Let’s see, Bloomberg said yesterday that the Federal government had committed $7.4 trillion to lending facilities and guarantees. The total is now $8.2 trillion thanks to new programs announced today to aid borrowing by consumers, small businesses, and homeowners.
Stocks have rallied, and the 30 year bond is also up three points, due to a GDP report that revised third quarter growth from positive 0.3% to negative 0.5%. We had been skeptical of the GDP release figures at the time. Note that October was worse than September, but retailers have said there is a slight improvement in the last couple of weeks from the sales levels they had seen earlier.
From the Fed’s press release:
Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.
From a separate press release:
The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).
Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department–under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008–will provide $20 billion of credit protection to the FRBNY in connection with the TALF.
Some fine print from an attachment:
Eligible collateral will include U.S. dollar-denominated cash (that is, not synthetic)
ABS that have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO.All or substantially all of the credit exposures underlying eligible ABS must be newly or recently originated exposures to U.S.-domiciled obligors. The underlying credit exposures of eligible ABS initially must be auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration. The set of permissible underlying credit exposures of eligible ABS may be expanded later to include commercial mortgage-backed securities, non-Agency residential mortgage backed securities, or other asset classes. The underlying credit exposures must not include exposures that are themselves cash or synthetic ABS.
Originators of the credit exposures underlying eligible ABS (or, in the case of SBA guaranteed loans, the ABS sponsor) must have agreed to comply with, or already be subject to, the executive compensation requirements in section 111(b) of the Emergency Economic Stabilization Act of 2008.
As we said in a post last evening on this program:
There are a few problems with this approach:
1. The banks have already been given support right, left and center. They are still not lending,
2. Some of the stinginess is warranted. Um, a credit bubble means a lot of people got loans who shouldn’t have. Do we want banks again to make unsound loans? I should hope not, but I could be wrong here. A fair bit of consumer credit ought to contract. And even if a lot of good customers also have their credit lines cut, do you really think the banks are going to turn around and reverse these decisions on a meaningful scale. Ain’t happening.
3. Consumers are scared about employment and the loss of their home equity piggybank. They also know they borrowed too much. They want to lower debt levels. So as a reader put it, “Even if you throw the horse in the lake, you can’t make him drink.”
4. Banks are so desperate to restore profits that they are jacking up prices on existing consumer credit, even as the Fed and Treasury have been provided lots of low-cost support. Citibank and American Express are raising interest rates on existing loan balances for a a significant proportion of customers, and they no doubt have company. If consumers face higher charges on their outstanding debt. it considerably reduces the odds that they can or will take on more debt.
And a separate issue: consumer debt and consumer spending were at unsustainable levels. They need to fall. Trying to shore up consumers is a wrongheaded way to stimulate the economy. Fiscal expenditures, including a broadening of safety nets, is a much better way to go.
Persisting in a failed course of action is not a sign of intelligence.
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I remain commited to the 800 $B consumer stimulus program, where they can just send us the money. It would make more sense that some of what is floating out now.
Was really disappointed to hear the sound bites of ‘jolting’ the economy back to life. Jolts tend to make burnt out structures crumble in on themselves.
repost from last thread:
The incremental $1.1 Trillion, its been good for 110 points on the S&P. In other words it only cost the American taxpayer $10 billion per S&P point. So by this measure to get us back to the Oct-07 high we need an incremental $6.5 trillion. As bloom reported yesterday, we have already spend or guaranteed $7.5 trillion. I guess that makes it $13 trillion in new debt and guarantees to get us back to the old high.
said differnetly, on a market cap basis for the S&P 500 the past 3 days have added 885 billion versus the $1.1 trillion spent. Negative leverage, just like the deterioriating debt to gdp ratios
At the peak, the S&P cap was $14 trillion vs the low yesterday $6.7 Trillion netting to $7 trillion. This is virtually equivilant to the amount committed by the gov't so far.
You forgot to mention the JP Morgan Chase is upping the minimum monthly payment on credit cards to 5% of balance from 2% of balance.
This will sink many people.
First whats happening on consumer loans. According to FED this
http://www.federalreserve.gov/releases/g19/Current/
Housing Wire is reporting that the latest action is intended to shore up the market for agency bonds – no one wants to buy agency bonds when they can buy new FDIC-insured bank bonds. More unintended consequences.
Just nationalize the banking at this point and stop playing games.
ruetheday,
Agreed. That’s where we’re going anyway.
Doing the same thing over and over and expecting different results is the definition of what again?
Eligible collateral will include U.S. dollar-denominated cash (that is, not synthetic)
Okay, that one’s funny. Maybe we’re not completely incapable of learning and challenging our own assumptions, after all.
