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Luis Palau
Loo-king Gooooood ………
Well, Federal Reserve Board Chairman Ben Bernanke stepped up to the plate this morning around 8AM and essentially opened the “discount window” at the Federal Reserve Board. This may be a stroke of genius and Bernanke may prove to be one of Bush’s (43) most important legacies. This really caught everyone by surprise. Not so much because he acted, but that he acted in this way. Everyone was looking for (probably more like hoping for) a reduction in the target rate for the “overnight” loans banks take from each other, but “managed” by the Federal Reserve Board in targeting rates by effecting money supply. However, this is a subtler but maybe more genius solution for the moment. He moved it only ½ point, which still keeps it ½ point above the Federal Funds (overnight rate), but two things are important to consider. He still has another ½ point in his pocket or two ¼ moves and he essentially has made this tool available for a more stable infusion of capital into the skittish markets while it sorts itself out.
Previously the Discount Window was for overnight loans, but he has opened it up to 30 day loans with the possibility of additional time. This window is primarily for depositary instructions (banks, savings & loans) and on the surface may not seem to be in line to help the likes of Countrywide Mortgage, but with the Federal Reserve Board’s approval virtually anyone can borrow there and will accept practically any collateral versus what they will accept in “open market operations.” Banks are hesitant to use the Discount Window because it draws attention to them, but this action sort of legitimizes such approaches.
Wall Street seems to be liking this maneuver and at 9:00 AM before the stock market open the arithmetic mix of the Dow Jones Future Market and the Dow Jones “Fair Value” point to a market “opening” comfortably north of 200-250 points. This will be an interesting day for those that like to follow the stock market and Federal Reserve and this is on the heels of yesterdays bizarre trading. I haven’t yet received any comments about my post HERE on the record stock market of 14,000 on July 22nd with the anticipated “see, what do you know, the market is risky” comments, but I am looking forward to them. Such comments would be doomed to fall in the same trap the Democratic Leadership has waded into every time the market has been down this past 15 years. If you have lost money in your 401-K’s this month, hang in there. It may take a few more months to work its way out, but the long-term bias will remain up.
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9 Responses to “Loo-king Gooooood ………”
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more than happy to enter this thread.
the reason i did not respond to the earlier one was i wanted to wait to see if anyone would take your bait for discussion. this one however is more appealing than a psychological indicator thread.
i say this because i dont think “uncle ben” should use rates to bailout businesses when the free market can and should decide. those lenders and borrowers in serious trouble now had no qualms when they were making money hand over fist and living above their means resp.. now that the tide is reversed, they want to be helped out of the quagmire they got themselves into over their own greed and extravagant living. this will come at the taxpayers expense wont it?
i dont like it when bureaucrats bailout the greedy. still, the money has to come from somewhere and if i am mistaking how the system works, then i withdraw the high criticism of uncle ben.
as far as people with the 401-k’s, i think investment horizon of when you tap the money is critical in how the portfolio is allocated. true, the long-term holder will benefit exceptionally for this high volitility decades later. however, those who cant afford to be high risk with their allocation i am sure have moved mostly into fixed income or less risky investments and did not loose as much.
i would be somewhat perturbed if this current administration would take credit for the hugh gains from march 03-present and then try to take credit for the volitility that leads to the downside aswell. seems like they want people to accept the tax cut as beneficial to pulling us forward (which it did), but they also want to take credit for the down as a buying opportunity. is this my twisted conception, or is it the parasox of what economists call the “moral hazard”?
Matt……I think Ben is showing proportionality with this move. He didn’t change the Open Market Rate (at least yet) and has shown some restraint in the way he is handling the Discount Window. I’m not prepared to criticize it and I think, like he must have as well, that maybe the alternative would be too punitive. I don’t know if you follow Cramer on MSNBC but he was looking for a crash starting today or Monday approaching the magnitude of Black Friday in 1987. He recanted this morning before the open based on this action of Bernanke. These are tumultous times and it will take some time for the Credit markets to level out, but I think everyone is encouraged because they see Bernanke as fully engaged here, something you never can be sure of with the Fed………steve
i understand you response and i am probably mixing sociology with economics. that being said, i do think that those involved with the whole subprime, mortgage and homebuilding sectors are the equivalent of the bernie ebbers and ken lay’s of the business world. those three sectors have messed over people on both sides of the equation. their personal greed and inability to manage risk is of collosal proportions. i think it will be a matter of time before the lawsuits come and the feds step in like they did with worldcom and enron.
as far as cramer goes, i do believe he is quite talented, knowledgeable and well connection in world markets. i also believe that he is a blowhard and loves hearing his own voice. if you chart his recommendations and proclitivty for snap judgements, i think you will find he does the investor more harm than good. his latest youtube rant might have been on the money, but his behavior exaggerated his own importance in it.
but, back to the greed part, can you help me to sort out how the latest fed infusion of money is not a bailout of the rich and greedy at the expense of taxpayers and our future growth? i agree that a healthy and robust economy is great for the people to keep and maintain jobs, but i cant see how it is great for the people when the ones who are responsible for the mess dont have to pony-up for their consequences. if we believe in free market capitalism, shouldn’t the sword cut both ways? i dont think that a potential incarciration is necessary, but they have really messed up bigtime. for them to ask the government to bail them out to me is tremendous greed and the message it sends to the common citizen is that the rich will get rich and when they screwup, the taxpayers will pickup the bill without consequences.
