The economic and financial order of the world is changing. The Group of 20 met in Pittsburgh last week and clearly showed that it was the international body to contend with rather than the G-7. This past weekend there was the annual meetings of the World Bank and the International Monetary Fund. On Friday, Dominique Strauss-Kahn, who leads the IMF, referred to G-7 as the “late G-7”.
The organizations that deal with world financial and economic issues are broadening their base and becoming more inclusive of nations that are playing a larger and larger role in the world. What is clear, implicitly, if not explicitly, is that the United States is being challenged, not only in terms of its leadership of the world, but also financially in terms of the role that the United States Dollar plays in the world.
The economic leadership of the United States, in pre-conference statements, defended the position of the dollar in the world by “mouthing” their commitment to a strong United States Dollar. Before the weekend meeting, both Mr. Geithner and Mr. Bernanke spoke in support of the dollar: “Top U. S. officials threw their weight behind the dollar Thursday, with the Treasury chief stressing the importance of a strong dollar and the Federal Reserve chief addressing concern about the greenback’s future as a reserve currency.” (Wall Street Journal: http://online.wsj.com/article/SB125440283756156107.html.)
The problem with this is that their assurances were exactly the same as those issued by Treasury Secretaries O’Neill, Snow, and Paulson and that of a Federal Reserve chief with the name of Greenspan. For eight years the Bush (43) administration voiced its support of a strong dollar and the value of the dollar dropped more than 40% against other major currencies!
Geithner, Bernanke, and the Obama administration continue on the defensive as the value of the U. S. Dollar is down both against the Euro by about 11% and against major currencies by about 10% since January 20, 2009.
Given the stance of both the Bush (43) administration and the Obama administration over the past nine years the credibility of U. S. leadership in international circles is not very high.
Although the world community speaks very softly on the issue of the changing nature of international financial and economic cooperation, the talk “off-the-record” is expanding with more call for change surfacing from time-to-time. And, the position of the United States continues to weaken as the government continues to pile up huge deficits which ultimately lead to the further decline in the value of the dollar.
The United States cannot have it both ways. It cannot continue to be fiscally irresponsible and financially powerful.
Another piece of evidence supporting this conclusion is the continuing sale of physical assets in the United States to foreign interests. As the value of the dollar has declined over the past eight years, Sovereign Wealth funds as well as private interests have continued to acquire all or parts of U. S. companies. This move to foreign ownership is not going to cease given the fiscal path the United States is following.
And, it is going to be very difficult and take a good piece of time for the government to change the direction it is heading in. First, the mindset of Washington has to change and there is no evidence that anything of that kind is in the works.
We are in the midst of a major change in how the world is organized. It is not going to happen overnight, but, it is going to happen. The United States will continue to be the most powerful nation in the world, but, its relative position is changing and will continue to change. Furthermore, given these shifts, the United States cannot “get away” with the behavior that it has exhibited in the past. It is going to have to cooperate with others and this includes acting responsibly in terms of its fiscal and monetary policy. Until this happens continue to expect a weak dollar.
Monday, October 5, 2009
Friday, October 2, 2009
Mr. Geithner and Mr. Bernanke Support the Dollar?
“Top U. S. officials threw their weight behind the dollar Thursday, with the Treasury chief stressing the importance of a strong dollar and the Federal Reserve chief addressing concern about the greenback’s future as a reserve currency.” (Wall Street Journal: http://online.wsj.com/article/SB125440283756156107.html.)
What was the name of the Treasury Secretary…O’Neill? Or, was it Snow? Or, was it Paulson?
Oh, well.
And the Federal Reserve chief…that was Greenspan, wasn’t it?
And the value of the dollar dropped more than 40% against other major currencies!
Oh, that was the Bush (43) Administration.
When it comes to international confidence in a country’s currency, the officials of that country’s government must not just “Talk the Talk”, they must “Walk the Walk”!
Don’t watch the lips…keep your eyes on the hips!
Talk, talk, talk, talk…
Federal deficits growing out into the future in the neighborhood of $10 trillion or more!
Monetary policy where the banking system averaged excess reserves of $855 billion for the two weeks ending September 23, 2009! And, in a banking system where required reserves averaged only $60 billion for the same time period.
After nine years of promises from different Treasury Secretaries and from two Chairmen of the Board of Governors of the Federal Reserve System why is there no credibility in these statements?
The value of the U. S. Dollar is down against the Euro by about 11% since January 20, 2009 and the value of the U. S. Dollar against major currencies is down about 10% since January 20, 2009.
The report card given this administration by international financial markets is not good.
My guess is that the value of the U. S. Dollar will continue to fall over the next year or two and will continue to fall until participants in international financial markets see some action on the part of the United States Government and not just empty talk from its Treasury Secretary and the Chairman of its central bank.
What was the name of the Treasury Secretary…O’Neill? Or, was it Snow? Or, was it Paulson?
Oh, well.
And the Federal Reserve chief…that was Greenspan, wasn’t it?
And the value of the dollar dropped more than 40% against other major currencies!
Oh, that was the Bush (43) Administration.
When it comes to international confidence in a country’s currency, the officials of that country’s government must not just “Talk the Talk”, they must “Walk the Walk”!
Don’t watch the lips…keep your eyes on the hips!
Talk, talk, talk, talk…
Federal deficits growing out into the future in the neighborhood of $10 trillion or more!
