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Open Thread: Rescue Me!

(Since I hate embedded sounds, you can play this if you choose: Rescue_Me)

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As we noted earlier today, the Fed, along with a slew of other Central Bankers, warmed up the whirlybirds and went out and about for a little joyride.
Contrary to some accounts, they were not responding mad pleadings of JC. Rather, the Central Bankers around the world responded to a sudden surge overnight of interest rates. When the US and Eurpean rates suddenly spiked -- far above their Overnight Lending Rates -- the central bankers are compelled to act.  Early Friday, markets had pushed the rate charged on overnight loans between banks to 6%. By day's end the Bankers' maneuver brought it down to 5.25%.

Here is a round up, courtesy of Real Time Economics, of their actions the past few days:

Friday, August 10, 2007 | 06:25 PM | Permalink | Comments (64) | TrackBack (1)
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Comments

Where's my popcorn?

Posted by: schaz | Aug 10, 2007 6:56:42 PM

They really have only two choices (with their helicopters)....

1. Drop Money

2. Drop Live Turkeys

It is obvious they will try anything to lift the bull....

http://news.bbc.co.uk/cbbcnews/hi/newsid_6760000/newsid_6766200/6766261.stm

Posted by: MarkTX | Aug 10, 2007 7:09:08 PM

Spikes in the Fed Funds rate (FFR%) come when there are specific banks that are in
an overdraft situation in the interbank
clearinghouse system and are forced to
borrow from banks with surplus funds. This
problem results from late payments and/or
defaults from bank clients. There can be
systemwide overdrafts as occured in 1982
when many of the old LDC and OPEC blocs
defaulted on the old CHIP system. The Fed
then added reserves and directed major US
banks to put up funds since overdrafts cannot be carried overnight. I imagine there
could be worldwide fund redemptions and
some liquidations which could be straining
the banking system, forcing the central bankers to pony up enough in reserves to
cover all the overdrafts and keep individual
banks from dumping investments and/or calling in loans. These large reserve
injections by central banks are temporary
and stop gap and cannot be made routine.
The size of the pot created thus far
suggests to me that the central banks need
to come forth and spell out clearly the
difficulties the banking system is
experiencing and further to say precisely
what can be done about it.

The problems are centered in the financial
services area around structured debt and
hedge positions that cannot be unwound in
an orderly fashion because the low quality
assets involved are receiving no bids.
Investors who have money in a variety of
funds that use leverage especially do not
know the real net asset values of their
investments in troubled funds.

If confidence is not soon restored via
other investors who see value in deeply
oversold assts, central bankers and
country regulators will have to decide
whether to provide long term financial
facilities that accumulate the very
distressed assets and restructure them over time.

The best thing now is for Bernanke, Trichet
et al to come public and discuss what they
are facing in terms as specific as possible,
and to make a case for whether market
forces can successfully carry the day and/
or whether new protective facilities will be needed.

PR

Posted by: peter richardson | Aug 10, 2007 7:09:21 PM

I assume these are not permanant reserves. The question might be what happens when they are withdrawn? If they are permanant, and continue, you might consider borrowing to buy a farm!
A lot of hedge fund managers bought the farm already!

Posted by: Ross | Aug 10, 2007 7:10:45 PM

With the SEC looking at both Merrill's and Goldman's sub-prime exposure and markes today, a reckoning must be forthcoming, I would think. I don't think the visit today was a bog-standard procedure that had been on the calander for an extended period of time....

http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20070810-000655-1626

Posted by: shoeless | Aug 10, 2007 7:18:45 PM

Since the Fed said Tuesday that things were fine, they have lost all credibility. That can't be good.

Posted by: Steve Barry | Aug 10, 2007 7:19:00 PM

Hey Mark, I'll take the turkeys and sell you half my hay meadow in Hunt County. I'll even through in an eigth override on the mineral rights.
This situation reminds me of a scene in a James Garner movie 'Wheeler Dealers'. Great flick and the shams and nonsense are remarkably the same. Yea, popcorn and this movie over the weekend.

