Monday, February 23, 2009

Fed balance sheet growing again; TALF to start soon

The Fed balance sheet is growing again; bank credit is up $76.9 billion for the week ending on Feb. 18 to $1.91 trillion, while reserve balances grew another $85.6 billion to $688.9 billion. The balance sheet is set to expand (much) further; the Fed is expected to announce the start date of its new Term Asset-Backed Securities Loan Facility (TALF) soon. The program is massive - up to $1 trillion - and could help consumer ABS markets, but questions still remain.

The chart illustrates the asset side of the Fed's balance sheet, including its credit easing policy measures - Commercial Paper Funding Facility (CPFF), its various non-commercial bank loans (Maiden Lane, Maiden Lane II, and Maiden Lane III), and listed under "securities held outright, the mortgage backed security purchase program (MBS), for example.

Over the last week, bank credit grew mainly due to the following: (1) a new $55.69 billion of the NY Fed's MBS purchase settled on balance, and (2) the Fed increased its Term Auction Facility (TAF) lending another $34.7 billion.

The Fed is purchasing MBS on a weekly basis, but the securities only settle on balance at a lag. To date, another $71.6 billion in MBS have already been purchased by the NY Fed that have not yet settled on balance. As for the TAF, the Fed still has 3 auctions scheduled through March 23 2009 for another $450 billion in lending. Unless the Fed wants to wind down this program (highly unlikely), which currently holds a 23% share of total bank credit extended by the FEd, further auctions will likely be scheduled soon.

TALF will raise Reserve bank credit by up to $1 trillion, or more than 50% of its current total.

The TALF program is expected to get underway soon - the NY Fed has been uploading a lot of technical information regarding the program. The TALF plan is simple. The NY Fed will lend to eligible borrowers (the requirements are much broader than the commercial banking system) at a fixed or floating interest rate against eligible collateral of various consumer and small business asset-backed securities (ABS).

The collateral eligible for the TALF loan includes the highest rated ABS backed by auto loans, credit card loans, student loans, and small business loans. Depending on what type of security is used as collateral, the Fed will lend up to 95% of the collateralized assets (haircut amounts range from 5%-16%). If the security is downgraded after the Fed assumes it as collateral, the Fed takes the hit. If the borrower defaults on the loan, the Fed sells off the ABS collateral.

The TALF program was extended - from $200 billion to $1 trillion - as part of the government's Financial Stability Plan . It is not certain exactly how effective will be the TALF on the ABS markets. For one thing, there is some question as to the incentives of the program: whether or not the haircut (5%-16%) plus interest payments will be sufficient to attract participants to the program. Another Fed program, the Money Market Investor Funding Facility, did not attract any eligible participants to borrow under the program (its lending on the Fed's balance sheet remains at $0).

Other questions remain. Here is an excerpt from the NY Times last week:
Investors and bankers say the Treasury program, called the Term Asset-Backed Securities Loan Facility, or TALF, could help unclog vital channels of capital, but they add that it is hard to know how big an impact it will have.

For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans. That will not help banks sell junior bonds, which many investors have shunned because of fears that losses would rise as the economy worsened, said Thomas H. Atteberry, a partner at First Pacific Advisors, an investment firm based in Los Angeles.

“It’s probably a step forward but it may only be a baby step forward,” said Mr. Atteberry, who does not plan to use the TALF.

Jerry Marlatt, a partner at the law firm of Clifford Chance who specializes in securitization, said that lenders using the TALF would be willing to retain more of the risk associated with loans on their own books to get deals done. That should help ensure that lenders make better-quality loans in the future, because they will be liable for most of the losses.

Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more. “The TALF,” he said, “raises a lot of questions.”
Rebecca Wilder


  1. jan 42269 -0.08 0.01 0-T
    feb 40982 -0.06 -0.04
    mar 38551 -0.13 -0.12
    apr 39474 -0.13 -0.04
    may 40646 -0.07 0.00
    jun 38287 -0.12 -0.06
    jul 38786 -0.10 -0.05
    aug 38505 -0.11 -0.03
    sep 38105 -0.11 -0.04
    oct 37690 -0.12 -0.07
    nov 37645 -0.12 -0.11
    dec 37271 -0.14 -0.09
    jan 38522 -0.14 0.00 01
    feb 37946 -0.14 -0.04
    mar 36354 -0.13 -0.11
    apr 37354 -0.12 -0.02
    may 38410 -0.12 -0.01
    jun 36921 -0.10 -0.04
    jul 38009 -0.07 0.00
    aug 38550 -0.06 0.02
    sep 38657 -0.05 0.03
    oct 43867 0.11 0.18
    nov 38801 -0.02 0.01
    dec 39433 -0.02 0.04
    jan 42055 -0.01 0.16 02
    feb 41102 0.00 0.10
    mar 38882 0.01 0.01
    apr 39683 0.01 0.07
    may 38965 -0.04 0.03
    jun 37302 -0.03 -0.03
    jul 37943 -0.02 -0.02
    aug 38104 -0.01 -0.13
    sep 37306 -0.02 -0.04
    oct 36993 -0.02 -0.06bot
    nov 37365 -0.01 -0.11
    dec 38030 0.02 -0.07
    jan 41068 0.07 0.06 03
    feb 39968 0.05 0.01
    mar 38959 0.07 0.00
    apr 39627 0.06 0.06
    may 40152 0.05 0.06
    jun 39988 0.08 0.05
    jul 41640 0.10 0.12
    aug 42313 0.10 0.14
    sep 42886 0.11 0.15
    oct 41618 -0.05 0.09
    nov 41057 0.06 0.00
    dec 41239 0.05 0.03
    jan 43889 0.04 0.13 04
    feb 42609 0.04 0.08
    mar 42264 0.09 0.05
    apr 44089 0.11 0.10
    may 44465 0.14 0.07
    jun 43556 0.17 0.03
    jul 44799 0.18 0.04
    aug 43942 0.15 0.06
    sep 44518 0.19 0.08
    oct 43549 0.18 0.06
    nov 43337 0.16 -0.01
    dec 44460 0.17 0.04
    jan 48569 0.18 0.15 05
    feb 45206 0.13 0.03
    mar 44208 0.13 -0.01
    apr 44912 0.13 0.03
    may 44845 0.12 0.00
    jun 44211 0.11 0.01
    jul 44600 0.07 0.00
    aug 43077 0.02 -0.01
    sep 43391 0.01 0.00
    oct 42017 0.01 -0.05
    nov 41973 0.02 -0.14
    dec 42777 0.04 -0.05
    jan 45496 0.04 0.03 06
    feb 43084 0.01 -0.04
    mar 41242 -0.02 -0.08
    apr 42920 -0.03 -0.03
    may 43648 -0.02 -0.02
    jun 43278 -0.01 0.00
    jul 43328 -0.03 0.00
    aug 41162 -0.06 -0.02
    sep 40865 -0.08 -0.03
    oct 40088 -0.08 -0.06
    nov 40543 -0.06 -0.11
    dec 41461 -0.07 -0.04
    jan 43113 -0.11 0.05 07
    feb 41214 -0.09 -0.04
    mar 39159 -0.11 -0.10
    apr 41072 -0.09 -0.05
    may 42699 -0.05 -0.01
    jun 42034 -0.05 0.02
    jul 41164 -0.08 0.01
    aug 39906 -0.07 0.00
    sep 40460 -0.07 0.00 top
    oct 40161 -0.04 -0.03
    nov 40331 -0.04 -0.06
    dec 41048 -0.04 0.00
    jan 42427 -0.07 0.08 08
    feb 41145 -0.05 0.00
    mar 39731 -0.04 -0.07
    apr 41642 -0.03 -0.01
    may 43062 -0.01 0.05
    jun 41616 -0.04 0.04
    jul 42083 -0.03 0.04
    aug 42055 0.02 0.05
    sep 42456 0.04 0.05
    oct 46930 0.17 0.14
    nov 50363 0.24 0.19
    dec 53723 0.30 0.31
    jan 62409 0.45 0.57 09
    feb 61813 0.50 0.48

    This data comes from the Board of Governors statistical release on Required Reserves. The St. Louis Fed publishes this series. It has been reconstructed to account for sweep accounts, etc., and is more accurate than the BOG.