We’re following the first rule of holes. Keep digging for long enough, and eventually you’ll end up in China.
“Fiscal expenditures, including a broadening of safety nets, is a much better way to go.”
Agreed…we have to pull back consumption and increase savings, thereby funding our own fiscal stimulus. We have to re-balance the system…It’s got to happen, otherwise we’re going back to Great D-down.
There are lots of ways to look at this but the fact that nobody was buying Fannie and Freddie bonds or any of the credit card bonds was sending interest rates upwards. So what they have really done is disguised Fannie and Freddie bonds as treasuries and credit card loans. Nobody wants those housing mortgage bonds because house prices are dropping and defaults on credit cards are soaring whereas people cannot get enough of those treasuries.
In theory it is not a bad idea but now investors are going to be that little bit unsure about US treasuries. Let’s face it treasury bonds and bills were being bought because they had little to do with the sub prime housing mess. This is a big risk and global investors might be getting the impression that the persistence of the bailouts mean the US is significantly more unsound than they thought.
There is a good reason why there have been some strong movements in currencies today and the TIPS and Treasury yields for today should prove interesting when they come out tomorrow. If not this time, then before long pushing those debt interest rates down will result in much higher prices as people lose faith in the dollar. Its just one step closer to the cliff edge in my opinion as nobody wants to take on more debt at the moment.
“You forgot to mention the JP Morgan Chase is upping the minimum monthly payment on credit cards to 5% of balance from 2% of balance.
This will sink many people.”
For years consumer advocates have complained that low minimum payments trapped consumers in endless interest payments, by not requiring paying down any significant amount of principle. Now the banks are sufficiently desperate to need borrowers to pay back principle, and people will complain that that will hurt borrowers too. So borrowers are screwed either way, I guess. Clearly, it’s just better not to owe money on a credit card.
A. I don’t need the money
B I like falling prices
C. I don’t do business with thieves if I know they are thieves.
D. Paying interest to borrow my own tax money back and pay these pricks interest ain’t gonna work.
Agreed…we have to pull back consumption and increase savings, thereby funding our own fiscal stimulus.
Thanks for linking the great piece by Pettis, mxq. We should look more closely at the implications of your statement, though. Pulling back on our own private consumption to fund our own fiscal stimulus is totally nonsensical unless you believe the government is a more effective capital allocator than the private sector. Pettis points this out:
This is just another way of saying that the money that used to go towards financing private US consumption will now go to finance public US consumption
Again, the idea that Keynesian stimulus is a net positive is nothing more than mythology.
Well said. The TALF prolongs and even worsens the consumer debt bubble. Markets need to clear before we can heal the wounds of the crisis and resume a trajectory of positive economic growth.
While I agree that debt in general needs to shrink, and new debt to the marginally creditworthy needs to end. However, the problem is apparently that good credit is going wanting and that there are demands for repayment on credit that is being serviced but is “at risk”.
The last last two issue, if true, serve nobody.
There are a number of ways to tighten consumer credit, turn revolving lines into fixed terms, increase rates, increase repayment terms or increase required credit scores.
I was a consumer lender going into the 1990 recession. I distinctly remember the memo that raised the point score required for credit cards, car loans and mortgages. This was done 4 to 6 months prior to the recession really hitting. Rates didnt get touched.
In this case, it seems to be hitting after the problems have happened…another case of nobody seeing it coming like this.
Once again banks are hoarding money, rationally, as they still expect to have to take loan losses and are worried about redemptions on money market funds and savings accounts as savings are drawn down in the initial stages of recession.
Until you see the savings rates rise or stabilize due to people adjusting consumption patterns and debt repayment the banks wont feel comfortable.
More loan losses to write off…at least one quarter, maybe two. Assuming we survive all of this and there are no more quakes then the rebuilding begins. The question is will the rebuilding lead to another bubble in another asset class? Stocks? Bonds? Real Estate? A particuler type of stock or bond or security?
Has the Fed answered the question of how to prevent or prick bubbles…to date they have said they wont….is that the job of monetary, fiscal policy, or regulation or all three?
Moopheus is right.
Remember the original AMEX charge card which required (and often still does require) 100% of the balance paid each month?
The live-in-debt paradigm is the watering-down of such sound financial principles. As years pass credit cards required smaller and smaller balance payments until 2% is expected and 5% will sink people! This nicely sums up the cloud cuckoo-land modern consumerism has become.
