The Invisible Hand
It’d been a while since I posted anything new and fresh, but that does not translate to the dullness of life by any chance.
Lately I’ve been keen in watching the news on subprime implosion and the coming credit contraction. Last Friday the Federal Reserve decided to lend out 38 billion dollars to ease the overnight Inter-bank borrowing rate spike, by ways of 3-days termed-repos on the agency grade Mortgage-Backed Security (MBS) such as Fannie Mae. This was in addition to the 24 billion dollars that came to rescue just the day before. A year ago I would not have the interest nor the knowledge to care for a news headline like this, but I’ve since owned a passion in learning about the state of our economy. The catalyst really began from my frustration in looking for an affordable housing (condo/townhouse) in the Seattle/Eastside area. Today how I transited from house hunting to stock-watching is no longer as important or relevant on the records as to what I’m discovering everyday, given my geek nature. It is indeed one of the greatest stories yet to tell – in watching the Great American Greed gets unfolded.
The Friday termed repos will last only 3 days including the weekend, before the borrowing banks will have to pay back the Fed with principle and interest. The action to inject liquidity was synchronized around the globe, from the European Central Bank ($213 billions) to Japan ($8.4 billions), to Canada ($1.55 billions), Swiss ($1.68 ~$2.5 billions) and Singapore ($1 billions) I can’t imagine how the demand for cash can be so great and urgent in such a short notice, unless something smelly is going south. Understanding that lending can only secure the current commitments that are taking place, any future IPO’s, stock buyback and institutional borrowing should be subjected to newer lending standards imposed by banks who will very possibly become risk averse and demand to know the real values of the CDO (collateral debt obligation) and many other asset-backed securities that are currently floating in the market (by $trillions), obfuscated in their pricings.
Given that the stock market has been trading sideway the last two weeks, with ever-increasing volatility, there are now more and more voices in Wall Street asking the Fed to lower the Fed Fund Rate. In addition, over $1 trillions of subprime mortgage are ready to be reset in the coming months of the year and the pressure on people to have to dish out more on their monthly payments will also mean we are going to see more defaults, by those who mis-price themselves in the housing market. There are already clouts of political influence rising to want to help out the “unfortunate” mass, but alas, lowering the interest rate will greatly cut back on the value of dollar currency, which has already been degraded much in the last few years. Foreign banks that are holding reserves on US dollars will soon see the debasing of their asset (in comparing with their own inflation rate) and reconsider the course of holding a losing currency. What would the Fed do, help the bankers and self-destruct the US dollar, or watch the liquidity evaporate and asset values depreciate all across the board (another word: recession)?
Today the Fed has injected another $5 billons in repos. In the past only the Treasuries notes are allowed in the trading but now the Fed, obviously wanting to help out the banking elites, has agreed to purchase the MBS in wholesale…
P.S. I owe everything I learn, the lingos and the meats, from Barry Ritholtz (http://bigpicture.typepad.com/) as well as Michael Shedlock (http://globaleconomicanalysis.blogspot.com/). They are absolutely the best Internet blogs I’ve yet to find.
Lately I’ve been keen in watching the news on subprime implosion and the coming credit contraction. Last Friday the Federal Reserve decided to lend out 38 billion dollars to ease the overnight Inter-bank borrowing rate spike, by ways of 3-days termed-repos on the agency grade Mortgage-Backed Security (MBS) such as Fannie Mae. This was in addition to the 24 billion dollars that came to rescue just the day before. A year ago I would not have the interest nor the knowledge to care for a news headline like this, but I’ve since owned a passion in learning about the state of our economy. The catalyst really began from my frustration in looking for an affordable housing (condo/townhouse) in the Seattle/Eastside area. Today how I transited from house hunting to stock-watching is no longer as important or relevant on the records as to what I’m discovering everyday, given my geek nature. It is indeed one of the greatest stories yet to tell – in watching the Great American Greed gets unfolded.
The Friday termed repos will last only 3 days including the weekend, before the borrowing banks will have to pay back the Fed with principle and interest. The action to inject liquidity was synchronized around the globe, from the European Central Bank ($213 billions) to Japan ($8.4 billions), to Canada ($1.55 billions), Swiss ($1.68 ~$2.5 billions) and Singapore ($1 billions) I can’t imagine how the demand for cash can be so great and urgent in such a short notice, unless something smelly is going south. Understanding that lending can only secure the current commitments that are taking place, any future IPO’s, stock buyback and institutional borrowing should be subjected to newer lending standards imposed by banks who will very possibly become risk averse and demand to know the real values of the CDO (collateral debt obligation) and many other asset-backed securities that are currently floating in the market (by $trillions), obfuscated in their pricings.
Given that the stock market has been trading sideway the last two weeks, with ever-increasing volatility, there are now more and more voices in Wall Street asking the Fed to lower the Fed Fund Rate. In addition, over $1 trillions of subprime mortgage are ready to be reset in the coming months of the year and the pressure on people to have to dish out more on their monthly payments will also mean we are going to see more defaults, by those who mis-price themselves in the housing market. There are already clouts of political influence rising to want to help out the “unfortunate” mass, but alas, lowering the interest rate will greatly cut back on the value of dollar currency, which has already been degraded much in the last few years. Foreign banks that are holding reserves on US dollars will soon see the debasing of their asset (in comparing with their own inflation rate) and reconsider the course of holding a losing currency. What would the Fed do, help the bankers and self-destruct the US dollar, or watch the liquidity evaporate and asset values depreciate all across the board (another word: recession)?
Today the Fed has injected another $5 billons in repos. In the past only the Treasuries notes are allowed in the trading but now the Fed, obviously wanting to help out the banking elites, has agreed to purchase the MBS in wholesale…
P.S. I owe everything I learn, the lingos and the meats, from Barry Ritholtz (http://bigpicture.typepad.com/) as well as Michael Shedlock (http://globaleconomicanalysis.blogspot.com/). They are absolutely the best Internet blogs I’ve yet to find.
posted by Andrew Chen at 12:43 AM
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