Monetary policy where the banking system averaged excess reserves of $855 billion for the two weeks ending September 23, 2009! And, in a banking system where required reserves averaged only $60 billion for the same time period.
After nine years of promises from different Treasury Secretaries and from two Chairmen of the Board of Governors of the Federal Reserve System why is there no credibility in these statements?
The value of the U. S. Dollar is down against the Euro by about 11% since January 20, 2009 and the value of the U. S. Dollar against major currencies is down about 10% since January 20, 2009.
The report card given this administration by international financial markets is not good.
My guess is that the value of the U. S. Dollar will continue to fall over the next year or two and will continue to fall until participants in international financial markets see some action on the part of the United States Government and not just empty talk from its Treasury Secretary and the Chairman of its central bank.
Thursday, October 1, 2009
The Problems of the Savings Industry
In an earlier post I reported that the weakness being experienced in the year-over-year rate of growth of the M2 measure of the money stock could be attributed to shifts in deposits from thrift institutions into commercial banks. (September 25: http://seekingalpha.com/article/163456-thrift-struggles-dragging-down-m2-growth.)
On Tuesday, September 29, I wrote about commercial banks and how bank holding companies had raised a substantial amount of funds in the capital markets from the second quarter of 2008 to the second quarter of 2009 but most of the funds raised by these institutions went into non-bank subsidiaries. Chartered U. S. banks saw some increase in assets over this time period but these funds went into cash assets, government or agency securities, and mortgages, mostly of the commercial type.
We also have data from the flow-of-funds accounts that give us some insight into what is happening at savings institutions and credit unions. The real success story seems to be that connected with credit unions. The credit union industry ended the second quarter of 2008 with almost $900 billion in financial assets. All other savings institutions had assets of about $1,400 billion and the Office of Thrift Supervision (OTS) reported that thrift institutions had assets that amounted to only $1,100 at the end of the second quarter.
Who would have ever thought that the credit union industry would ever be about the same size as the thrift industry?
Credit Unions grew by $73 billion, year-over-year, and the credit that they extended seemed to expand during this time period at a fairly steady pace.
The bad news: savings institutions, which include savings and loan associations, mutual savings banks, and federal savings banks, performed abysmally. For one, industry assets, according to the OTS fell by 27% over the last year, reflecting the failure and sale (to commercial banks) of several large thrift institutions. Total loans at these institutions fell by 35%.
The total decline in financial assets for the industry was $420 billion: the mortgage portfolio of the industry declined by almost a third or $360 billion. Consumer credit also declined by about $14 billion.
According to the OTS, the industry as a whole earned a profit of $4 million—yes, that’s million—in the second quarter. This is the first quarterly profit since the third quarter of 2007.
The industry added almost $5.0 billion—yes, that’s billion—to loan loss provisions in the second quarter. This loan loss provision was exceeded in history by only five other quarters. However, these five other quarters were the five quarters just preceding the second quarter of 2009.
The OTS reports, however, that “96.2% of all thrifts exceed ‘well-capitalized’ regulatory standards.” These institutions, we are told comprise 95.9% of industry assets but most of them are relatively small. So, institutions with approximately $45 billion in assets are in not “well-capitalized” thrifts, by industry standards. The number of problem thrifts reached 40 at the end of the second quarter.
Yet the industry has about $40 in what are called troubled assets, about 3.5% of Total Assets. Troubled assets are noncurrent loans and reposed assets.
It seems as if the thrift industry is dying and needs to be consolidated and merged into the commercial banking industry. (And this from a person, myself, who successfully turned around two thrift institutions.) I don’t believe that there should be a merger of thrift institutions with the credit union segment of the industry. Credit unions seem to be doing something right. (I have worked, in recent years, with groups to form three credit unions and I believe that credit unions can fill a very important gap in consumer finance, credit and banking services.)
The thrift industry played a very important role in the history of the United States (and elsewhere in the world). In the current era of securitization and financial innovation, I believe that savings institutions have exceeded their useful lifetime. The savings and loan crisis saw the collapse of the industry and the 2000s just verified that the industry really needs to continue to shrink and become incorporated into other segments of the market.
On Tuesday, September 29, I wrote about commercial banks and how bank holding companies had raised a substantial amount of funds in the capital markets from the second quarter of 2008 to the second quarter of 2009 but most of the funds raised by these institutions went into non-bank subsidiaries. Chartered U. S. banks saw some increase in assets over this time period but these funds went into cash assets, government or agency securities, and mortgages, mostly of the commercial type.
We also have data from the flow-of-funds accounts that give us some insight into what is happening at savings institutions and credit unions. The real success story seems to be that connected with credit unions. The credit union industry ended the second quarter of 2008 with almost $900 billion in financial assets. All other savings institutions had assets of about $1,400 billion and the Office of Thrift Supervision (OTS) reported that thrift institutions had assets that amounted to only $1,100 at the end of the second quarter.
Who would have ever thought that the credit union industry would ever be about the same size as the thrift industry?
Credit Unions grew by $73 billion, year-over-year, and the credit that they extended seemed to expand during this time period at a fairly steady pace.
The bad news: savings institutions, which include savings and loan associations, mutual savings banks, and federal savings banks, performed abysmally. For one, industry assets, according to the OTS fell by 27% over the last year, reflecting the failure and sale (to commercial banks) of several large thrift institutions. Total loans at these institutions fell by 35%.
