Busted: Bankers and The Global Economy

August 18, 2008

Will Global Confidence Cause a Chain Reaction?

Just a few weeks ago, U.S. Treasury Secretary Henry Paulson held that a bailout of Fannie Mae and Freddie Mac to be highly improbable, if not impossible. Now there is talk that an extraordinary Treasury capital infusion may be needed to restore faltering foreign demand for debt issued by Fannie Mae and Freddie Mac. The mortgage twins are the nation’s two top home funding sources that the government is willing to rescue to save the U.S. housing market.

Foreign central banks have dumped nearly $11 billion from the holdings of the “mortgage twins” in the last four weeks. They don’t plan to reinvest in force until the U.S. government is clear when it will back Fannie Mae and Freddie Mac.

Investors and foreign central banks may be concerned, but the reality of a bailout is academic. The entire fabric of the U.S. housing industry depends on the continued functioning of the mortgage twins. Unless foreign bankers and the Fed expect to pull out on their support of the U.S. economy, such paranoia is largely unwarranted. Obviously, the real concern for central banks is the value of the securities that the foreign bankers hold. Devalued securities diminish their investments; hence, their power. Monetary value has really come to be all about appearance and confidence. Central bankers won’t be caught holding any empty sacks in the name of tacit support. They are part of a chain reaction.

Mortgage bonds are trading poorly while investors wait for good news on Fannie and Freddie capital. Meanwhile, U.S. mortgage rates have climbed to their highest levels in a year in reaction to the contracting housing market. Both are part of a chain reaction.

Investors are momentarily in a mood of increasing nervousness about the global economy, with deteriorating growth in the United States, Europe and Japan now beginning to bite into “emerging markets.” There is a growing belief among investors that the world economy in general is at risk, and with it the emerging markets that have been a powerhouse of growth and investment gain over the past few years. The emerging markets cannot and do not stand on their own. At this stage of development, they are step-children of larger marketplace that isn’t all that sound to begin with. Investors are always ready to be nervous, especially in a time of volatility. They can be and usually are part a wild card in the chain reaction.

Oil commodities, which were up and making the world nervous are now down, making the world nervous. It would seem that the world is simply nervous and using oil as an excuse. Previously, oil was a great profit hedge. When the U.S. started openly discussing releasing a large portion of the Strategic Petroleum Reserve on the open market, investors backed off from the heady world of oil commodities. Naturally, they are taking it slow. Nobody wants to rock the boat too hard. This is part of the chain reaction.

Inflation is up, which has been blamed on Big Oil or at least on commodity futures through investment banks. Which came first, the chicken or the egg? While this topic is open for debate, global inflation is up after inflationary pressures shot up in the U.S. and the Middle East from overheated greenbacks. That doesn’t look to get better anytime soon, especially as long as the U.S. keeps stealing money from the taxpayers vis a vis the Federal Reserve. This is part of the chain reaction.

Global banker’s incessant worrying over their central bank interest rate is nonsense. Rates are so low as to have little effect in the real world. Commercial bankers are profiteering from borrowed central banking money as well as keeping their leaky banks afloat during this rough period. This is part of the chain reaction.

The single bright sector in banking remains in Islamic banking with a very different set of rules that bankers have yet to learn to exploit to full potential. In their worry, investors will look at this new hot market in hopes of developing new means of prosperity, which will likely mean a rise in power in Muslim nations. That is enough to worry many political persuasions worldwide as politics feeds into the monetary system. That is part of the chain reaction.

As economists, politicians, bankers, analysts and writers, we are always looking for an excuse, rationalization or explanation to meet a mindset. While most economists would tell you otherwise, it is not science, but rather a facet of human behavior. As such, economics enjoys the same ups and downs as human life does. That is part of the chain reaction.

August 5, 2008

Federal Reserve Betting on Banking Mojo

shell game banking

shell game banking

Kevin Warsh laid out much of the bad economic news as a result of the banking, finance and mortgage failure of the last year at the U.S. Department of the Treasury Press Conference. The Fed Governor spoke to Henry Paulson and bank supers, as poetic as a banker could be where innovation was concerned. It was what could be described as a banking innovation pep talk, an effort to drive inspiration for the latest money making banking creations while establishing a new securitized banking pool concept.

“the path to a new financial market architecture, however uneven and improvised, will not only be marked by the forces of retrenchment. The path should equally…be distinguished by the creative impulses that drive product and market innovation. It is perhaps too convenient to denigrate the attributes of …ingenuity…when the forces of innovation can disappoint and weaken the real economy. Policymakers and market participants alike should recognize that innovation–in our product markets, labor markets, and yes, our financial markets–is likely to prove a necessary net contributor to economic growth in the coming period. We should also be reminded that financial innovation need not be equated with product complexity.”

Creative impulses…market innovation…ingenuity…not…product complexity. Bankers just went through a peak period of massive banking innovation and have paid dearly…or rather some have paid dearly. On balance, the world has paid dearly with the exception of central bankers. Since the credit money isn’t real in their eyes anyway, nobody was really hurt. The insanity failed, apparently only because bankers weren’t financially literate enough. Warsh is ready to try a new kind of insanity again, fully recommending it as he pats his banker buds on the back and fully expecting a different result…or does the current Federal Reserve really care about the long-term results aside from their own corporate profits?

Warsh is suggesting research and testing for new banking innovation that can be exported to other economies to (gosh) profit bankers for rebuilding banking. This is a public admission that the morally bankrupt aren’t even hesitant to admit. They just cover it with big words and long sentences while the public ignore their public plans for profit at the expense of whole economies. But this time, the current crack Fed team is involved from the beginning and they are going to get it right.

The reality is that the Fed wants more of the same mortgage and bond medicine. They want a guaranteed bond framework to attract investors. They want greater access to mortgage credit created by “high quality assets” in a pool that banks will manage. These pools would rotate active mortgage securities. If a security were to become delinquent, it would be conveniently removed from the investment banking pool in a magic mojo shell game. “Newly issued covered bonds backed by high quality mortgage loans and issued by strong financial institutions may find a growing investor base in the United States.” Imagine that. Guarantee securitized bonds to make them desirable and they (the investors) will come in droves.

As if the United States and the world haven’t had enough banking innovation straight to economic disaster after years of abuse, the Federal Reserve is looking for new magic mojo banking prowess to bail out the world. They are thoroughly “unrepentant” of the past because there are no longer any ethics or morals in finance and banking. Bankers say, if we’d just done it a little differently, we would have succeeded.

This is all okay with Kevin and the Fed team because of “high quality” and properly understood financial innovation. The Federal Reserve seeks to encourage new and innovative sources of funding to secure its latest big mojo idea. Get ready for a brave new world of investment using a ball and golden shells on a table. You are sure to win the game over the bank, especially since they print the money anyway.

Who is going to guarantee the casino madness? Do you think the Fed is going to stand up as the guarantor on this one? ~ E. Manning

May 4, 2008

The Federal Reserve Panic Button

With so little wiggle room in the interest rate, we’ve mused about what the Fed intends to do to encourage the market and to free up liquidity. The Fed has come up with another quick fix. It’s called expanding the Term Auction Facility to $75 billion per auction. Now, the Fed is allowing an expansion of what it will receive as collateral for the TAF. The Fed will now accept securitized “junk” bonds based on the subprime and alt-a mortgage loans in exchange for bank credit to expand banking liquidity. This action is hoped to take additional pressures from the liquidity-pressed commercial bankers in the U.S.

Interestingly, similar measures are being adopted at other international “fellow central banks”. (more…)

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