Matt………You asked:
“can you help me to sort out how the latest fed infusion of money is not a bailout of the rich and greedy at the expense of taxpayers and our future growth?”
Let me say for those that aren’t aware of what is happening that this is not a “bailout” of the stock market. This is all directed at the Credit Markets. I am sure the Fed would hope that whatever action they take and whenever they take it that it wouldn’t impact the stock market. They would tell you and correctly so that this is not what they are about. Having said that I would like to start your answer by saying that I don’t see this as a bailout of the “rich” with taxpayer’s money at all. Understand this is a liquidity move not a bail out.
I look at a bail out as more of the type of remedy we had a number of years ago during the S&L crisis. This is were the US Treasury had to come to the aid of the FSLIC and FDIC which were not adequately funded for the crisis at that time.
In this case the Federal Reserve is making available direct loans (as opposed to open market operations) to mostly depositary institutions that provide excess of 100% collateral with a minimum of AAA Commercial Paper. Normal Discount Window operations are for “overnight” loans and these have been extended to 30 days with possibility for extension if the intuition applies for that, but it is still essentially short-term loans with adequate collateral (100%+) at an interest rate higher than the banks charge each other. The Fed will actually make a profit on this. This will increase the money supply for a period that will soothe markets and allow for orderly restructuring.
I am sure you will hear about some institutions collapsing, that is a given, but this is an effort to protect the financial (not stock) markets of the country at what I don’t accept as being described a “bail out.” Hope this helps clarify my viewpoint here…
I don’t know if you recall the saga of the Financial Corporation of America collapse. This was the countries largest Savings & Loan out of California that even though they were not a “bank” but a S&L, they would have been ranked as the 10th largest bank in the country at that time if they had been so chartered. It was run by (in your words and correctly so) the greedy Charlie Knapp. I worked as a VP for that company for a period of time in their FCA Asset Management division. I caught the scent of the odor of their impending restatement of earnings and collapse about a month in advance of the fact. When I was in California at one of their seminars I argued profusely with the “spinners” as to the true nature of one of their arcane accounting practices called “debt defeasment.” (I won’t go into that here) But, they weren’t too happy with me at that time, but I left within 30 days anyway (at my choice). Nobody came out clean, including myself when I tanked a deep six figure loss on their equities.
In the end this company “collapsed” (as others did at the time) but the “bail out” if you will was for the depositors. This cost the U.S. Tax Payer money and a lot of it industry wide.
I am fully in agreement with you about Cramer, but he is fun (though tiring) to watch sometimes …..steve
was the financial corp. of america tied to ivan boesky and michael miliken? i think these two characters are up there with the bonnie and clyde’s, ken lay’s and bernie ebbers. i find it astounding that boesky and miliken went to jail as multimillionaires. does anyone know if they are out of jail and still insanely wealthy? i was telling my wife that it is unfortunate that our society does not treat white collar and blue collar criminals the same. i think that white collar criminals can reintegrate into society without the badge of dishonor that blue collar criminals do. do you think that the white collar crime is significantly more devastating to the health of our country than blue collar?
oh, and the explanation helps. the media outlets use so much jargon and “marketese” that it makes me appreciate people who can explain complex current affairs wihtout being accused of beign a sesquipedalian. sorry readers, couldn’t resist.
Matt………I don’t believe that Boesky nor Milken were related to FCA activities at all. Charlie Knapp, the Chairman of FCA, is a name that was certainly commensurate with their notoriety at that time. I wrote him because I was a major investor with the idea of seeing if he would allow me to open an Ohio office for him. He wrote back and said they were already doing that but offered me to talk to them about coming on as a VP, which we did and I accepted.
Don’t know much about Boesky, but Michael Milken is a good buddy of Ted Turner (who feels Milken got a bum wrap) and he was released after about 5 years and was banned from the “financial markets” as terms of his release, but he was still apparently active on the side lines because Turner spiffed him a $50,000,000 bonus for some assistance related to the sale of CNN to Time Warner. I am sure he is eating well, though I understand he had treatment for Prostrate Cancer. His net worth is north of 2 Billion Dollars but he is very philanthropic.
White Collar Blue Collar, it is all crime I guess, but I would prefer my children were not victims of the what you call the ”blue collar” variety, if by that you mean violence. I would not be opposed to punishing violent criminals and pedophiles worse than we do the white collar variety, but on average I would be for increasing the penalties for both varieties over what society seems to have the stomach for.
Sesquipedalian…………I had to look that up.