    The money supply's expansion coefficient has been falling. I.e., the banks have unused lending capacity (in spite of M1's 27% growth rate since OCT).

  2. The timing of the market declines in Sept 07 & Sept 08 was no happenstance. Where was Bernanke?
    Short term rates-of-change in legal reserves generally track short term market movements—but they are also volatile. Even so, the weekly reporting member banks maintain required reserves on their current liabilities, as well as clearing balance requirements, with a 30 day lag. In the past this has provided some advance trading information.
    An example: On Wednesday Feb 27, 2007, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier." (the Dow dropped 416 points or 3.3%) However, member commercial bank adjusted "free" legal reserves declined from 97.6 to 90.9 bill from Jan. to Feb (the day before the stock market dropped was also bank squaring day). It was a record for the sharpest and largest draining of seasonal bank reserves.
    The rates-of-change in legal reserves that correspond to (1) real-gdp and (2) inflation are always the same. These monetary lags never vary. The lag for real-gdp is the same as used by the Bank Credit Analyst’s “debit/loan ratio”. The lag for inflation was adopted from Friedman. Inflation’s crest builds until the maximum range observed by Friedman.

    “Bernanke, Laubach, Mishkin, and Posen (also) describe a two-year lag between policy actions and their main effect on inflation as ‘a common estimate. They observe that this estimate has been embodied in the forecasting and decision-making of several inflation-targeting central banks.” This is also the lag I discovered.

    It is no happenstance that the proxy for rates-of-change in the transactions velocity of bank deposits is exactly the same as the proxy for rates-of-change in legal reserves. They both conform to gdp data.
    The G.1 debit series (now discontinued), or the rates-of-change in monetary flows (MVt), is defined as the volume of our means-of-payment money times its rate of turnover. This transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (M) equals the volume of means-of-payment money; (V), the rate of turnover of this money; (T), the volume of transactions units.
    The “econometric” people never liked the equation because it is impossible to calculate P and T. (only Paul Spindt received recognition for the “debit-weighted-money-index in 1983 & the 1938 committee recommendated reserve requirements pertaining to bank debits) Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.
    The (MVt) figure encompasses the total effect of all monetary flows, including the expenditure of the savings by the non-bank public, their dis-savings, or an increasing number of housewives selling their labor in the marketplace, etc. (except for Mutual Savings Banks).
    The reported rates-of-change in bank debits is higher than the rates-of-change in gdp data --because bank debits include financial transactions. The accuracy in defining any theoretical concept, and the accuracy in, collecting, calculating, & publishing all economic statistics, .is subject to limitations. Even so, as the ratio of financial transactions to actual gdp transactions trends higher, it signals higher levels of inflation (or speculation). Thus it is very easy to identify when the economy is overheating, and it is impossible for Central Banks to overlook so-called asset-bubbles.
    Economic forecasts are easy to formulate because if you have 20 of 24 months of data, and you know the monetary lag, you know the economy’s direction. These projections are reliable up to about 18 months. The rates-of-change in these monetary flows (MVt) always follow the same direction as the economy.
    Both of these monetary lags represent a series of growth rates in both transaction units (T), and unit prices (P), or the proxy for nominal-gdp. These growth rates continue to increase as they approach their maximum wave. If this data was represented by a scatter plot diagram, the distribution of points would be concentrated in one month more so than any of the other months (corresponding to the economic lag).