Redstate

they are just worth a lot less than they were at purchase. They hold actual real estate assets, so there is a limit to how low they will drop.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Asset prices are determined by supply and demand. Something can be perfectly valuable on a long-term or fundamental basis, but if no one wants to hold it at any given point in time, it will be effectively valueless. At that point in time.

So I agree with all of your points except the very last one.

Even under ideal circumstances, there are essentially no secondary buyers for mortgage-backed securities. (That's not unusual for fixed-income products in general, and especially not for engineered products like mortgage-backed securities.)

What makes this situation abnormal is that, in addition to the lack of buyers, there are now a lot of people who need to sell. And they can't.

and maybe its because I haven't read enough, is this just a 28-day patch or will the banks be able to roll these loans over for additional 28-day periods until the Fed decides that the crisis is over?

...mention of a specific end date. They're going to hold an auction every Thursday afternoon of specific Treasury securities on which primary dealers may bid. The resulting loans will be for 28-day terms and are not pre-payable.

The first TSLF auction will be held on March 27.

but to be the Buyer of all the junk. These Auctions are to give these "to big to fail" lenders liquidity so they can continue to lend.

If these lenders had to charge-off or reserve actual cash for the loans that are already bad or will go bad, they would be deemed insolvent. Thats is what is supposed to happen but the FED refuses to allow that to happen. Their mind set is to SAVE the big ones and let the local ones go down. The FED would rather see a small mom and pop shop go under (that the Fed has funds to liquidate) than allow a poorly managed Big one go down. This is strictly a size game.

...the Japanese banking collapse shortly afterward. :-)

Wouldn't it take an act of Congress to do what you're talking about? (I'm not saying that it won't come to that.)

for a S&L in the 80's. We were 3 Billion (not too big to fail) and financially sound. Until the Regulators came and MADE us start writing down loans that were fully performing and fully capitolized. They took us down in less than 9 months, just to merge us with what is now Chase.

Saw the Real Estate Disaster of the 80's and saw this coming 2 years ago. We pulled our horns in and made only local loans that we intended to keep from the begining. We are and will remain well capitolized because we did no spec lending and requiredcash from a buyer to do a deal.

WE did learn from our lessons 20 years ago, seems Wall Street thought they were the smartest guy in the room, but their managers/owners may walk away. Sadly, with Billions of taxpayers money.

They could simply announce to the market that they were prepared to buy any security presented to them at some particular price.

And you'd get a burst of inflation that would make Zimbabwe and Weimar Germany look like warm-up throws.

They're not going to go there.

by making 200 Billion available, they are saying-WE will buy anything, especially your soon to be non-preforming Junk.

We all know who is really buying it and that is the Taxpayers. We are getting to pay for the financial irresponsibility of a few Americans.

We had the same bailout in 1986-88 when the FSLIC went under and SAIF came about. Congress "gave" 600-800 billion to rescue the institutions who were "to big to fail". These billions were gathered through US Bonds and they are still being serviced.

The 200 billion "injection" is on top of the 100 billion already injected and there will be more to come. So get ready for another interest rate cut, to stimulate the economy, so we can get housing/consumer spending going again. The Taxpayer Funded Cycle continues.

...collateral under the TSLF will necessarily default while the Fed holds them. Otherwise, I'm not seeing the specific taxpayer liability.

I haven't read the credit terms of the TSLF, but I have read those of the earlier TAF (which is the $100 billion you mentioned), and I'm not as worried about the credit risk of the collateral as you are.

You do make a powerful case against moral hazard. I admit that I don't know what to do about that short of removing the Fed as a lender of last resort.

And in any case, the stage has now been set for the next bubble, as all the extra money being created by low interest rates will have to slosh around and end up somewhere.

It would be nice if it caused a nice fat stock-market bubble in China. Too bad the Chinese already know that trick.

And that's what will happen if every mortgage-backed security in the world is marked to market today.

I'm as sympathetic as anyone to the need to punish and deter moral hazard. I can see from the inside that the stock market rally is a dead-cat bounce. And I'm not interested in socialism either.

But this is a very tricky moment, one of the trickiest in history. We need to find a way to put out the fire (or let it burn itself out) without letting it spread to the whole block.

not to too much money placed in "poor" investment choices. It started because there was no money in the system. Hoover had contracted the money supply so much there was nothing available for investment/spending. There were secondary reasons but contracted money supply was primary starting factor. FDR "primed" the pump with gov't deficit spending and we have been deficit spending ever since then.
Lots more contributing factors but too much to discuss here.

In the first place, I don't blame Hoover for the money supply contraction that touched off the banking crises of 1930-1933. That was the doing of the Federal Reserve, starting shortly after the death of Benjamin Strong in 1928, and well before Hoover was inaugurated.

In terms of banking, however: I've looked through records compiled by the American Banking Association circa 1935, and they show that nearly every single asset class at that time was in severe distress. The only asset class that never suffered a significant default from the onset of the banking crises into the extended Depression, was US Treasury debt. And ABA records show that bankers significantly prolonged the depression by staying as liquid as they possibly could, for years. In practical terms, the only thing they were comfortable investing in at that time was short-term Federal paper.

By the time FDR became President in March 1933, nearly every other major economy had already pulled out of financial crisis. With a handful of minor exceptions (Italy for one), only the US suffered a prolonged Depression.

This is why I allow myself to make comparisons between now and the Depression. If we get a extended period of risk aversion, credit could remain tight and economic growth slow for years. And we're now in a fully-globalized economy, so a lot of the capital that would be affected by this isn't controlled by Americans, either.

The only way I can think of to avoid this is if we get more risk-taking with Other People's Money. Now you're right back to moral hazard, and the next financial disaster in the making.

You're a banker. Tell me what it will take for you and all your peers to start expanding your books of business.

This is a fascinating subject.

My recollection from various readings is that Britain and France weathered the Depression better than the US because they had larger internal markets (including their empires- I think the UK term was Imperial Preference) so that trade did not contract as much.

The US, with an internal market badly damaged by the speculative excesses of the late 20's and access to international markets restricted by the tariff wars started by the Smoot-Hawley legislation, was in much worse shape.

And we all know what happened in Germany.

Just my 2 cents.