The total decline in financial assets for the industry was $420 billion: the mortgage portfolio of the industry declined by almost a third or $360 billion. Consumer credit also declined by about $14 billion.
According to the OTS, the industry as a whole earned a profit of $4 million—yes, that’s million—in the second quarter. This is the first quarterly profit since the third quarter of 2007.
The industry added almost $5.0 billion—yes, that’s billion—to loan loss provisions in the second quarter. This loan loss provision was exceeded in history by only five other quarters. However, these five other quarters were the five quarters just preceding the second quarter of 2009.
The OTS reports, however, that “96.2% of all thrifts exceed ‘well-capitalized’ regulatory standards.” These institutions, we are told comprise 95.9% of industry assets but most of them are relatively small. So, institutions with approximately $45 billion in assets are in not “well-capitalized” thrifts, by industry standards. The number of problem thrifts reached 40 at the end of the second quarter.
Yet the industry has about $40 in what are called troubled assets, about 3.5% of Total Assets. Troubled assets are noncurrent loans and reposed assets.
It seems as if the thrift industry is dying and needs to be consolidated and merged into the commercial banking industry. (And this from a person, myself, who successfully turned around two thrift institutions.) I don’t believe that there should be a merger of thrift institutions with the credit union segment of the industry. Credit unions seem to be doing something right. (I have worked, in recent years, with groups to form three credit unions and I believe that credit unions can fill a very important gap in consumer finance, credit and banking services.)
The thrift industry played a very important role in the history of the United States (and elsewhere in the world). In the current era of securitization and financial innovation, I believe that savings institutions have exceeded their useful lifetime. The savings and loan crisis saw the collapse of the industry and the 2000s just verified that the industry really needs to continue to shrink and become incorporated into other segments of the market.
Wednesday, September 30, 2009
The Bailout of the FDIC
The FDIC under-estimated.
In May of this year the FDIC projected $70 billion in losses associated with the failure of closed banks. This was an increase of $5 billion from earlier in the year. Now the figure has been revised upwards to $100 billion.
And, the FDIC is broke!
According to the New York Times: “Officials said that as of this week, the fund, which began the year at more than $30 billion and had about $10 billion over the summer, would have a negative net worth.”
The plan is to have banks “lend” money to the insurance fund in the form of a prepayment of annual assessments for the next three years. This “lending” would show up as an asset on the balance sheets of banks.
Four things are on my mind this morning.
First, the pace of bank failures has been orderly. That is, the problems are basically “known unknowns.” And, the FDIC is resolving the cases step-by-step.
Second, the concern arises about the pace of actual resolutions: has it been slowed because the FDIC knew that it was running out of money and was hoping that the situation would get better. If so, then the FDIC gets an F for this behavior.
We have had almost 100 bank failures this year and there are over 400 more banks on the problem list. Unemployment is rising, people are dropping out of the job market, there are lots of mortgages still to re-price in the next 18 months or so, foreclosures are still rising, and there still is the overhang of commercial real estate loans that are tenuous, at best. The potential number of problem banks could be even larger.
Has the FDIC under-estimated again?
Third, “it’s not over until it’s over!” The failure of financial institutions is a “lagging indicator”. The economy could be bottoming out, yet we can still experience a rising number of bank failures for another year or so due to the lag effect of the failures. But, the government is going to have to eventually “foot-the-bill”.
Accelerating annual assessments is a gimic! It is estimated that this will wipe out bank earnings for the year. So, with bad assets and zero earnings who believes that banks will begin lending again anytime soon?
And, if the banking system doesn’t get back into the lending game, how will the economy recover?
The only ones doing anything in the banking system seem to be the large bank holding companies and they seem to be putting their funds into “nonbank” subsidiaries. (See my post: http://seekingalpha.com/article/163983-credit-market-debt-a-return-to-pre-crash-practices.)
Fourth, what does this tell us about our leaders in government?
My personal view about the last election is that the public viewed the contest, not as a race between Democrats and Republicans, nor as a race between the liberals and conservatives. The public saw the election as a contest between incompetence and “possible” competence.
As of this date, the polls seem to indicate a rising concern that what seemed to be “possible” is fading away. People, at this time, don’t seem to want to move “left”. Look at Europe. Failing economies generally bring on a move for governments that can be labeled more toward the socialist end of the spectrum. Yet, what has been seen is the election of center-right governments.
I think people, in general, are still of a “centrist” mode. That is one reason the health care bill and other legislation is having trouble.
People want competence and they don’t seem to be getting it! Both the FDIC failure and the weak-kneed response to the situation does not raise my confidence level in those in charge.
I had thought Bair was doing a fair job. Now, she seems right up there with Geithner, Bernanke, and others who are not coming through for us.
Needless to say, I am not comforted by this mornings’ news concerning the FDIC!
In May of this year the FDIC projected $70 billion in losses associated with the failure of closed banks. This was an increase of $5 billion from earlier in the year. Now the figure has been revised upwards to $100 billion.
And, the FDIC is broke!
According to the New York Times: “Officials said that as of this week, the fund, which began the year at more than $30 billion and had about $10 billion over the summer, would have a negative net worth.”
The plan is to have banks “lend” money to the insurance fund in the form of a prepayment of annual assessments for the next three years. This “lending” would show up as an asset on the balance sheets of banks.
Four things are on my mind this morning.