Posted by: Ross | Aug 10, 2007 7:20:51 PM

i heard a story on Bloomburg radio this afternoon about BBB mortgage paper trading at 4 cents on the dollar!

is there a buyers strike, or just an unwillingness to recognize current prices?

Posted by: toddZ | Aug 10, 2007 7:23:51 PM

Orlando, it is a little soon to say that we have had a correction.

Maybe a 4,000 plunge over a 4 week timeframe is coming, but just hasn't yet.

You need to take attitudes and break peoples wills.

Posted by: Cherry | Aug 10, 2007 7:35:07 PM

A futile exercise. You can't solve a liquidity driven bubble by pumping in more money. Let the market run it's course.

http://lovelymoney.blogspot.com/2007/08/money-for-nothing.html

Posted by: Christopher | Aug 10, 2007 7:35:15 PM

I'm new to this, but doesn't throwing good money at bad rates just make them worse later on? How does increasing liquidity slow inflation? Why shouldn't there be a decent spread between risk levels? I'd hold on to your turkeys and hay.

Posted by: chad | Aug 10, 2007 7:37:48 PM

The infusion will halt the deflationary influence of the credit and housing collapse.

That leaves only the inflationary factors.

The dollar drops further, but perhaps not as quickly as the euro.

Bottom line is to hold hard assets: gold, silver, maybe ag commodities. Oil probably won't do well if the economies are fractured.

No?

Posted by: Grodge | Aug 10, 2007 7:39:38 PM

This is why a crash, with the magnitude of the past ones(let alone 1929), is no longer possible.
Cantral banks will come to help.

The way is up, up

Posted by: Bullion | Aug 10, 2007 7:57:00 PM

inOrlando said:
"Isn't it dumbfounding that all this liquidity action has occurred with the broad market off by a mere 6.5%?"

On it's face, I'd agree, but if the right people/institutions have gotten caught leaning the wrong way, it doesn't surprise me. What does surprise me is how open ended the Fed's public commitment is, a reminder that it's a hell of a lot harder to make a short dollar than a long dollar.

If we're guessing what happens next, my entry is one or more liquidity injections over the next week that bring things back up to where they were on Wednesday. After that, a gradual slide amidst more yammering about cutting rates and a cut in either Sept or Oct, then big rally into the end of the year.

I am not implying that there is any justification for injections, cuts or rallies, only guessing what will happen based on the dynamics of a system that is mainly artificial to begin with.

==whipsaw==

Posted by: whipsaw | Aug 10, 2007 8:03:57 PM

This, to me, is the correct explanation as to what is happening:

"Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness... Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic... The final outcome of the credit expansion is general impoverishment... Some people may have increased their wealth... but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode."

Ludwig von Mises

Short term, it's who knows bad.

Mid-term, meaning 5-10 years, it's game over bad.

Long term, it's Roman Empire bad.

Posted by: Winston Munn | Aug 10, 2007 8:07:24 PM

I can't believe Kudlow had people claiming this wasn't a bail out...unreal.

The Fed will keep pumping money and all these people saying that the fed shouldn't lower rates are missing the fact that if they do not all those ARM's reseting this fall are just going to make things that much worse.

This is the problem many of us have been anticipating. Buy the PM's and sit tight...this is going to get a lot worse...wait till the investors statements come out, home owners mortgages reset, lawsuits become prevelant, taxes revenues fall dramatically and pension funds start making there losses known. The Fed's creditbility is about to plunge with the money they will be dropping.

Posted by: Sammy20 | Aug 10, 2007 8:19:20 PM

Here are my thoughts on the subjects and the events of the day. It is a bit too long to reproduce here.

http://musingsofaspeculator.blogspot.com/2007/08/about-central-banks.html

Posted by: Werner Merthens | Aug 10, 2007 8:28:08 PM

Where does this Central Bankers influsion flow to? Who has the advantage to this "new money"? Does it help these poor little hedge funds that have all those losses?

