. Show all posts
Showing posts with label Federal Open Market Committee. Show all posts
Friday, August 27, 2010
Tuesday, March 16, 2010
The Federal Reserve and the Smaller Banks
The Open Market Committee of the Federal Reserve System meets today. No one is expecting that there will be any change to the Fed’s target Federal Funds rate. The reason given is that the economy still remains exceedingly weak with the unemployment rate remaining just below 10 percent and the inflation rate as measured by the consumer price index less food and energy, the Fed’s preferred price measure, hovering between a one percent and a 1 ½ percent, year-over-year rate of increase. This latter fact combined with the information that there is a lot of unused capacity in United States manufacturing is believed to be the primary argument for keeping the target interest rate at such a low level.
I, too, believe that the Open Market Committee will not change the target rate of interest at this time, but I still believe that the Federal Reserve is still very troubled about the condition of small- and medium-sized banks. To repeat the statistics again, the FDIC has more than 700 banks on its problem list with the expectation that over the next 12 to 18 months there will be three to four banks closed, on average, every week. The small- to medium-sized banks in this country do not appear to be in very good shape.
To raise rates at this time and remove reserves from the banking system could make the situation amongst the small- to medium-sized banks much more difficult. Yes, according to Federal Reserve statistics, small domestically chartered commercial banks in the United States make up only about 34% of the banking assets of domestically chartered banks in the United States as of the first week of March 2010. (The largest 25 domestically chartered banks therefore makeup about two-thirds of the assets of domestically chartered banks in the country.) Therefore, about 8,000 banks in the United States hold only one-third of the bank assets in the country. Perhaps this is not sufficient to worry too much about.
However, one could argue that another reason, perhaps the main reason, that the Fed does not want to raise its interest target is the shaky shape of this portion of the banking system.
The smaller banks in the country hold about $320 billion or about 9% of their assets in cash assets in the first week of March. This is up from 6% one year ago!
Furthermore, these banks hold about 12% of their assets in Treasury and Agency securities with another 7% of assets held in other securities. (This total of 19% is up from around 17% one year ago.)
Thus, these banks hold almost 28% of their assets in cash or marketable securities. This is up from about 23% at the same time in 2009.
One keeps looking for “green shoots” amongst these smaller banks. The bigger banks are going to make it now and do not present much of a worry to the Feds. In fact, the bigger banks are raking in the profits, one way or another.
The problem is, that I don’t see much happening in the smaller banks. The total assets of the bank are about the same as one year ago, but as the above figures show these banks have gone 100% risk-averse. It seems as if they are just holding on, hoping to survive the worst.
Total loans and leases at these banks are down a little more than 6% year-over-year. However, these totals are down almost $88 billion over the past 13 weeks, a drop of almost 4% in about three months.
Commercial and Industrial loans are down around 9%, year-over-year, although they have only dropped about $6 in the 13-week period ending March 3. Business loans are down severely and show no sign of picking up. This has got to have an impact on Main Street because the businesses that deal with these banks have few alternative sources of funds.
Another major area of concern to the small- to medium-sized banks is their portfolio of commercial real estate loans. These loans are down by more than 5% year-over-year and down almost $40 billion over the last 13-week period.
This is an area of major concern to these smaller banks and are expected to be the source of extended troubles to the banks over the next 18- to 24-months. This is the area over which Elizabeth Warren, the head of oversight for Congress of the TARP funds, has expressed extreme anxiety.
The fear that one has in this area is that the loan problems of these small- and medium-sized banks have not really been fully worked out. As such, these banks are behaving in a very conservative fashion for a reason. They are building up cash assets and liquid assets in order to provide protection for themselves to weather potential loan charge offs over the next year or so. If interest rates begin to rise and the Fed begins to withdraw reserves from the banking system, these banking organizations could be forced to charge off many of these loans and this could cause severe damage to their capital positions. It is my belief that the Federal Reserve is cognizant of this situation.
Overall, the Federal Reserve is keeping excess reserves in the banking system at record levels. In the two weeks ending March 10, 2010, excess reserves in the banking system average roughly $1.2 trillion.