First, the pace of bank failures has been orderly. That is, the problems are basically “known unknowns.” And, the FDIC is resolving the cases step-by-step.
Second, the concern arises about the pace of actual resolutions: has it been slowed because the FDIC knew that it was running out of money and was hoping that the situation would get better. If so, then the FDIC gets an F for this behavior.
We have had almost 100 bank failures this year and there are over 400 more banks on the problem list. Unemployment is rising, people are dropping out of the job market, there are lots of mortgages still to re-price in the next 18 months or so, foreclosures are still rising, and there still is the overhang of commercial real estate loans that are tenuous, at best. The potential number of problem banks could be even larger.
Has the FDIC under-estimated again?
Third, “it’s not over until it’s over!” The failure of financial institutions is a “lagging indicator”. The economy could be bottoming out, yet we can still experience a rising number of bank failures for another year or so due to the lag effect of the failures. But, the government is going to have to eventually “foot-the-bill”.
Accelerating annual assessments is a gimic! It is estimated that this will wipe out bank earnings for the year. So, with bad assets and zero earnings who believes that banks will begin lending again anytime soon?
And, if the banking system doesn’t get back into the lending game, how will the economy recover?
The only ones doing anything in the banking system seem to be the large bank holding companies and they seem to be putting their funds into “nonbank” subsidiaries. (See my post: http://seekingalpha.com/article/163983-credit-market-debt-a-return-to-pre-crash-practices.)
Fourth, what does this tell us about our leaders in government?
My personal view about the last election is that the public viewed the contest, not as a race between Democrats and Republicans, nor as a race between the liberals and conservatives. The public saw the election as a contest between incompetence and “possible” competence.
As of this date, the polls seem to indicate a rising concern that what seemed to be “possible” is fading away. People, at this time, don’t seem to want to move “left”. Look at Europe. Failing economies generally bring on a move for governments that can be labeled more toward the socialist end of the spectrum. Yet, what has been seen is the election of center-right governments.
I think people, in general, are still of a “centrist” mode. That is one reason the health care bill and other legislation is having trouble.
People want competence and they don’t seem to be getting it! Both the FDIC failure and the weak-kneed response to the situation does not raise my confidence level in those in charge.
I had thought Bair was doing a fair job. Now, she seems right up there with Geithner, Bernanke, and others who are not coming through for us.
Needless to say, I am not comforted by this mornings’ news concerning the FDIC!
Tuesday, September 29, 2009
Credit Market Debt: Why Is So Much Going to Bank Holding Companies?
Credit market debt increased by only 3% from the end of the second quarter of 2008 to the end of the quarter of 2009, a total of roughly $1.5 trillion. Of course, the primary story concerns the shifts in borrowing that took place during this time. The data used in this analysis is from the Flow of Funds accounts from the Federal Reserve.
One should note that the only two really substantial increases in credit market debt during this time period were the Federal Government and bank holding companies. Bank holding companies?
The Federal Government is easily identified as one of the primary borrowers during this time period as the debt of the government rose 36% or a total of $1.9 trillion. This is the largest year-over-year increase, dollar-wise, in history! But, this is not a surprise for we knew this was coming.
Note, that this increase does not include other sources of government debt extension in what are called “Funding Corporations” that include the creations of the Federal Reserve System to fund AIG and so on. This source of government funding reached a maximum of $445 billion in the fourth quarter of 2008 and dropped off to only $224 billion by the end of the second quarter of 2009.
One thing that has interested me is the performance of the commercial banking industry. The commercial banking industry, as a whole, has increased its use of credit market debt by a little more than 23%, although U. S. chartered commercial banks have actually reduced its reliance on this source of funds by about 6%. Note, too, that the credit market debt of the whole financial sector declined by about 1%.
The difference has come in the dramatic increase in the use of credit market debt by bank holding companies. Bank holding companies increased their use of this source of funds by 50%, an increase of $365 billion. In the process, the bank holding companies reduced their reliance on commercial paper by $78 billion and raised a net of $443 billion in corporate bonds. Thus there was not only a substantial increase in the funds bank holding companies raised during this time period, there was also a lengthening of the liabilities of these institutions.
One should call attention to the fact that Goldman, Sachs and Morgan Stanley became bank holding companies during this time period. How much of an impact this fact had on these aggregate numbers is hard to tell, but one should be aware of this movement. These two organizations became bank holding companies on September 22, 2008 and the bank holding numbers did not really increase appreciably during the third or fourth quarters of the year. Although total financial assets in bank holding companies rose modestly from the end of the second quarter to the end of the fourth quarter, actual credit market liabilities decreased. The numbers really began to jump upwards at the end of the first quarter of 2009.
Another factor influencing bank holding company debt during this time is the guarantee on bank bonds provided by the federal government. This gave bank holding companies the ability to raise funds relatively more cheaply than they could have raised them otherwise: a good reason to raise funds.
The interesting thing is that the raising of these funds did little or nothing to spur on bank lending or commercial bank growth. Investment in bank subsidiaries by bank holding companies went up by about $112 billion but this certainly doesn’t seem to have gone into bank loans since most of the increase in U. S. chartered commercial bank assets has been in the form of a rise in cash assets and government securities.