Again – a simple failure of regulation. A legal minimum of 20% balance payment on credit cards would have deflated the massive credit card bubble long before now. Citigroup probably rues the day it reduced the balance payable on its cards. Of course that would have slightly reduced profits, its share price, and horror of horrors share option values!
Hey, look everyone! The Fed and Treasury have already formed the next crisis BUBBLE! Over 8 trillion now! That’s the biggest, baddest bubble I’ve ever seen form so quickly!
They have 3 choices – do nothing, promote saving, or spend like there’s no tomorrow.
Option 3 seems to be the favored route, since doing nothing is totally out of the question, though is what they should in fact do. And saving is what we tried in GDI. GDII will have its own personality.
Isn’t it like encouraging an obese person to continue eating as usual instead of eating less?
People have been living in excess for so many years, and this excess has been fueled by increasing debt. It has been a fun to be livin’ large, but it’s over. Yet these idiots want to keep the party going.
Here’s an excellent article about the consumer bubble: The Great Consumer Crash of 2009
Rick Santelli (one of the few good commentators at CNBC) in a discussion on the new programs announced today and the idea that the Treasury has figured out how to add leverage the TARP by outsourcing it to the Fed.
Rick Santelli on CNBC (Nov 25)
“consumer debt and consumer spending were at unsustainable levels. They need to fall. Trying to shore up consumers is a wrongheaded way to stimulate the economy.”
Yup.
Paying for this will not come from income taxes….putting my crystal ball on the table….I see a US national sales tax being implemented.
Question is what value chain taxes get eliminated to make it happen. In Canada there was a manufacturers sales tax that rewarded imports over domestic producers…it was eliminated as the “trade off”.
The point is most economists LOVE consumption taxes, politicians hate them because they are visible. They promote savings over consumption and they pee money wherever they are implemented. In Canada, having a “VAT” in place during the last recovery in the early 90’s saw such a huge upswing in revenue the government couldnt find pockets for all of the cash.
This is the only way I can see the US clearing the deficit and paying down the debt. Will congress have the cojones to pass it? Will Obama have the cojones to propose it?
Re: I guess that makes it $13 trillion in new debt and guarantees to get us back to the old high.
>That may not be far off, or to see it another way, GDP next year will be worth as much as 13-week Treasury bills, but it is interesting to ponder how The Treasury will collect tax revenues if growth falls off a cliff, thus, that $13 Trillion of funding will take longer and longer to be collected from tax payers. I also think that by kicking the deflation can down the road, we will have less play money to pay for future interest on bailouts and our deficit will increase as GDP falls, which sounds sort of like a depression.
I also think that by kicking the deflation can down the road, we will have less play money to pay for future interest on bailouts and our deficit will increase as GDP falls, which sounds sort of like a depression.
This is a very succinct description of 2002-2007. :P Remember, our goal was to prevent deflation then with the rapid rate cuts. We performed the experiment already and got nothing more than a housing bubble for our troubles. But there was a little dry kindling left in the economy at that time. We’d perform it again if we could just… find… the… resources…
I want a tax on every securities transaction now. NOW! NOW!
the brat
the advance gdp print was not positive. it was -0.3%….
Pledges by Fed, FDIC, Treasury, and FHA = $90k per Taxpayer
http://econompicdata.blogspot.com/
We noted earlier the absolute size of this, but assuming 90 million taxpayers (there were ~86 million that actually paid taxes in 2004), max pledges made by the Fed, FDIC, Treasury, and FHA to date amount to ~$90,000 per taxpayer (or ~$30,000 per U.S. citizen).
Eventually, the piper will be paid. If we’d taken our lumps in 2001, when we were in recession, we wouldn’t be in this mess.
Spend now, pay dearly later. Keynesian economics will be discredited someday soon and forever. What a mess.
Let’s go create some demand!
ndk,
FYI, the previous peak debt to GDP seen in the US (prior to the last couple of years) was 260%, and that occurred in the early years of the Depression, as GDP fell sharply but debts had not defaulted or been written off.
I resent that in naming this new program TALF, the Fed is sullying the good name of the Take an Artist to Lunch Foundation.
(Yes, it’s a joke. Then again, these days, I’m wondering about how seriously to take the Fed…)
Spend now, pay dearly later. Keynesian economics will be discredited someday soon and forever. What a mess.
Ben, I should be more careful in my comments. I don’t think that Keynesian stimulus never works. There is a set of circumstances (abnormally high domestic savings rate, current account surplus, etc.) under which it makes a lot of sense. It makes absolutely no sense in our current environment, where we have a very different set of conditions. I also think that repeated iterations of successful Keynesian stimulus in environments that are progressively less suited to it inevitably leads to Yves’ point.
