Did the Federal Reserve blow it with their Sunday announcement?

[Ward Smith + 6,615]

I'm not worried so much about the zero percent interest rate, I'm much more concerned about the ZERO PERCENT asset requirement for the banks! Does anyone understand divide by zero math? 

[Ward Smith + 6,615]

And they have the audacity to reduce Exxon's credit rating? By any criteria the banks are already bankrupt! 

[Ward Smith + 6,615]

The Real wolf of Wall Street

[wrs + 893]

The fed blew it a long time ago.  They are too focused on stocks and not the real economy.

[Geoff Guenther + 317]

Dropping it to 0 isn't the wrong thing. If they had gotten the rates back up to a more normal 3-4 percent they would have a lot more leeway. 0 does signal desperation to the market, though, and traders keep their ears tuned for desperation. 

For banks? They just make a margin of pushing through that margin. It should give businesses a bit more cushion. They'll be getting pressure to loosen credit requirements and potentially lower interest rates for companies who are on the edge. 

Like wars says, a lot of traders are looking at the horrible manufacturing numbers in China and realising that a bit of monetary stimulus is far less important to the market than getting the virus turned around. 

[Ward Smith + 6,615]

1 hour ago, Geoff Guenther said:

Dropping it to 0 isn't the wrong thing. If they had gotten the rates back up to a more normal 3-4 percent they would have a lot more leeway. 0 does signal desperation to the market, though, and traders keep their ears tuned for desperation. 

For banks? They just make a margin of pushing through that margin. It should give businesses a bit more cushion. They'll be getting pressure to loosen credit requirements and potentially lower interest rates for companies who are on the edge. 

Like wars says, a lot of traders are looking at the horrible manufacturing numbers in China and realising that a bit of monetary stimulus is far less important to the market than getting the virus turned around. 

I probably should clarify, the zero percent is the leverage number the bank uses. Basel III required 3%, which means they could "print" $33,333.33 for every $1000 you placed on deposit in a bank. At 2% they can print $50k, at one percent $100k. At zero percent, they can print… infinity$

 

[canadas canadas + 136]

13 hours ago, Geoff Guenther said:

Dropping it to 0 isn't the wrong thing. If they had gotten the rates back up to a more normal 3-4 percent they would have a lot more leeway. 0 does signal desperation to the market, though, and traders keep their ears tuned for desperation. 

For banks? They just make a margin of pushing through that margin. It should give businesses a bit more cushion. They'll be getting pressure to loosen credit requirements and potentially lower interest rates for companies who are on the edge. 

Like wars says, a lot of traders are looking at the horrible manufacturing numbers in China and realising that a bit of monetary stimulus is far less important to the market than getting the virus turned around. 

What is to stop banks from borrowing this money at 0% interest from the Federal Reserve Bank and instead of lending it they go and buy U.S. government bonds or securities that pay interest so that they get to make a profit from the difference while only helping themselves profit?

Edited March 17, 2020 by canadas canadas

[Geoff Guenther + 317]

 

28 minutes ago, canadas canadas said:

What is to stop banks from borrowing this money at 0% interest from the Federal Reserve Bank and instead of lending it they go and buy U.S. government bonds or securities that pay interest so that they get to make a profit from the difference while only helping themselves profit?

Buying bonds is over a fixed term. If the economy recovers in the meantime, the 0% (variable) rate will go up and a low-interest rate fixed bond will be underwater.

[canadas canadas + 136]

6 minutes ago, Geoff Guenther said:

 

Buying bonds is over a fixed term. If the economy recovers in the meantime, the 0% (variable) rate will go up and a low-interest rate fixed bond will be underwater.

Short term bonds and government backed secured treasuries instead but their interest rates may also be low.

Edited March 17, 2020 by canadas canadas

[canadas canadas + 136]

Hey Greta, Did you notice how fast the money that governments said they didn't have for climate crashes suddenly appeared when the stock markets crashed?

[0R0 + 6,251]

On 3/16/2020 at 2:43 PM, Ward Smith said:

I'm not worried so much about the zero percent interest rate, I'm much more concerned about the ZERO PERCENT asset requirement for the banks! Does anyone understand divide by zero math? 

