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Greenspan 2003 Or Yellen 2015: "We Don't Know Enough About How The Financial System Works"
Submitted by Jeffrey Snider via Alhambra Investment Partners,
The June 2003 FOMC meeting is one of those events that has only taken on increased relevance and significance with time. That gathering marked a major shift in monetary policy as it was, particularly with relation to the fomented housing bubble, as the FOMC was debating the zero lower bound. The discussion centered around the proposed monetary alignment that would take the federal funds target down, finally, to 1% and a historic low, which only brought out questions about what might happen beyond.
The entire discussion is worth reading through, though it amounts to 211 pages of mostly numbing inconsequence to and fro about orthodox concerns, platitudes and unearned sureties about their own pieties. From that point in time, with uncertainty about the “jobless recovery” and any lingering effects of the dot-com bust, policymakers were being forced (by those pieties) to actually come to grips with the ghost of the zero lower bound (ZLB). Though they did not think it likely at that point, or at any point in the future, there was Japan already there and the fact that they were about to vote favorably on 1% meant that several boundaries had already been crossed.
In one sense, there is the funny and weird occurrence that continually repeated whereby a member would suggest an investigation about what might happen at ZLB and beyond, Greenspan would concur, but it is clear that nothing was ever done so. Between June 2003 and June 2008 and certainly into the ZIRP and QE’s, the FOMC keeps asking the same questions without any apparent effort having been expended on anticipation. It’s as if they worried about what might happen down there, and then were too confident to admit the possibility, keeping instead their fingers crossed the US would never trace Japan that far.
One passage in particular comes from Alan Greenspan and says a lot about the conditions that dominate a decade after his speculation:
One is that I don’t think we know enough about how the private financial system works under these conditions. It’s really quite important to make a judgment as to whether, in fact, yield spreads off riskless instruments—which is what we have essentially been talking about—are independent of the level of the riskless rates themselves. The answer, I’m certain, is that they are not independent.
The “these conditions” above are ZLB considerations, and his initial qualification gives away the seriousness as well as tears apart the public mask of surety that typifies expressed statements of confidence in policy and economic framing. We know all-too-well that yield spreads and swap spreads aren’t as dependent (at all) as Greenspan was hoping then; in fact, on more than a few occasions the financial system has exhibited a tendency to be wholly independent of what monetary policy hoped to achieve.
While that says a lot about ultimate impotence and thus well-founded fears about the ZLB, the context of that Greenspan quote is evident even as far as March/April 2015. The discussion was with Federal Reserve Bank of Dallas President Robert McTeer who was mentioning what he thought was a contradiction of policy heading toward “ultra-low” levels and actual bank function:
I’ve been surprised to see the resistance among the bankers on my board to continuing reductions in interest rates. About the middle of 2002, we started getting resistance to further easing moves, primarily from our bankers. I was a little shocked at their inability, apparently, to lower their costs as fast as their income was going down.
To which Greenspan replied:
I think the answer is very simple. If you are an institution that is doing well within the parameters under which you’re used to functioning, you will fight any change without any notion as to whether that change is good or bad. That’s because there’s a very large uncertainty premium associated with the change.
That tendency to dismiss actual market considerations has marked monetary policy since before 2003, but takes on increasing importance in these areas that are not well-defined by historical experience. It is interesting, in the “proof” hindsight (as I will show below), that maybe what they thought of as “easing” might not be so under actual conditions of repression that far and hard. That is certainly a condition of the current operational framework, where narrow spreads and ultra-intrusive monetarism changes the fundamental character of finance, especially liquidity. While the specific manner of those changes might be difficult to anticipate (though I am not so sure) it at least should render considerations of repression far less straightforward.
In this specific case, I am talking about repo capacity and the systemic ability to absorb large changes – which is all that liquidity is really about to begin with. Since October 15, that major domestic side of a liquidity event, repo volume in MBS has nearly doubled. That sounds like a positive outcome but since we are talking about what amounts to bedrock liquidity it isn’t at all clear if that is the correct categorization. It may very well be that such a rise in MBS, especially, marks not an increase in capacity but an almost last resort before detaching into a full-blown break.
As repo volumes have climbed precipitously, GCF rates in repo have too – far and above anything since 2012. What is particularly noteworthy is that as repo volumes initially started upward around February 2014 (after the MBS issuance devastation of the massive rout the year before) repo rates increased only modestly, remaining very much consistent with GCF rates that dominated post-crash (from July 2013 forward). The dramatic rise post-October 15, however, has been met with a surge in repo rates that has not unwound.