FYI, the previous peak debt to GDP seen in the US (prior to the last couple of years) was 260%, and that occurred in the early years of the Depression, as GDP fell sharply but debts had not defaulted or been written off.
You’re absolutely right, and it’s a legacy of skewed incentives and the past successes of monetary and fiscal policy. I really believe the next school of economics that emerges from this will pay more attention to aggregates like this.
Dumb question – where’s the money for all this coming from?
Did I somehow miss an appropriations bill, or was it just that I slept through that day in Civics where we learned how spending bills can also originate in the Treasury?
Yves, your points #1 and #2 at the end relate to banks’ willingness to lend. Seems to me that a lot depends here on two key factors:
A. Are the new Fed loans to be nonrecourse? If so, then banks willingness to lend based on that money depends mostly on…
B. …the haircut. How big will it be? This haircut puts banks in the first-loss position. But by how much? If the loss exposure is small enough then banks may ease on the restraint a tad.
Anyone have further info on either of these?
ndk : “Pulling back on our own private consumption to fund our own fiscal stimulus is totally nonsensical unless you believe the government is a more effective capital allocator than the private sector.”
I would tend to agree with you here under most circumstances.
But right now, the private enterprise is unable/unwilling to allocate capital. That’s why the gov’t is a better option in this specific instance. They are ready and willing to spend. That sounds reckless, i know, but that’s what the system needs (and all the US has got?)
But right now, the private enterprise is unable/unwilling to allocate capital.
You’ve certainly got a point there, mxq. I think that once you look at the numbers involved, though, you’ll agree that it’s just not really mathematically possible to replace private capital in scale. We’ve just added a big multiplier to the TARP, which is one way to get closer.
But my goodness, this really ruins the Fed/Treasury balance sheet further. That screws up our ability to even make policy at all, regardless of whether we happen to succeed at refiring inflation someday, and it also reduces the viability of the currency itself.
If they really want to encourage people to spend more, they need to PAY THEM MORE.
Income and wages are the real problem, along with those at the top making too damned much money. And I say that as one of the top five percent families. When I look at the disparity between even our income and the next higher percentiles, it simply stuns me.
What is the end goal of all this shocking and jolting and stimulating?
(My word, that certainly sounds dirty, doesn’t it?)
Simplistic, I know, but if I found myself out of work with a huge debt hanging over my puny assets, the last thing I would do would be to borrow more money. I’m sure the banks would agree with me.
The US is now “out of work”, with a massive debt over it’s deflated assets, so why would the rest of the world lend it even more? Very shortly, those IOUs you’ve printed (a.k.a. greenbacks) won’t be worth much at all.
I can assure you that a lot of us consumers have pulled back on spending. I’ve cut out the satellite TV and the cell phone is going next. I go to the grocery store once a week and try not to waste food and, I hardly ever drive out of town. There is no dining out, clothes are replaced only when necessary and there is very little discretionary spending on a daily basis. There isn’t much more to cut out of the basics. Most everyone else I know is doing or has done some of the same and we all have homes we are not in danger of losing and steady jobs or incomes. But most of us know, even though we are not experts, that the worst hasn’t come yet. And I’ve come to the conclusion that most of the Wall Street “experts” are clueless as well as many of our government officials who are too far removed from the lives of ordinary citizens. The government has still not addressed the largest problem which is falling home prices and the shrinking middle class. And, as far as CNBC’s Rick Santelli’s expertise, he was quite adamant that Bernanke not lower interest rates for fear of inflation. And, we all know how that turned out. All these “experts” in $2,000 suits need to go visit a homeless camp to see who is living there now. Just go under the highway crossing a river near your city or town. Or try your local parking lot after dark. At least these homeless folks still have cars. This is what is silently happening all over America.
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Perhaps the longer run changes in terms and quantities of consumer debt should not be seen in such narrow fashion but in relation to production capital’s need to realize value added, i.e. to transform surplus value into profit, something which becomes increasingly problematic as real hourly and weekly wages have been in long-run decline, as incomes have become very much more unequal and developing economies’ internal markets have been stiffled through application of neo-liberal prescriptions.
But sure, who ever imagined the added weight of appropriation through finance would not hit limits which, I must add, cannot be overcome via either higher wages or greater fiscal stimulus as these do not address an overaccumulation of means of production relative to value creating living labor. In other words a rising technical composition of capital or, if you like, capital intensity, comes to impose limits which are not simply demand side.
I received a letter from Capital One today. They explained how my credit limit was being cut in half because I was not using it. True but, I’ve never been late, in fact I pay my business balance off each month in full. Can you say running scared?