Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.
Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.
The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all want it; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending from the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.
This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.
On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia’s central bank last month and then tripled it to $30 billion.
“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than” the Fed’s rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It’s a step in the right direction and prevents things from getting worse.”
Worse than what; these actions reveal a previously unthinkable level of desperation.
Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).
Ordinarily, an increase in the money supply of this magnitude would be highly inflationary. However, the magic of the multiplier effect doesn’t happen until the money is lent out. So far, there’s little evidence that this has happened. Banks continue to hoard cash to cover anticipated losses and writedowns. Take a look at the Baltic Dry Index, which is a proxy for international shipping and manufacturing. Its recent cliff dive is partially due to shippers’ inability to get banks to accept letters of credit from other banks. Individuals have stopped out-of-control consumption. Take a look at this month’s Consumer Confidence Index. It’s at 38, the lowest level on record.
Try as the Fed might, deflationary forces remain stronger than the inflationary kind.
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