That may prove to be a problem in the future. But it has been a heavy restriction on banks to maintain a live (real time) 10% excess capital buffer on their liabilities (not their assets) has prevented them from providing new lending when demand was rising rapidly. That was the recent circumstance where credit lines have been drawn so rapidly that banks were on the verge of falling below their capital requirement, and had already cut their mortgage originations because of a lack of regulatory capital to back it up. So mortgage spreads spiked, rising to 3.4%, as bad as during the financial crisis. Today they narrowed to 2.5%. They should have gone to below 2% spreads. 

The Fed keeps underestimating the cash demand going on. As essentially 20% of the US and European economy (using the Chinese proportions as a guide)  is shutting down and needs to raise the equivalent of  2 months of REVENUE in cash right now. That on top of the cash demand needed to refloat working capital loans of stopped business due to supply chain disruption from China. Then also suspended foreign operations of US companies. Those also need to be refinanced and raise cash to substitute for lost revenues. So 130% of 20% of US GDP /6 needs fresh credit before considering credit demand from interrupted supply chains. So 4.3% of GDP, or $1 trillion of new cash had to be floated just now, on top of the $trillion of cash demand from supply chain disruption that was already pulling the credit markets apart before the covid 19 breakout in Italy, EU and now US..  

There should be an enormous increase in the growth of M2 showing up in the stats soon.. 20% SAAR would be on the low side. 

So there was no way the excess capital requirement could remain in place while banks are being relied upon to essentially fund a 2 month hole in revenues for a huge portion of the economy. The system simply hasn't that order of magnitude of spare balance sheet capacity.

[0R0 + 6,251]

22 hours ago, Ward Smith said:

I probably should clarify, the zero percent is the leverage number the bank uses. Basel III required 3%, which means they could "print" $33,333.33 for every $1000 you placed on deposit in a bank. At 2% they can print $50k, at one percent $100k. At zero percent, they can print… infinity$

 

The US banks are on a much tighter leash. Their top down requirement is 10%. 

[0R0 + 6,251]

Deutschebank is at just under 5% capital over liabilities. 

 

[0R0 + 6,251]

On 3/16/2020 at 3:53 PM, Ward Smith said:

The Real wolf of Wall Street

The Fed targeted the wrong markets. They now solved the prior month's problem in Repo, while ignoring the general dash for cash, and that there has to be more cash created. So now they are creating a commercial paper facility to back up money markets, and a dealer financing facility since dealers could not trade due to a lack of credit sources. Places where we had a problem last week. 

At least the suspension of the capital requirement allows the banks to lend. As we see with the rise in treasury rates along the yield curve, that is not where the banks are putting their new credit issue capacity. 

All of this should have been ready to go 2 weeks ago as the yield curve sank rapidly was signaling upcoming dollar tightness also indicated by spreads blowing out. But the Fed is always thinking it is someone elses' problem till it blows in their face. 

[footeab@yahoo.com + 2,192]

10 minutes ago, 0R0 said:

Deutschebank is at just under 5% capital over liabilities. 

 

And how every country counts capital and liabilities is different.  Same goes for default etc.  Comparing numbers is near impossible and why I do not bother anymore after I stupidly entered said arena over a decade ago professionally, made an utter fool of myself, and quickly got out saving myself further embarassment from the utterly idiot discussions which were not discussions as everyone were saying the same words, but neither party was using the same words...

[0R0 + 6,251]

14 minutes ago, footeab@yahoo.com said:

And how every country counts capital and liabilities is different.  Same goes for default etc.  Comparing numbers is near impossible and why I do not bother anymore after I stupidly entered said arena over a decade ago professionally, made an utter fool of myself, and quickly got out saving myself further embarassment from the utterly idiot discussions which were not discussions as everyone were saying the same words, but neither party was using the same words...

I love the Italian standards for loan performance, one payment in 270 days keeps you in good standing. 

[Ward Smith + 6,615]

To be clear Basel III required 3 percent as one of its "legs". Not 5, not 10. Mark to market is another issue, but banks never belonged in the market, but thanks to Clinton they're back with a vengeance. 

[Ward Smith + 6,615]

Crisis line opened

1-800-we're screwed