Posted by: MDDwave | Aug 10, 2007 8:34:27 PM

wow. everyone's bearish.

how's this for a change of pace:

the risk aversion will spur buying in treasuries, which will be bullish for the dollar.

the yield curve will steepen, allowing a better spread for the banks to make money from.

oil prices are falling, which is good news, and would fall further with a strengthening dollar.

oh yeah, core inflation is slowing down (WOO-HOO), so the fed has room to ease (WOO-HOO x2).

see?

it's not so bad.

Posted by: m3 | Aug 10, 2007 8:35:33 PM

Listening to various shows on CNBC and various articles in the MSM there's a real misconception out there as to what the FEDs actually bought today - people are talking bailouts, buying subprime MBS, unfreezing the mortgage market and so on.

Their transactions today were 3 day transaction; they bought AGENCY(Fannie Mae etc ) MBSs, not that secondary market subprime tranche based stuff, as well as AGENCY debt and Treasuries, with the understanding that the seller will buy the same back 3 calendar days later and cough up somewhere between 4% and 5.25% interest - that's all.
Fed link at : http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

and the clarification of what collateral they took is at:

http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

So what happens Monday ? I have no idea - should be interesting though.

Meantime, why is the MSM so ready to misrepresent things ? Lazy? Just plain ignorant ? conspiracy ? Anything for a "juicy story" ?

-K

Posted by: sk | Aug 10, 2007 8:38:20 PM

I have noticed the Russell 2000 has gone from leading the down draft to holding up better than the DJIA & SP500.

Is this just a bet on the FED cutting rates?

Posted by: BobbyP | Aug 10, 2007 8:39:04 PM

Dear taxpayers,
Thanks for the low interest federal loan. Don't worry, those CDOs are going to work out for you in the end.
You guys are the best!

Posted by: bam | Aug 10, 2007 8:46:39 PM

The issue isn't the conditions/terms of the money provided....the issue is that it needed to be provided and the markets needed to be reassured that the money will keep being provided.

If someone gives me money and tells me to go ahead and do whatever the hell I please cause there will be more money where that came from regardless of how much debt I pile up....That is the definition of moral hazard and a constant reminder that a bailout exists.

Posted by: Sammy20 | Aug 10, 2007 8:48:47 PM

The core problem will not go away: billions of CDOs sold and held around the world in leveraged accounts are worth a lot less now than they were at the beginning of the year.

Furthermore, it isn't clear at all what many CDOs are worth at anymore. Short of the impossible task of poring over ever underlying asset, determine "true" ability to pay principal+interest, default risk, fraud, losses, etc., buyers have not idea how much to pay for a AAA or BBB- CDO tranche composed of MBS.

We are in a state of fear. We have not hit panic. I suspect we're going to hear of more fund blow ups in the next few weeks. The dollar may take a hit. Volatility is back.

Posted by: BeachGuy | Aug 10, 2007 8:58:28 PM

re: Sammy

But this is part of what they've stated they will do for hmmm years and years(1986?) - ever since they abandoned monetary supply ( M3, hmmmm MZM too once upon a time I think )targets and started using interest rate targets.. The mechanism for maintaining the target rate is precisely this type of open market operation - so when the rate went too much past 5.25% they had to do this to bring it down again - they do this type of thing all the time - I grant you in a more organized fashio - not 3 times in a day, nor at a such an odd time, nor issues statements , nor specifically invite and take AGENCY MBS collateral..

That last action looked like smoke'n'mirrors to me - the problem isn't in AGENCY MBS - its the tranched crap from the secondary market that has issues..

So.. I'd see it not as pumping money in, rather they brought the interest rate down using their time honored technique - from the money perspective its all temporary - money IN today OUT on Monday - they'll have to do some stuff on Monday again.

-K

Posted by: sk | Aug 10, 2007 9:02:50 PM

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