Total financial assets at banks rose by about $950 billion from the end of the second quarter of 2008 until the end of the second quarter of 2009. However, cash assets and reserves at the Federal Reserve rose by $430 and Government, Agency and GSE-backed securities rose by $185 billion. The only lending category to show much of a rise was the mortgage category, $233 billion, and this was primarily in commercial real estate. Commercial loans actually declined by about $100 billion. Something called Miscellaneous Assets rose by about $160 billion. Not a lot of lending going on in the banking sector.
However, investment by bank holding companies in nonbank subsidiaries actually rose by about $630 billion and investment in Other Miscellaneous assets rose by about $150 billion!
Thus, bank holding companies invested almost $800 billion in funding nonbank assets.
It seems as if big financial institutions are continuing to behave in the same way that they did before the financial markets started to unravel toward the end of 2007. That is, they put their money into non-bank operations, areas that the regulators did not have a lot of insight into or control over. That is, the banking system is still not relying on the fundamentals of banking to make money these days! They are returning to the areas that proved to be so profitable to them before the crash. And, once again, we seem to be in the dark as to what exactly they are doing.
Even through the credit crisis of 2008 and 2009, the credit markets provided some issuers of debt a substantial amount of funds. However, it seems as if these funds are going into hands that were very similar to the ones that were obtaining funds right before the crisis took place.
One should note that the only two really substantial increases in credit market debt during this time period were the Federal Government and bank holding companies. Bank holding companies?
The Federal Government is easily identified as one of the primary borrowers during this time period as the debt of the government rose 36% or a total of $1.9 trillion. This is the largest year-over-year increase, dollar-wise, in history! But, this is not a surprise for we knew this was coming.
Note, that this increase does not include other sources of government debt extension in what are called “Funding Corporations” that include the creations of the Federal Reserve System to fund AIG and so on. This source of government funding reached a maximum of $445 billion in the fourth quarter of 2008 and dropped off to only $224 billion by the end of the second quarter of 2009.
One thing that has interested me is the performance of the commercial banking industry. The commercial banking industry, as a whole, has increased its use of credit market debt by a little more than 23%, although U. S. chartered commercial banks have actually reduced its reliance on this source of funds by about 6%. Note, too, that the credit market debt of the whole financial sector declined by about 1%.
The difference has come in the dramatic increase in the use of credit market debt by bank holding companies. Bank holding companies increased their use of this source of funds by 50%, an increase of $365 billion. In the process, the bank holding companies reduced their reliance on commercial paper by $78 billion and raised a net of $443 billion in corporate bonds. Thus there was not only a substantial increase in the funds bank holding companies raised during this time period, there was also a lengthening of the liabilities of these institutions.
One should call attention to the fact that Goldman, Sachs and Morgan Stanley became bank holding companies during this time period. How much of an impact this fact had on these aggregate numbers is hard to tell, but one should be aware of this movement. These two organizations became bank holding companies on September 22, 2008 and the bank holding numbers did not really increase appreciably during the third or fourth quarters of the year. Although total financial assets in bank holding companies rose modestly from the end of the second quarter to the end of the fourth quarter, actual credit market liabilities decreased. The numbers really began to jump upwards at the end of the first quarter of 2009.
Another factor influencing bank holding company debt during this time is the guarantee on bank bonds provided by the federal government. This gave bank holding companies the ability to raise funds relatively more cheaply than they could have raised them otherwise: a good reason to raise funds.
The interesting thing is that the raising of these funds did little or nothing to spur on bank lending or commercial bank growth. Investment in bank subsidiaries by bank holding companies went up by about $112 billion but this certainly doesn’t seem to have gone into bank loans since most of the increase in U. S. chartered commercial bank assets has been in the form of a rise in cash assets and government securities.
Total financial assets at banks rose by about $950 billion from the end of the second quarter of 2008 until the end of the second quarter of 2009. However, cash assets and reserves at the Federal Reserve rose by $430 and Government, Agency and GSE-backed securities rose by $185 billion. The only lending category to show much of a rise was the mortgage category, $233 billion, and this was primarily in commercial real estate. Commercial loans actually declined by about $100 billion. Something called Miscellaneous Assets rose by about $160 billion. Not a lot of lending going on in the banking sector.
However, investment by bank holding companies in nonbank subsidiaries actually rose by about $630 billion and investment in Other Miscellaneous assets rose by about $150 billion!
Thus, bank holding companies invested almost $800 billion in funding nonbank assets.
It seems as if big financial institutions are continuing to behave in the same way that they did before the financial markets started to unravel toward the end of 2007. That is, they put their money into non-bank operations, areas that the regulators did not have a lot of insight into or control over. That is, the banking system is still not relying on the fundamentals of banking to make money these days! They are returning to the areas that proved to be so profitable to them before the crash. And, once again, we seem to be in the dark as to what exactly they are doing.
Even through the credit crisis of 2008 and 2009, the credit markets provided some issuers of debt a substantial amount of funds. However, it seems as if these funds are going into hands that were very similar to the ones that were obtaining funds right before the crisis took place.
Friday, September 25, 2009
Reasons for the slowdown in M2 growth: A Thrift Industry Crisis?
A surprisingly large amount of attention has recently been given to the slowdown in the growth rate of the M2 measure of the money stock. Around the first of the year, the year-over-year rate of growth of the M2 money stock was around 10%, a healthy rate of increase given the recession and the stance of quantitative easing on the part of the Federal Reserve.