What makes that unusual, insofar as anything might be called unusual under these parameters, is the UST GCF repo rate has been moving equal to MBS without the surge in volume. That would suggest that systemic capacity to forward “cash” into this aspect of the liquidity system is under strain regardless of marginal collateral (which is unsurprising). Given the nature of UST shortages, MBS might be the current path of least resistance or at least the manner/conduit through which any marginal liquidity absorption could take place. The point here is that the system may be taking that path but at a cost that isn’t fully known (or denoted beyond GCF rates).
I think that point is further implied by MBS repo fails, which behave in a different manner than UST.
Ever since October, MBS fails have increased in deviation if not in average. That would suggest greater uncertainty, relative to the post-2013 crash existence, more recently about collateral regimes as volumes rise. In other words, it seems another element of strain if only by relative comparison.
That brings us back to Mr. McTeer’s resistance among bankers to lower interest rates. The repo market isn’t so different in actual operation among providers as other elements in finance, namely if a bank cannot take consistent profit from the endeavor they will cease to participate. One of the “unforeseen” problems at the ZLB and “below” via QE is how unprofitable being a liquidity provider has become – with one important exception in the case of QE’s. Warehousing MBS and UST when security prices are rising leads to “prop trading” profits (or FICC since prop trading is “banned”; FICC “revenue” has been decimated generally since Q3 2013) that are really incidental to liquidity-providing activities.
That seems to have been enough to maintain even minimal liquidity standards where dealers were certainly not making enough of minimal spreads on dealer activities alone. Ever since that MBS/credit selloff in 2013, these profit considerations have been altered; and with it dealer capacity and liquidity. Without any “guaranteed” boost via QE affecting fixed income prices, and that includes interest rate swaps, there is not enough profit to maintain sufficiency.
The implications of that are what we see now, where a rise in MBS repo comes at a cost in at least misbehaving GCF repo rates. As of today, GCF rates in MBS, UST and agency remain quite elevated compared to recent experience.
This is highly unusual in that quarter-end surges (to begin with, the latest was the largest, in MBS, since the panic) are always unwound the next day. For repo rates to remain as they are suggests some kind of altered behavior or existence, a fact that is, again, unanchored from Greenspan’s calculus that all rates are derived from the risk-free setting. While he was mostly focused on the longer side of any curves, further out in maturities and tenors, we should not ignore the shortest spaces especially as it is these ultra-short maturities that form the biggest and most asymmetric problems.
Bankers were telling the FOMC all the way back almost twelve years ago that there would be problems; and lo and behold there are, quite serious too. Greenspan dismissed those concerns as resistance to change, but hindsight shows clearly that resistance has been as much a monetary policy position as anything else.
Some of this relates to the potential for an April 15 rerun, but it also has larger implications beyond just repo markets to the “global dollar” position overall. To that end, the Fed’s weekly H.4.1 showed the largest weekly increase in UST custody in the series (going back to 2007). There isn’t any way to determine what or why, but clearly something “interesting” occurred right at quarter end related (probably) to UST as collateral from a foreign source.
It looks very much like a collateral call though we have no idea “from where” and “to where.” Apart from March 2014’s unusual activity (noted on the chart above), the last time there was such a surge was the last week in October 2008 – closing out that quarter in progress of panic.
None of this is to suggest something similar afoot at the moment, only that the FOMC should have heeded their own advice and figured out or at least investigated structural shifts in the integrity of basic and vital financial systems. It is clear that liquidity function is very much “off” and that such a condition is “unthinkably” durable. As with so many other indications, the “rising dollar” is as much about weakness that persists, even if the direct manner of that shift is unclear or even confusing. In that sense, the post-crisis FOMC has been just as much about fingers crossed as that interim after June 2003 – they simply jumped into ZIRP and QE hoping that what was gained economically would be more than enough to offset all these “unknowns.” We are left at the edge of both, namely that not much (if anything) was gained economically but those “unknowns” are starting toward perpetual misdirect and misfire.
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It's all rigged and you know it.
Title should be renamed:
Greenspan 2003, Bernanke 2008 Or Yellen 2015: "We Don't Know Enough About How The Financial System Works BUT We Do Know Enough About How To Help Our Own Kind In Profitting From it"... nobody really understands gold prices and I don’t pretend to understand them either.