…….steve
It will be interesting to look back on this in 10-15 years and see what the real affect is.
bd……that will be an ideal retrospective…..steve
I am not sure how much of a genius Ben is when a couple weeks ago Cramer blew his top yelling at Ben and calling him an academic for not opening up the window sooner. Watch this, it is very interesting and I’d be interested in your take on it.
http://www.youtube.com/watch?v=rOVXh4xM-Ww
Patrick, thanks for stoping by. I saw that video last week. I also saw Cramer this morning prior to the market open and he was saying that Bernanke litterally saved the market with his action and today or Monday was the exact perfect time for this action. He expected a market crash starting Friday (today) or Monday on the scale of 1987 (black friday) but felt that today’s action was the remedy. I’m away right now but will be visiting your site tomorrow to check it out….
P.S. After I posted this response to you comment I came across this article:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6vM.YOJHOVA
at Bloomberg. It is titled “Cramer Takes Credit for Fed Rate Cut; Then He Doesn’t” I thought I would include this to add a little more of the Cramer humor to the discussion……..steve
Just so that I understand… formal acknowledgement that our economy is in bad shape correct?
Encouraging the banks to borrow directly from the fed… for mortgage lending at least… nice.
Serving notice that the fed is prepared to act indeed.
But definitely look for Ben Bern to stay at the table (which I assume you also think will be the case by his keeping a half a point in his pocket)… The economy continues to weaken & the housing market continues to shrink. Scratch that, lets hope not right!
Interesting comments Matt.
& I don’t care for Cramer at all. Huge headache to say the very least…
M2…. Incorrect..this is not a formal or informal acknowledgement that the economy is doing badly. This (unstable financial markets due to mortgage, lending and housing excesses) could however have a negative spill over effect on the economy no question. To call it evidence of a bad economy would be the equivalent to saying that high gas prices are evidence of a bad economy or high taxes are evidence of a bad economy. Either could be the cause and lead to a bad economy but neither would be evidence or an indicator of a struggling economy.
To follow one of these examples a step further, this action by the Fed is sort of like the U.S. Government opening the “strategic pertroleum reserve” in order to increase supply to stablize energy markets when prices are high and erratic and supply continuity is in question.
More to what I think your point is, this is not a reflection on the economic policy of the Administration, actually this action of the Fed is indicative of the things that the government (not necessarily executive branch) can and sometimes must do to keep the markets and economy stable.
“But definitely look for Ben Bern to stay at the table (which I assume you also think will be the case by his keeping a half a point in his pocket)…” I’d agree with you here for the time being. This is not an insignificant point even if he keeps the points in his pocket. There also could be and probably will by 9/18 some adjustment (downward) in the Federal Funds target rate. I think the markets are extremely relieved to know that he is engaged and watching. This will have a strong impact maybe equivalent to the action itself….
Interesting perspective of Cramer, my wife makes me surf right over him. She says watching him makes her heart race and gives a major headache. ………steve
thanks for the heads up Steve..time will tell!
Hi Angel………yep, just hold your breath for a while longer……….steve
do you think that what could be going on is a proper correction of 10%, and the market makers and institutions are using any data and news as an excuse to let volitility make them short term money?
i think it is relevant that the extended bull run we have had since march 17 2003 is quite long in the tooth. a good correction to rebalance the excess and re-evaluate risk is necessary.
my wife and your wife think alot alike. mine goes as far to say that cramer’s antics stress her out. she does not like talking heads that enjoy the sound of their own voice. i bet that men, more so than women are pro-cramer. the shenanigans he pulls is quite sophmoric and appeals to most post-adolescent men who like fantasy football and playing the arm-chair quarterback with stocks. like i told a colleague, “paper trades and tips dont count when real money is on the line”
Matt……….Very possibly so in that the intraday low on the down move was very close to 10%. Market prognosticators have been saying that we need a 10% correction before the market can form a base to ultimately move higher from. Otherwise you are left with “irrational exuberance.”
…….steve
i read another perspective on the whole fed cut from a market maker from nasdaq. he beleives that the whole timing is suspicious. he thinks that the financials s&p 500 sector had such heavy activity on thursday because of insider activity that the fed’s move forced a short covering period on friday morining. further, since it was a quad-witching day on the friday, it was exacerbated and made things appear crazy. do you think this is a conspiracy that could be rooted in half-truths?
if this bloomberg correspondent is partially correct, how could the sec ever investigate such large activity? i ask this because the whole numbers game seems cloaked in mystery because markets go up, then down, then level, then volitile at the drop of any news.
personally, i am not convinced that it is healthy that our economy is so heavily influenced by consumer spending. people living outside their means in the least will cause psychological nightmares, let alone our future being dependent on someone else’s buying decision. make any sense, or is this all hot air?
Matt……..I heard the equivalent report at about 6AM this morning on CNBC. Gee, I don’t know. I think the Fed need to loosen as a general matter anyway and maybe they could have softened this current blow if they had acted much sooner, but I am sure their viewpoint is “maybe so, but it would have been an action with higher risk.” Of course that concern has been dwarfed by the actual market of late.
I would add that a healthy economy must be influenced by consumer activity and probably primarily so, otherwise it is more of a mirage, but I agree that excessive spending and debt build carries it own set of problems and risks to the individuals and the economy as a whole……….steve