The Discount Window Non-Solution

In reference to discount window exceptions granted by the Fed and also to Bush's so called moves to aid homeowners (see Bush Moves to Aid Lenders) Minyanville's Mr. Practical offered practical ideas in The Discount Window Solution? Here is the Mr. Practical's reply to a reader question about the discount window:

The inevitable is beginning. The government, with its proven abilities to “manage” markets, is coming up with solutions. Those solutions are placebos at best and poison at worst.

Your implication is correct. Heavy borrowing at the discount window simply illustrates there are no other sources of liquidity to service current liabilities. Of course this does nothing to expand the credit base (it is trying to shrink, not expand), which is necessary to re-inflate growth. The forces of deflation are growing.

So the U.S. government is beginning to pull out all the stops. We now see Republicans bending over to bail out lenders (this has nothing to do with the borrowers) by reforming laws and using taxpayer money and foreign borrowing to bail them out. If I was a U.S. taxpayer who has been prudent with my money I would be furious. If I were a foreign lender I would pull my money out of the U.S. as fast as possible (lower dollar).

This is the beginning of the end. The markets will incorrectly rally on this last step by a Republican president to appease the banking industry. The more government control, the more inherent debt in society and the less future growth.

As markets rise this morning I would use the strength not to increase risk, but reduce it even more.

Mr. Practical

Systemic Risk And Exceptions to Fed Regulations

In point number three of Five Things on August 28th Minyanville's Prof. Kevin Depew offered his take on the discount window in A Strange and Terrible Comment on Potential Systemic Risk.

A little over a week ago the Federal Reserve suspended the limit on the percentage of capital that Citigroup (C) and Bank of America (BAC) can lend to their affiliated brokerage firms. What does that mean, and why should we care?

• The exemptions are from section 23A of the Federal Reserve Act and the Board's Regulation W.
• Section 23A and Regulation W limit the amount of "covered transaction" between a bank and any single affiliate to 10% of the bank's capital stock and surplus, and limit the amount of covered transactions between a bank and all affiliates to 20% of the bank's capital stock and surplus.
• Both Citigroup and Bank of America petitioned the Federal Reserve for the exemptions in order to extend short-term liquidity (in excess of these caps) to finance "certain mortgage loans" and related assets.
• Well, hey, that's' well within the Fed's mandate, right? After all, they are to provide liquidity and help ensure the stability of markets, right?
• Sure, after all the Fed must have some leeway in determining when to grant section 23A and Regulation W exemptions in order to fulfill those objectives.
• In researching this we stumbled across a Chicago Federal Reserve comment paper on Regulation W that discusses Reg W exemptions, among them this important paragraph:
• ....common sense warrants limiting matrix pricing for the (d)(6) exemption to relatively “plain vanilla” transactions such as investment-grade corporate bonds and commercial paper. This would effectively exclude most structured notes and mortgage-backed securities where the ultimate price is highly dependent on prepayment and rate volatility assumptions."
• So much for that suggestion.
  

Point number 4 in the above link is also worth a look. It discusses, the Fed's target interest rate level, currently at 5.25%, and how often it actually trades there.

My thoughts on Fed Exceptions for Citigroup (C) and Bank of America (BAC) can be found in Now we know who and why.

The socialization of America continues

Select Comments found on The Market Traders

"Karmaoption" offered this opinion:

The socialization of America continues! Bill Gross and Mozilo should be especially proud today! This is only going to assist in housing prices crashing harder, and more Americans not paying their mortgages. Why should I, if I am going to get bailed out will be the prevailing thought. Let's see, I don't have to pay for 90 days, then they will decide I am a risk factor. Then remember this is the gov't, so I probably won't have to pay for another year, while they guarantee my lender gets paid, and then I will get thrown to the curb. 15 months of free rent, then I am foreclosed upon, making sure new massive inventory hits the market. That is my prognostication, only making this whole thing drag out for much, much, longer and bankrupting our system. When will we learn?

"Rien" offered this prediction:

A prediction: The govt is going to own the houses, the occupants will pay a "realistic" (ie some commission will decide on the rent) rate, and somehow the whole thing will be financed through the banks so they can extract their part.

A Couple Select Comments On my Blog

"Tax Haven" writes:

I suspect a good number of the deadbeat home "owners" will simply walk away from the property no matter what little sweeteners are offered.

"Bubble Buster" writes:

This is not the America I came to live in. This is a socialist republic of America where Profits are enjoyed and Losses are socialized.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/