- Bernocchio, 2013
No worries, the lesson is on the horizon...
Black and blue are the colors of the school of hard knocks...
In theory there is no difference between theory and practice, in practice there is... I keep telling people we need to shoot all the economists and replace them with humorless, hard-ass acountants.....
LOL!!!! Bullshit, they know the sheep around the world still accept those paper promises...
for now.
http://research.stlouisfed.org/fred2/graph/?g=16OR
Jesus fucking Christ these people as so late to this party.
IF you have been reading the minutes and looking at the data then none of this comes as the least surprise.
The idea that the banksters couldn't and didn't front run the bond market with inside information is laughable.
Claiming the banks wanted to inhibit lower interest rates and couldn't carve a wider spread on loans with a combination of interest rate swaps -some purchased directly from The FED itself, global securitization markets upon which to unload shoddily if not fraudulently underwritten 125% LTV MBS, and derivative insurance underwiritten by behomoth insurance companies like AIG is an even better one.
I'll repost one of my perennial favorites. READ the damned thing! These assholes have left the blatant evidence of their crimes lying all over the place. Nothing is very well hidden unless it is truly monstrous..
http://www.federalreserve.gov/monetarypolicy/files/FOMC20030625meeting.pdf
The mule that goes batshit crazy when dragged into my enemy's orgy is my friend...
Of course they don't understand the market - their salaries depend on it!
Don't know enough to make it work, but have just enough knowledge to muck it up into an incomprehensible, untradable stew, stalling things while we try and figure it out.
Banking Act of 1933, commonly called Glass-Steagall
http://www.federalreservehistory.org/Events/DetailView/25
Stop trying to find blame, you fucked up your own monetary system. Globalization/Project Venus is DOA. I'll repeat, DOA.
"Banking Act of 1933, commonly called Glass-Steagall
http://www.federalreservehistory.org/Events/DetailView/25
Stop trying to find blame, you fucked up your own monetary system. "
IF blame is propely assigned we have to hang the last 35 years of seated congresspersons, a few thousand regulators at IRS and the Treasury, the FED boards, and most of the upper management of the banks, insurance companies and exchanges.
Nice chat with Keen and Kaisser
the never ending pull between the stupiditiy of the system and the evil
https://www.youtube.com/watch?v=8jqvyCLyCn0
The satanic bastards know enough to take everything for themselves and leave everyone else with nothing, and they're doing an excellent job at that.
Hey you fucking white haired bitch, what you don't realize is there are those of us out here who are fighting the current bullshit system you keep alive by screwing us 99%ers.
Die and rot in hell Federal Reserve!
they know exactly how it works.
extend, pretend, take bonus
Answer to the headline: Both?
...the answer is, four? [/rodney dangerfield, back to school]
They know exactly how it works. lol. It works AS designed. They jammed it down everyone's throat with legal tender laws by packing the supreme court. And not 1 person in a 1000 has ever even heard of the case. http://www.thetruthaboutthelaw.com/they-make-you-use-money-that-is-backe...
lawyer4anarchists: from your link:
I tried to convince this wall street guy to pay me with some inside information, but he knew about the legal tender laws so I had to take his sh***y Federal Reserve Notes.
I gave a financial institution (not a bank) Federal Reserve Notes (FRNs). After a period of time I asked (demanded) they return those notes plus my earnings on them in the form of FRNs. They refused. They said I could ask them to pay my creditors by writing a check to them. Or they could write a check to me. But they could not, and would not, return what I was owed in FRNs. Their defense? They were "not" a bank.
Amazon.com is doing the same thing and they for sure aren't a bank. This "FRN is legal tender stuff" only goes one way. It "must be accepted", but that doesn't say payment out must in FRNs. I can't even ask the SSA to return the money they have been taking from me in FRNs. If I don't have a bank account, I must use a piece of plastic owned by JPMorgan. Interestingly, the banks "must" give me FRNs for the plastic account balance when I ask for it.
Does anyone think there ever was a law ... or ever will be one?
lawyer4anarchists: from your link:
I tried to convince this wall street guy to pay me with some inside information, but he knew about the legal tender laws so I had to take his sh***y Federal Reserve Notes.
I gave a financial institution (not a bank) Federal Reserve Notes (FRNs). After a period of time I asked (demanded) they return those notes plus my earnings on them in the form of FRNs. They refused. They said I could ask them to pay my creditors by writing a check to them. Or they could write a check to me. But they could not, and would not, return what I was owed in FRNs. Their defense? They were "not" a bank.