The banking system as a whole is recording about $1.3 trillion in cash assets in the banking week ending March 3. This is divided up between Large Domestically Chartered banks about $570 billion, Small Domestically Chartered banks about $320 billion, and Foreign-Related institutions about $460 billion. (What is perhaps interesting is this latter figure which was about $230 billion one year ago. Just what is going on with these foreign-related institutions?)
The loan portfolios of the large banks continue to contract as well. Total loans and leases are down about 7% year-over-year, and have dropped $85 billion over the last 13-week period. The two biggest declines registered come in Commercial and Industrial Loans, $31 billion, and Residential loans, also around $31 billion. There does not seem to be much activity in the Commercial Real Estate portfolio, contrary to what seems to be happening in the small- to medium-sized banks.
The conclusion?
No “green shoots” but lots of problems remaining in the smaller banks!
Surveys coming out from the Federal Reserve indicate that fewer banks are tightening up their lending standards. This is promoted as a good sign. Other indicators in housing construction, foreclosures, and bankruptcies are seen as pointing to a turnaround in the banking system.
I don’t see it yet. And, I don’t think that the Federal Reserve really sees it yet.
The banking system must begin lending again if we are to have an economic recovery and job growth. Many companies seem to be tapping the capital markets as debt issues climb. However, these are not Main Street businesses. And, history teaches us, the banking system must be there to underwrite any expansion of business activity because for many, Main Street is the only place they can raise funds.
I, too, believe that the Open Market Committee will not change the target rate of interest at this time, but I still believe that the Federal Reserve is still very troubled about the condition of small- and medium-sized banks. To repeat the statistics again, the FDIC has more than 700 banks on its problem list with the expectation that over the next 12 to 18 months there will be three to four banks closed, on average, every week. The small- to medium-sized banks in this country do not appear to be in very good shape.
To raise rates at this time and remove reserves from the banking system could make the situation amongst the small- to medium-sized banks much more difficult. Yes, according to Federal Reserve statistics, small domestically chartered commercial banks in the United States make up only about 34% of the banking assets of domestically chartered banks in the United States as of the first week of March 2010. (The largest 25 domestically chartered banks therefore makeup about two-thirds of the assets of domestically chartered banks in the country.) Therefore, about 8,000 banks in the United States hold only one-third of the bank assets in the country. Perhaps this is not sufficient to worry too much about.
However, one could argue that another reason, perhaps the main reason, that the Fed does not want to raise its interest target is the shaky shape of this portion of the banking system.
The smaller banks in the country hold about $320 billion or about 9% of their assets in cash assets in the first week of March. This is up from 6% one year ago!
Furthermore, these banks hold about 12% of their assets in Treasury and Agency securities with another 7% of assets held in other securities. (This total of 19% is up from around 17% one year ago.)
Thus, these banks hold almost 28% of their assets in cash or marketable securities. This is up from about 23% at the same time in 2009.
One keeps looking for “green shoots” amongst these smaller banks. The bigger banks are going to make it now and do not present much of a worry to the Feds. In fact, the bigger banks are raking in the profits, one way or another.
The problem is, that I don’t see much happening in the smaller banks. The total assets of the bank are about the same as one year ago, but as the above figures show these banks have gone 100% risk-averse. It seems as if they are just holding on, hoping to survive the worst.
Total loans and leases at these banks are down a little more than 6% year-over-year. However, these totals are down almost $88 billion over the past 13 weeks, a drop of almost 4% in about three months.
Commercial and Industrial loans are down around 9%, year-over-year, although they have only dropped about $6 in the 13-week period ending March 3. Business loans are down severely and show no sign of picking up. This has got to have an impact on Main Street because the businesses that deal with these banks have few alternative sources of funds.
Another major area of concern to the small- to medium-sized banks is their portfolio of commercial real estate loans. These loans are down by more than 5% year-over-year and down almost $40 billion over the last 13-week period.
This is an area of major concern to these smaller banks and are expected to be the source of extended troubles to the banks over the next 18- to 24-months. This is the area over which Elizabeth Warren, the head of oversight for Congress of the TARP funds, has expressed extreme anxiety.