Now, the year-over-year rate of growth in the M2 money stock measure has dropped below 8% and concern has been raised about the weakness in this particular indicator of the effectiveness of monetary policy. The question this weakness raises concerns the ability of the Federal Reserve to influence the real economy and the fact that the economy remains very, very weak.
The reason for this weakness, I believe, has less to do with the effectiveness of the Fed’s monetary policy and more to do with the shift in funds within the financial system. For one, the year-over-year rate of increase in the M1 money stock continues to be quite high, averaging more than 18% in the past month or two.
Whereas the M1 money stock increased about $260 billion over the past year, the M2 measure rose by $600 billion. Thus, the increase in the non-M1 part of the M2 measure was approximately $340 billion. The difference in growth rates for the aggregate measure obviously comes because the base for the M2 growth is much larger than the base for the M1 growth.
But, another interesting shift has occurred within these figures. Some deposit levels within the
non-M1 part of the M2 measure have actually declined over the past year. Note where the declines came: they came in time and savings deposits at thrift institutions and in retail money funds.
People are taking their money out of thrift institutions and money funds and putting them into deposits at commercial banks!
Time and savings deposits at thrift institutions fell about $130 billion over the past year and retail money funds dropped by almost $160 billion.
Note that time and savings deposits at commercial banks rose by $625 billion during the same time period.
This movement is reinforced by the shift in “other checkable deposits” over the past year. Other checkable deposits at commercial banks rose by about $50 billion whereas the same type of accounts at thrift institutions remained roughly the same. (Demand deposits at commercial banks increased by about $125 billion over the same time period.)
If one looks at the flow-of-funds accounts, the total financial assets at savings institutions dropped by about $420 billion from the second quarter in 2008 to the second quarter in 2009. Deposits at these institutions dropped by almost $200 billion and credit market instruments (supplying funds to these institutions) fell by about $280 billion.
What we seem to be observing is a massive withdrawal of funds from the thrift sector! This, I would suggest, is not a result of the monetary stance of the Federal Reserve System.
Very little attention has been given to the thrift industry over the past year. Maybe some more attention should be directed to the problems being faced by this industry.
Now, the year-over-year rate of growth in the M2 money stock measure has dropped below 8% and concern has been raised about the weakness in this particular indicator of the effectiveness of monetary policy. The question this weakness raises concerns the ability of the Federal Reserve to influence the real economy and the fact that the economy remains very, very weak.
The reason for this weakness, I believe, has less to do with the effectiveness of the Fed’s monetary policy and more to do with the shift in funds within the financial system. For one, the year-over-year rate of increase in the M1 money stock continues to be quite high, averaging more than 18% in the past month or two.
Whereas the M1 money stock increased about $260 billion over the past year, the M2 measure rose by $600 billion. Thus, the increase in the non-M1 part of the M2 measure was approximately $340 billion. The difference in growth rates for the aggregate measure obviously comes because the base for the M2 growth is much larger than the base for the M1 growth.
But, another interesting shift has occurred within these figures. Some deposit levels within the
non-M1 part of the M2 measure have actually declined over the past year. Note where the declines came: they came in time and savings deposits at thrift institutions and in retail money funds.
People are taking their money out of thrift institutions and money funds and putting them into deposits at commercial banks!
Time and savings deposits at thrift institutions fell about $130 billion over the past year and retail money funds dropped by almost $160 billion.
Note that time and savings deposits at commercial banks rose by $625 billion during the same time period.
This movement is reinforced by the shift in “other checkable deposits” over the past year. Other checkable deposits at commercial banks rose by about $50 billion whereas the same type of accounts at thrift institutions remained roughly the same. (Demand deposits at commercial banks increased by about $125 billion over the same time period.)
If one looks at the flow-of-funds accounts, the total financial assets at savings institutions dropped by about $420 billion from the second quarter in 2008 to the second quarter in 2009. Deposits at these institutions dropped by almost $200 billion and credit market instruments (supplying funds to these institutions) fell by about $280 billion.
What we seem to be observing is a massive withdrawal of funds from the thrift sector! This, I would suggest, is not a result of the monetary stance of the Federal Reserve System.
Very little attention has been given to the thrift industry over the past year. Maybe some more attention should be directed to the problems being faced by this industry.
Friday, September 18, 2009
The Federal Reserve Exit Watch--Number Two
Due to the great concern over how the Federal Reserve plans to reduce its balance sheet from $2.2 trillion to something comparable to the level it was at in August 2008, something around $900 billion, I will be posting on a regular basis my analysis of how the Fed is withdrawing funds from the banking system and the financial markets.
The concern about having put too many funds into the banking system is one about future inflation. The argument here is that it takes a while for inflation to build up. But, as the credit bubble earlier created by the Fed earlier this decade ended up in the financial collapse of 2008-2009, the fear is that if all the reserves the Federal Reserve has put into the banking system remain there, inflation will become a factor in 2010 and beyond.
The concern about removing the funds from the banking system too quickly comes from the 1937-1938 experience where commercial banks had a large quantity of excess reserves on their balance sheets. The Federal Reserve, at that time, raised reserve requirements to establish “tighter control” over the bank activity. However, the large amount of excess reserves on hand was consistent with the conservative behavior of the banks. The increase in reserve requirement caused banks to be even more conservative resulting in a substantial decline in the money stock. The result was the depression of 1937-1938.