Amazon.com is doing the same thing and they for sure aren't a bank. This "FRN is legal tender stuff" only goes one way. It "must be accepted", but that doesn't say payment out must in FRNs. I can't even ask the SSA to return the money they have been taking from me in FRNs. If I don't have a bank account, I must use a piece of plastic owned by JPMorgan. Interestingly, the banks "must" give me FRNs for the plastic account balance when I ask for it.
Does anyone think there ever was a law ... or ever will be one?
Also from the same link:
Laws that would, about 40 years later, allow private banks to then step in with the creation of the federal reserve to create money out of thin air for a private group of bankers.
I once spent some time reading the early history of Illinois. In that history it is plainly described that private banks were able to create money out of thin air. In the Illinois case they were talking of the financing of the canal from Lake Michigan to the Mississippi. The banks collapsed and the canal work was stalled numerous times. This is 40+ years before reconstruction and 30+ years before the civil war.
I'm surprise you didn't call attention to the fact that one person at the supreme position of our legal system can decide anything. It would seem to me that anything that difficult to decide and agree to should be a unanimous decision or not decided at all ... the law should remain silent. I assuming the Constitution doesn't say how things should be decided at that court if it is silent on how that court is populated.
I don't know about you, but I've never found the Constitution to be a particularly enlightened set of rules ... especially when its most important set of rules were completely left out and had to be added later as an afterthought.
Again from your link:
I find the whole thing quite entertaining. And if you think about it. They are RIGHT, our political system is probably the greatest system ever conceived, but not for the reasons you are told or believe. It is the greatest system because it FOOLS the FOOLS so effectively despite what is right in front of them. lol
I don't know of a single law under which everyone is equal ... do you? Everyday I see some people curtailed by laws that are completely ignored by others and by the law enforcers and by the law interpreters and by the law creators and by the law judgers and by the law deciders. And that flexibility still isn't enough ... 40,000 new ones each and every year. Go figure.
Every single academic strongly believes that Financial System works totally disconnected from the Real Economy.
You don't even need to have an economy. Just type up numbers on computers, as per academics.
Mutual exclusion might be the best medicine.
I think the real economy would function better if the acedemics were 'disconnected'.
Why can't she read ZH? it is free, and we pretty much explain the financial system from 35,000 feet -/+ sea level. every. single. day.
What the FED is confuuused?
Mortgage Backed Securities are financial instruments that spawn from Mortgages. MBS are swapped for large pools of money floating around the world, to give that cash a place to park, while also earning “safe” interest. Interest safety is because mortgages are dotted line connected to original mortgaged debtor. This dotted line also connects to FDIC insurance.
In other words, the security is made more secure through government sanction and the fact that you will pay, or lose your house. This is the way it always is with money, as money gets its authority through its legal sanction, and then by force. Banksters play on this and absorb the law and say it is theirs. They are special creatures above the law.
Said banksters created SPV’s, which typically are entities within TBTF banks. TBTF banks are usually primary dealers of the FED, and in reality, FED Responds to TBTF. In other words, FED is an agent for TBTF banks. As most people know, the FED is a private for Profit Corporation.
SPV: A SPV, or a special purpose entity (SPE), is a legal entity created by a firm (known as the sponsor or originator) by transferring assets to the SPV, to carry out some specific purpose or circumscribed activity, or a series of such transactions. SPVs have no purpose other than the transaction(s) for which they were created
MBS are created at SPV within TBTF bank. FED reacts to mortgage creation e.g. debt creation by making sure private debt-spreading banks have reserves if needed. Your mortgage is re-hypothecated into a MBS. Usually when one takes out a mortgage, said new debt instrument is almost immediately on-sold. Your mortgage ends up at a SPV to be tranched.
The first hypothecation created new credit money via the new loan, the second hypothecation created MBS which then attracts existing capital. Usury on your loan ends up paying the international dark pools of money that parked into MBS.
The interest paid on your mortgage does not help you or your neighbors, it vectors into financial oligarchy. This is a form of Usury.
MBS scheme encourages sector inflation in the FIRE (finance, insurance, real-estate), thus pushing prices high. People vector their output into this sector rather than buying goods and services from each other. If you are paying debts and interest, then you wallet money is not buying goods and services from your neighbors. Money supply is 97% credit based on FIRE, and FIRE is 70% debt instruments relating to real-estate. Debts are not typically used to increase productivity, contrary to Economic textbooks.
