The Fed never met a bubble it wasn’t keen to reflate. The latest wrinkle is that it is trying to learn from its old behavior, although most of us would disapprove of the lessons it has drawn.
One of the cognitive biases in the readings of past crises is to attribute failure to official intervention, that is, the authorities either did not do enough, or they did the wrong thing. The result is a belief that correct action, if such a program had been divined, could have made the Great Depression a mild phenomenon, or tamed Japan’s post bubble malaise quickly.
The better question to ask is “How far can we go in short term intervention to alleviate pain and disruption without making things worse in the long run?” Admitting some dislocation is inevitable when you are in this big a mess is somehow verboten. And the “we can’t have too much visible distress” (tent cities are OK, it seems) plays right into the hands of the banksters, since “visible distress” seems to be measured more in asset values than human consequences.
For instance, in an oft-cited 2002 speech on deflation, Ben Bernanke cited a litany of things a central bank could do to create inflation. Nary a though was given to the possibility that if action as radical as he suggested was required, it could be a symptom that monetary policy had become ineffectual and doing more would yield little in the way of results. Or it might indicate that other problems were neutering monetary action, and addressing those issues would be more productive.
But no, the Bernanke default position on Japan was that its central bankers didn’t try hard enough. The Japanese, by contrast, believe their single biggest error was taking forever to take on and clean up the politically connected banking sector. Sound familiar?
So the latest of the “when in doubt, do more” syndrome is that the Fed is trying to get in front of an imminent commercial real estate bust by letting banks use the TALF for commercial real estate loans, thereby keeping credit cheap. The reason? That market is ready to go into free fall. Leon Black of Apollo Management, predicts a commercial real estate “back hole” that could deliver as much as $2 trillion in losses. to banks.
Ouch.
Ben, no matter how cheap the funding, is, if rent rolls collapse, commercial real estate prices and with it, commercial real estate debt values, will fall. Cash flow is king.
From Bloomberg:
The Federal Reserve is close to offering investors five-year loans to buy commercial mortgage- backed securities, granting an industry request, a person familiar with the matter said.
The decision on extending the term of such loans under the Fed’s Term Asset-Backed Securities Loan Facility isn’t final yet, said the person, who spoke on condition of anonymity. The Wall Street Journal reported the state of the decision earlier today. In December, the Fed lengthened the term of TALF loans to three years from one year.
Fed officials had been considering a compromise of charging higher fees after three years. That would be aimed at giving a greater incentive for investors to borrow from the Fed and helping restart markets for commercial mortgage-backed securities, while protecting the Fed’s flexibility to raise interest rates in the broader economy once consumer demand recovers.
“It continues to illustrate that it’s just a patchwork quilt of trying to shore up whichever asset du jour happens to be in trouble,” said Julian Mann, a manager of asset-backed bonds at First Pacific Advisors LLC in Los Angeles. In addition, “the taxpayer is encumbered for another few years,” Mann said.
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Wow! What logic can possibly justify this sort of action? The collateral underlying these loans is starting to decline in value and the probability of default is increasing, so the value of the loans themselves is going to decline, and we can’t let that happen because…what?
I think this exposes the central bank’s “reasoning” better than anything it’s done so far because it’s a preemptive action designed to keep prices up. In the case of residential mortgage-backed securities, at least they waited long enough to step in that they could make the (albeit almost certainly spurious) argument that they were irrationally undervalued. But here they’re not even making that pretense. This can only be read as an attempt to keep asset prices artificially high.
Bloomberg:
“The Federal Reserve is close to offering investors five-year loans to buy commercial mortgage- backed securities . . .”
Is the intent is to provide loans to borrowers in order to purchase already existing debt? I guess thats how the TALF works, right?
But how would this re-inflate anything? Certainly it won’t or isn’t designed to create new CMBS. There is a glut of office space and retail stores and hotels as it is.
So the real intent is to warehouse the debt in taxpayer secured vaults. This will free up the existing underwater CRE debt holders. By doing so the Fed hopes to inject liquidity into the system, which results in re-starting speculative flows – as is currently happening in the stock market. The Fed believes that by doing so the financial markets will pick themselves up as newly freed capital can be directed into assets, including I suspect commodities. Thus we get our anticipated inflation. It won’t last long, however, as the end result will only drive down consumption all the more and make borrowing even less obtainable as workers are increasingly laid off to reduce costs, as a result of having to cut back on consumption due to rising costs.
But no, the Bernanke default position on Japan was that its central bankers didn’t try hard enough. The Japanese, by contrast, believe their single biggest error was taking forever to take on and clean up the politically connected banking sector. Sound familiar?It’s very difficult to find empirical data in support of either conclusion.
Ben, no matter how cheap the funding, is, if rent rolls collapse, commercial real estate prices and with it, commercial real estate debt values, will fall. Cash flow is king.This does depend to a significant extent on systemic inflation rates, but I remain convinced that the Fed has limited ability to manage inflation to a gentle upward direction at the zero bound.
As the consequences of a serious bout of inflation are fairly severe, especially politically — witness Carter, who was more popular than Obama at this point in his own presidency — I don’t believe the Fed/Treasury have the stomach to induce it. I still believe positive real interest rates will cause deflation to continue, and prefer dollars to any other asset.
I really wish politics were less entangled with economics, but until empiricism trumps ideology, we are where we are. Hopefully, a new generation of Erasmus and the scientific method will arrive soon. Volcker’s invocation of the Rule of 72 against Kohn took me aback; it may come sooner than I think.
The TALF in its original version was only for newly-issued asset backed securities, then it was liberalized to include existing deals (!). The announcement is not yet out, but I would imagine it to include new lending (not that you’d expect much new lending if the market is tanking, but the Fed clearly believes it can reverse that).
Bloomberg: “The Federal Reserve is close to offering investors five-year loans to buy commercial mortgage- backed securities, granting an industry request, a person familiar with the matter said.” Soooo as I read this, this is credit provision to speculators in existing CMBSs, no? Using Fed money. So Jojo Hedger takes money from Uncle Feddy, and buys a CMBS at ‘market,’ i.e. near to face and way, _way_, WAAAAY above the value of that security over the next seven years, using the paper as collateral. If the economy come back, Jojo makes out like a bandit. If it doesn’t, Uncle Feddy gets handed the paper at $.10 to the value of what he loaned (or the like). But the current, present, existing, busted, speculative holder of said paper? he walks away in fancy duds of whole cloth to continued wealth and prominence.
This is just another way to make zombie security holders whole entirely at public expense. It would look bad for the _Fed_ to buy up all this crap paper at face and take the loss. So we have this three-handed three-card monte to make it look like the Fed is ‘assissting the ”market” restore ”’real prices.”” Is Ben Bernanke simply delusional or the World’s Greatest Sucker?? I don’t _think_ he’s a crook, but this scheme is bizarro world crooked, as well as thug world crooked. Oh by the way: fees for all participants for assisting the country in its time of need, what?
The notions coming out of the Fed leave reality behind in a galaxay far, far away.
Phoney markets. Phoney prices. Phoney agents. Phoney governance. Phoney solutions. Phoney answers.
The only thing real in this cycle of conceit is the steel-shod kick in the arse delivered to the American public when the bill for this non-sense is handed widdershins round the circle to hit us all in the wallet. One reason not to have the ‘Titans of the FIRE Economy’ define the fiber of our country is just that they never met a problem they couldn’t buy their way out of—until now.
1939: Can Do. 2009: Can’t Cope.
My take after reading this article is to short the yen.