For the two weeks ending September 9, 2009, depository institutions held $823 billion of excess reserves. Cash assets in the commercial banking system totaled slightly less than $1.0 trillion. In August 2008 these figures totaled less than $2.0 billion for excess reserves and around $300 billion for cash assets. Reserve balances with the Federal Reserve totaled about $860 billion on September 16, 2009; and this figure was about $50 billion on September 17, 2008.
It is an understatement to say that a lot of liquidity has been injected into the banking system!
Over the past 13 weeks ending on Wednesday September 16, 2009, reserve balances with Federal Reserve Banks increased by almost $120 billion. This increase alone represented a jump of about 13% of the Fed’s balance sheet one year earlier, so one cannot deny that the rise in reserve balances is not insignificant. The Federal Reserve is still acting in BIG NUMBERS, the size of which would have been incomprehensible 18 months ago!
Dissecting what took place during this time, however, is crucial to an understanding of how the Fed is trying to extricate itself from the situation it now finds itself in without setting off another panic in the financial markets. There were three basic changes in the Fed’s balance sheet over this time. The first change was operational in a seasonal sense and hence not crucial to the reduction in the Fed’s balance sheet. The second change is important because it relates to what is happening to all the special assets and facilities that the Fed set up to combat the financial crisis. These accounts appear to be phasing out. The third change relates to how the Fed is replacing the reserves draining out of the banking system because of the second change. Here the Federal Reserve is getting back into open market operations, something it abandoned in December 2007 as it created the Term Auction Facility (TAF).
The first major change in the balance sheet over the last 13 weeks was the swing in the general deposits the U. S. Treasury holds with the Fed. The movements here were seasonal and therefore solely of an operational nature. This swing has to do with tax receipts and the Treasury writing checks. The Treasury and the Fed have worked out operations so that tax collections and government expenditures do not disrupt the banking system any more than necessary. As a consequence you can get some pretty large swings in the balances that the Treasury holds at the Fed in this account without these movements causing large swings in the reserves that are in the banking system. Over the 13 weeks ending September 16, 2009, Treasury deposits declined by over $60 billion: however, in the last 4 weeks ending on the same date these balances increased by $32 billion. All this was handled smoothly.
It is the second of these factors that is vitally important for the exit strategy of the Fed. Accounts that can be associated with the “unusual” activities engaged in by the Fed over the last 21 months declined by over $300 billion over the last 13 weeks. The amount of funds supplied through the TAF dropped by over $140 billion. The net portfolio holdings of Commercial Paper Funding Facility LLC fell by almost $90 billion. Funding supplied through central bank liquidity swaps declined by more than $87 billion. The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility fell by about $19 billion.
In other words, the Federal Reserve is letting these facilities decline at their own pace as the need for them recedes. Even with all these reductions, however, one can still account for almost $600 billion of the Fed balance sheet being associated with assets created for the specific needs that officials perceived were necessary to keep the banking and financial system from collapsing. So there is still a ways to go to return to normalcy.
The Fed is replacing these assets that are running off with the purchases of various kinds of open market securities. Over the past 13 weeks, the Fed has increased its portfolio of securities held by about $385 billion. (One should note that in the first week of September 2008 the Fed held “total” less than $800 billion in securities. Again the magnitudes are staggering!) Of this increase, $121 billion was in Treasury securities, $35 billion was in Federal Agency securities, and $229 billion were in Mortgage Backed securities. (Note that on September 16, 2009, the Federal Reserve held $685 billion in Mortgage Backed securities, about 88% of the “total” securities held by the Federal Reserve in the first week of September 2008.)
My best guess about how the Fed will reduce its balance sheet is as follows. (Note that I am not including in this analysis any effort on the part of the Fed to support the massive amounts of debt that will be created through the deficits of the federal government in the future.) The portfolio of Treasury securities and Federal Agency securities will not be an active part of the Federal Reserve exit strategy. In my mind, what the Fed would like to see happen is that the roughly $600 billion is “special” assets would “run off” over time without major difficulty. Then, as the market for Mortgage Backed securities stabilizes and then returns to a more normal pattern of activity, the Fed will either allow its portfolio of Mortgage Backed securities to run off or will sell them into a strengthening market and significantly reduce the size of its holdings of these securities. As mentioned above, the Fed’s portfolio of Mortgage Backed securities totaled $685 billion on September 16.
Thus, assuming the best of all worlds, if these two items on the Fed’s balance sheet were eliminated, this would account for almost $1.3 trillion. Take away $1.3 trillion from the $2.2 trillion of assets on the Federal Reserve balance sheet September 16 and you get roughly $900 billion. On September 10, 2008 the Federal Reserve balance sheet totaled a little more than $900 billion in assets!
Can the Fed do it? We’ll just have to wait and see. It is important for us to see that there is a logical path out of the dilemma the Federal Reserve is facing. However, there are many potential bumps along the path. The health of the economy is one. The ever increasing federal debt is another. Recovery around that world is also a factor. And so on and so on. We will continue to watch!
The concern about having put too many funds into the banking system is one about future inflation. The argument here is that it takes a while for inflation to build up. But, as the credit bubble earlier created by the Fed earlier this decade ended up in the financial collapse of 2008-2009, the fear is that if all the reserves the Federal Reserve has put into the banking system remain there, inflation will become a factor in 2010 and beyond.