The fear that one has in this area is that the loan problems of these small- and medium-sized banks have not really been fully worked out. As such, these banks are behaving in a very conservative fashion for a reason. They are building up cash assets and liquid assets in order to provide protection for themselves to weather potential loan charge offs over the next year or so. If interest rates begin to rise and the Fed begins to withdraw reserves from the banking system, these banking organizations could be forced to charge off many of these loans and this could cause severe damage to their capital positions. It is my belief that the Federal Reserve is cognizant of this situation.
Overall, the Federal Reserve is keeping excess reserves in the banking system at record levels. In the two weeks ending March 10, 2010, excess reserves in the banking system average roughly $1.2 trillion.
The banking system as a whole is recording about $1.3 trillion in cash assets in the banking week ending March 3. This is divided up between Large Domestically Chartered banks about $570 billion, Small Domestically Chartered banks about $320 billion, and Foreign-Related institutions about $460 billion. (What is perhaps interesting is this latter figure which was about $230 billion one year ago. Just what is going on with these foreign-related institutions?)
The loan portfolios of the large banks continue to contract as well. Total loans and leases are down about 7% year-over-year, and have dropped $85 billion over the last 13-week period. The two biggest declines registered come in Commercial and Industrial Loans, $31 billion, and Residential loans, also around $31 billion. There does not seem to be much activity in the Commercial Real Estate portfolio, contrary to what seems to be happening in the small- to medium-sized banks.
The conclusion?
No “green shoots” but lots of problems remaining in the smaller banks!
Surveys coming out from the Federal Reserve indicate that fewer banks are tightening up their lending standards. This is promoted as a good sign. Other indicators in housing construction, foreclosures, and bankruptcies are seen as pointing to a turnaround in the banking system.
I don’t see it yet. And, I don’t think that the Federal Reserve really sees it yet.
The banking system must begin lending again if we are to have an economic recovery and job growth. Many companies seem to be tapping the capital markets as debt issues climb. However, these are not Main Street businesses. And, history teaches us, the banking system must be there to underwrite any expansion of business activity because for many, Main Street is the only place they can raise funds.
Thursday, March 19, 2009
The Fed Moves to Monetize
The Federal Reserve shocked the financial markets yesterday. The Fed released the results of its just-ended Federal Open Market Committee meeting and the response was immediate—stock market indices went up—and the value of the dollar went down!
The reason—the Open Market Committee approved a plan to purchase up to $300 billion of longer-term Treasury securities over the next six months. This is in addition to a plan to increase the Fed’s purchase of up to an additional $750 billion of agency mortgage-backed securities.
The stock markets took this surprise as a positive sign that the Fed was being true to what Chairman Ben Bernanke had indicated in recent speeches and interviews—“the Federal Reserve will employ all available tools to promote economic recovery.” (Oh, he also added “and to preserve price stability.”) Good news—right? Well, the stock market seemed to be “mixed” today.
The foreign exchange markets took another view and the value of the dollar dropped sharply, and the selloff was “widespread” according to the Wall Street Journal. Bad news—right? Well, the value of the dollar continued to decline today.
It is a complex story. I have been one that has continuously expressed concern over the long term prospects for the dollar in foreign exchange markets. See for example my post “The Obama Stimulus Plan and the Dollar: Is There a Connection (http://seekingalpha.com/article/114310-the-obama-stimulus-plan-and-the-dollar-is-there-a-connection). The concern is over the huge United States budget deficit and how this deficit is to be financed in future years. The long-run view of such large deficits is that a substantial portion of them will have to be monetized by the central bank. The fundamental effort of all Keynesian fiscal policy is to inflate or reflate the economy.
There are some complicating factors to this simple story. Through all the financial and economic turmoil of the past six months the dollar has not declined in value but has actually strengthened. If participants in the financial markets are so concerned about the deficits of the United States government and the possibility that the Federal Reserve will monetize a bunch of the debt, why has the value of the dollar gone in the direction it has? Why hasn’t the value of the dollar tanked, instead?
For one, the United States dollar is the “world” currency and it still is the currency of choice in times of uncertainty and turmoil. Thus, the strength of the dollar has, to a large extent, been the result of a “flight to safety” on the part of many investors in the world. It will, undoubtedly, continue to be a “safe haven” for much of the world’s wealth for a long while into the future.