In a nutshell, Credit Banking System is fundamentally corrupt and should be thrown onto ash heap of history. Private Banker Credit type of money is transient, it enslaves, and it comes into existence improperly and does not match the transaction/savings needs of people or industry, or of a nation. It is inherently usurious.
Now of course, FED keyboard money (QE) buys crap MBS because the underlying private property cannot sustain it, because the real economy is becoming hollowed out. QE protects their private banking owners.
Oligarchy loves owning real assets, so you can become debtor/rental slaves in the former lands and housing that your civilization built and owned.
It is a new type of Feudalism, and of course the beneficiaries of the system will feign ignorance.
$12T of FED QE keyboard money has been created to swap for MBS and Bonds. Instead we could have created debt free by a legal entity, and channeled into the commons, building out things we can all use. Debt Free Legal Treasury money would have gone on to become savings, and then disappeared into ledger as it paid down private debts. It would not have been inflationary, and this is especially so when debts are recalling money to ledger, and said money DISAPPEARS. A positive meets a negative and it cancels from existence.
Bankers know damn well this is how credit money works – they see their ledgers every day. Debt free sovereign money would have been much more appropriate than QE; Debt Free could have been forced into channels helping the nation’s people, rather than how QE funds financial oligarchy.
Illuminist cabal will not let go of debt means, they will have to be forced to release money power and hand it back to the people. Instead, it looks like they are creating new institutions like BRICS and new kinds of SDR’s to spawn new credits, thus making more debts to pay off old debts, to continue the slavery system.
They are not confused.
www.sovereignmoney.eu
^^^MEFOBILLS' post ^^^is the best of the day...
^^^MEFOBILLS' post ^^^is the best of the day...
Except the only money that is not "debt" money is "counterfeit". Money originated by traders certifying their trading promises is obviously "debt". When the trader delivers, the "debt" money is returned and extinguished ... the debt no longer exists.
QE is "counterfeit" money. There is never any intention of the originating trader (in this case the Fed) completing a trade. Further, Treasury bills are DEFAULT. There is also no intention of the trader creating them (the US Govt) of completing a trade. They are intended to be rolled over forever ... which is of course DEFAULT.
MEFOBILLS get's real close ... but no cigar.
Knowing how any Medium of Exchange (MOE) is properly managed, this article is really comical.
For those of you who don't know proper MOE management:
Money is "a promise to complete a trade". This is obvious from inspecting the three steps of trade: (1) Negotiation; (2) Promise to deliver; (3) Delivery. In simple barter, (2) and (3) happen on-the-spot simultaneously. Money allows (2) and (3) to happen over time and space ... that is its purpose.
Knowing that: A trader freely makes a trading promise; gets it certified (terms of delivery recorded) creating money. That money then circulates as the most desired objects of simple barter. It "never" loses value, any time, anywhere. INFLATION is guaranteed to be zero. Supply and demand for it is in perfect balance all the time everywhere ... it's the nature of a trade.
When the trader delivers on his promise, he returns a like amount of money and it is extinguished (his record is cleared). If he DEFAULTs, that DEFAULT is reclaimed through a like amount of INTEREST collections and extinguished. His record is blemished and he and irresponsible traders of like risk pay INTEREST on subsequent trading promises.
By the relation: INFLATION = DEFAULT - INTEREST = zero, the market is unperturbed regardless of what the trader does. There is no cascading effect from the DEFAULT. The INTEREST collections do, however, serve as automatic feedback corrections assuring system performance and stability. There is no business cycle. There are no bubbles.
In a properly managed MOE, ZLB represents a perfect marketplace ... no DEFAULTs, no counterfeiting ... not ever likely to happen ... certainly not in the face of unprecidented QE counterfeiting.
Now, knowing the "improper" management of "our" MOE is obvious on its face, go back and read the artcle again. See how ridiculous it is, along with all the commentary supporting its thesis?
So they think they can hide their lyin' and stealin' behind "Hold my beer. Watch this! (But I'm not sure how this will turn out.)" They've known exactly what they've been doin' since plotting to get the Federal Reserve Act passed. This was pointed out even then, but few listened.
"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill." And "From now on, depressions will be scientifically created." -- Congressman Charles A. Lindbergh Sr. , 1913)
The Money Kings (Snakes in Suits) have been in control ever since.