The concern about removing the funds from the banking system too quickly comes from the 1937-1938 experience where commercial banks had a large quantity of excess reserves on their balance sheets. The Federal Reserve, at that time, raised reserve requirements to establish “tighter control” over the bank activity. However, the large amount of excess reserves on hand was consistent with the conservative behavior of the banks. The increase in reserve requirement caused banks to be even more conservative resulting in a substantial decline in the money stock. The result was the depression of 1937-1938.
For the two weeks ending September 9, 2009, depository institutions held $823 billion of excess reserves. Cash assets in the commercial banking system totaled slightly less than $1.0 trillion. In August 2008 these figures totaled less than $2.0 billion for excess reserves and around $300 billion for cash assets. Reserve balances with the Federal Reserve totaled about $860 billion on September 16, 2009; and this figure was about $50 billion on September 17, 2008.
It is an understatement to say that a lot of liquidity has been injected into the banking system!
Over the past 13 weeks ending on Wednesday September 16, 2009, reserve balances with Federal Reserve Banks increased by almost $120 billion. This increase alone represented a jump of about 13% of the Fed’s balance sheet one year earlier, so one cannot deny that the rise in reserve balances is not insignificant. The Federal Reserve is still acting in BIG NUMBERS, the size of which would have been incomprehensible 18 months ago!
Dissecting what took place during this time, however, is crucial to an understanding of how the Fed is trying to extricate itself from the situation it now finds itself in without setting off another panic in the financial markets. There were three basic changes in the Fed’s balance sheet over this time. The first change was operational in a seasonal sense and hence not crucial to the reduction in the Fed’s balance sheet. The second change is important because it relates to what is happening to all the special assets and facilities that the Fed set up to combat the financial crisis. These accounts appear to be phasing out. The third change relates to how the Fed is replacing the reserves draining out of the banking system because of the second change. Here the Federal Reserve is getting back into open market operations, something it abandoned in December 2007 as it created the Term Auction Facility (TAF).
The first major change in the balance sheet over the last 13 weeks was the swing in the general deposits the U. S. Treasury holds with the Fed. The movements here were seasonal and therefore solely of an operational nature. This swing has to do with tax receipts and the Treasury writing checks. The Treasury and the Fed have worked out operations so that tax collections and government expenditures do not disrupt the banking system any more than necessary. As a consequence you can get some pretty large swings in the balances that the Treasury holds at the Fed in this account without these movements causing large swings in the reserves that are in the banking system. Over the 13 weeks ending September 16, 2009, Treasury deposits declined by over $60 billion: however, in the last 4 weeks ending on the same date these balances increased by $32 billion. All this was handled smoothly.
It is the second of these factors that is vitally important for the exit strategy of the Fed. Accounts that can be associated with the “unusual” activities engaged in by the Fed over the last 21 months declined by over $300 billion over the last 13 weeks. The amount of funds supplied through the TAF dropped by over $140 billion. The net portfolio holdings of Commercial Paper Funding Facility LLC fell by almost $90 billion. Funding supplied through central bank liquidity swaps declined by more than $87 billion. The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility fell by about $19 billion.
In other words, the Federal Reserve is letting these facilities decline at their own pace as the need for them recedes. Even with all these reductions, however, one can still account for almost $600 billion of the Fed balance sheet being associated with assets created for the specific needs that officials perceived were necessary to keep the banking and financial system from collapsing. So there is still a ways to go to return to normalcy.
The Fed is replacing these assets that are running off with the purchases of various kinds of open market securities. Over the past 13 weeks, the Fed has increased its portfolio of securities held by about $385 billion. (One should note that in the first week of September 2008 the Fed held “total” less than $800 billion in securities. Again the magnitudes are staggering!) Of this increase, $121 billion was in Treasury securities, $35 billion was in Federal Agency securities, and $229 billion were in Mortgage Backed securities. (Note that on September 16, 2009, the Federal Reserve held $685 billion in Mortgage Backed securities, about 88% of the “total” securities held by the Federal Reserve in the first week of September 2008.)
My best guess about how the Fed will reduce its balance sheet is as follows. (Note that I am not including in this analysis any effort on the part of the Fed to support the massive amounts of debt that will be created through the deficits of the federal government in the future.) The portfolio of Treasury securities and Federal Agency securities will not be an active part of the Federal Reserve exit strategy. In my mind, what the Fed would like to see happen is that the roughly $600 billion is “special” assets would “run off” over time without major difficulty. Then, as the market for Mortgage Backed securities stabilizes and then returns to a more normal pattern of activity, the Fed will either allow its portfolio of Mortgage Backed securities to run off or will sell them into a strengthening market and significantly reduce the size of its holdings of these securities. As mentioned above, the Fed’s portfolio of Mortgage Backed securities totaled $685 billion on September 16.
Thus, assuming the best of all worlds, if these two items on the Fed’s balance sheet were eliminated, this would account for almost $1.3 trillion. Take away $1.3 trillion from the $2.2 trillion of assets on the Federal Reserve balance sheet September 16 and you get roughly $900 billion. On September 10, 2008 the Federal Reserve balance sheet totaled a little more than $900 billion in assets!
Can the Fed do it? We’ll just have to wait and see. It is important for us to see that there is a logical path out of the dilemma the Federal Reserve is facing. However, there are many potential bumps along the path. The health of the economy is one. The ever increasing federal debt is another. Recovery around that world is also a factor. And so on and so on. We will continue to watch!
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