Second, because most of the whole world is in some kind of a recession and are following similar fiscal and monetary policies, it becomes difficult to discern which currencies throughout the world are going to be the worst off. If changes in the value of currencies are a result of changes in the relative prospect for future inflation in different countries, then the exchange rates will ultimately be dependent upon just how each of these countries handles the pressures created by their own stimulus packages.
As for the United States dollar, the most important factor determining its value in the near term is going to be the “safety” factor. Still, other factors, like the aggressive posture of the Federal Open Market Committee cannot be ignored. And, this seems to be what is happening right now in foreign exchange markets. I would argue that even though this latter movement might be a short-run phenomenon, a person concerned with the future health of the United States economy should not ignore what the foreign exchange market might be telling us.
I continue to go to this statement of Paul Volcker: “a nation’s exchange rate is the single most important price in the economy.” (Paul Volcker and Toyoo Gyohten, “Changing Fortunes: the World’s Money and the Threat to American Leadership,” (New York: Times Books, 1992), p. 232.) Consequently, what is happening or will happen to this price should be of major concern to investors. This price will carry with it the view of the world investment community about how the United States is conducting its fiscal and monetary policies.
This is something that the Obama administration and the Federal Reserve System need to pay attention to. The most recent example of ignoring information like this came during the years of the Bush administration. In 2001 a tax cut was passed by the government that took the government budget from a surplus to a deficit position. This was followed by increasing expenditures that went to support several military engagements around the world. The fundamental market response to this was that the value of the dollar began to decline early in 2002.
In addition to this the Federal Reserve System kept short term interest rates at very low levels (the effective Federal Funds rate was below 2% from early in 2002 until the beginning of 2005) for an extended period of time which resulted in negative real rates of interest during this interval. Participants in foreign exchange markets continued to put pressure on the value of the dollar into the summer of 2008. Even though officials in the Bush administration and the Federal Reserve System claimed that they were watching the value of the dollar and maintaining its value was an important goal, little or nothing was done about this decline and the market value continued to sink.
The value of the dollar is something that we need to continue to watch closely. The concern over the monetary and fiscal policies of the Obama administration is not misplaced. A warning shot was issued this week by the Chinese Premier Wen Jiabao when he indicated that he was a “little bit worried” about the safety of the U. S. Treasury bonds that his government owns. The reaction of the foreign exchange market to the Fed’s announcement about their plan to buy up to $300 billion of longer-term Treasury securities is another. And, there is also the concern of some analysts that the real financial and economic issue facing the United States is one of “too much debt” and that this debt overload is exacerbating the economic slowdown. As the historian Niall Ferguson, author of “The Ascent of Money” (see review at http://seekingalpha.com/article/120595-a-financial-history-of-the-world), has stated, “the solution to the problem of having too much debt around is not creating more debt.”
Is the decision of the Federal Open Market Committee to purchase up to $300 billion of longer-term Treasury issues the next step in the monetizing of the debt? Will the release of this information contribute to a further decline in the value of the dollar? There are, of course, a lot of “known unknowns” and “unknown unknowns” at this time. Obviously, it is a very risky time. However, in my view, eventually the value of the dollar will continue to erode. History has shown that this is what eventually happens in situations like the one we are in.
The reason—the Open Market Committee approved a plan to purchase up to $300 billion of longer-term Treasury securities over the next six months. This is in addition to a plan to increase the Fed’s purchase of up to an additional $750 billion of agency mortgage-backed securities.
The stock markets took this surprise as a positive sign that the Fed was being true to what Chairman Ben Bernanke had indicated in recent speeches and interviews—“the Federal Reserve will employ all available tools to promote economic recovery.” (Oh, he also added “and to preserve price stability.”) Good news—right? Well, the stock market seemed to be “mixed” today.
The foreign exchange markets took another view and the value of the dollar dropped sharply, and the selloff was “widespread” according to the Wall Street Journal. Bad news—right? Well, the value of the dollar continued to decline today.
It is a complex story. I have been one that has continuously expressed concern over the long term prospects for the dollar in foreign exchange markets. See for example my post “The Obama Stimulus Plan and the Dollar: Is There a Connection (http://seekingalpha.com/article/114310-the-obama-stimulus-plan-and-the-dollar-is-there-a-connection). The concern is over the huge United States budget deficit and how this deficit is to be financed in future years. The long-run view of such large deficits is that a substantial portion of them will have to be monetized by the central bank. The fundamental effort of all Keynesian fiscal policy is to inflate or reflate the economy.
There are some complicating factors to this simple story. Through all the financial and economic turmoil of the past six months the dollar has not declined in value but has actually strengthened. If participants in the financial markets are so concerned about the deficits of the United States government and the possibility that the Federal Reserve will monetize a bunch of the debt, why has the value of the dollar gone in the direction it has? Why hasn’t the value of the dollar tanked, instead?
For one, the United States dollar is the “world” currency and it still is the currency of choice in times of uncertainty and turmoil. Thus, the strength of the dollar has, to a large extent, been the result of a “flight to safety” on the part of many investors in the world. It will, undoubtedly, continue to be a “safe haven” for much of the world’s wealth for a long while into the future.
Second, because most of the whole world is in some kind of a recession and are following similar fiscal and monetary policies, it becomes difficult to discern which currencies throughout the world are going to be the worst off. If changes in the value of currencies are a result of changes in the relative prospect for future inflation in different countries, then the exchange rates will ultimately be dependent upon just how each of these countries handles the pressures created by their own stimulus packages.
As for the United States dollar, the most important factor determining its value in the near term is going to be the “safety” factor. Still, other factors, like the aggressive posture of the Federal Open Market Committee cannot be ignored. And, this seems to be what is happening right now in foreign exchange markets. I would argue that even though this latter movement might be a short-run phenomenon, a person concerned with the future health of the United States economy should not ignore what the foreign exchange market might be telling us.
I continue to go to this statement of Paul Volcker: “a nation’s exchange rate is the single most important price in the economy.” (Paul Volcker and Toyoo Gyohten, “Changing Fortunes: the World’s Money and the Threat to American Leadership,” (New York: Times Books, 1992), p. 232.) Consequently, what is happening or will happen to this price should be of major concern to investors. This price will carry with it the view of the world investment community about how the United States is conducting its fiscal and monetary policies.
This is something that the Obama administration and the Federal Reserve System need to pay attention to. The most recent example of ignoring information like this came during the years of the Bush administration. In 2001 a tax cut was passed by the government that took the government budget from a surplus to a deficit position. This was followed by increasing expenditures that went to support several military engagements around the world. The fundamental market response to this was that the value of the dollar began to decline early in 2002.
In addition to this the Federal Reserve System kept short term interest rates at very low levels (the effective Federal Funds rate was below 2% from early in 2002 until the beginning of 2005) for an extended period of time which resulted in negative real rates of interest during this interval. Participants in foreign exchange markets continued to put pressure on the value of the dollar into the summer of 2008. Even though officials in the Bush administration and the Federal Reserve System claimed that they were watching the value of the dollar and maintaining its value was an important goal, little or nothing was done about this decline and the market value continued to sink.
The value of the dollar is something that we need to continue to watch closely. The concern over the monetary and fiscal policies of the Obama administration is not misplaced. A warning shot was issued this week by the Chinese Premier Wen Jiabao when he indicated that he was a “little bit worried” about the safety of the U. S. Treasury bonds that his government owns. The reaction of the foreign exchange market to the Fed’s announcement about their plan to buy up to $300 billion of longer-term Treasury securities is another. And, there is also the concern of some analysts that the real financial and economic issue facing the United States is one of “too much debt” and that this debt overload is exacerbating the economic slowdown. As the historian Niall Ferguson, author of “The Ascent of Money” (see review at http://seekingalpha.com/article/120595-a-financial-history-of-the-world), has stated, “the solution to the problem of having too much debt around is not creating more debt.”
Is the decision of the Federal Open Market Committee to purchase up to $300 billion of longer-term Treasury issues the next step in the monetizing of the debt? Will the release of this information contribute to a further decline in the value of the dollar? There are, of course, a lot of “known unknowns” and “unknown unknowns” at this time. Obviously, it is a very risky time. However, in my view, eventually the value of the dollar will continue to erode. History has shown that this is what eventually happens in situations like the one we are in.
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