I am a bit [read: really] late to the party: I just discovered FRED – the pure economic data in raw form, hosted by the Federal Reserve of St. Louis.  I’m playing around with it right now.  One thing I explored actually is the M1 money stock (M1 = all paper/coin money in circulation (what’s in every one’s wallets & tills) plus money in demand deposits/checking accounts) versus the velocity of money. 

I actually wondered about this at my previous job: the Fed is increasing the supply of money, as seen in the increase in money aggregates.  But the purpose of this quantitative easing is to jump start the velocity of money – to get money exchanged more frequently through different hands (aka: people need not to save it, but to spend it).  These two graphs have confirmed my hunch, that velocity isn’t really moving anywhere.  But what made me curious is what happened in/around 1995?  The same sort of thing happened where the money supply was increased but the velocity didn’t take into effect.

M1 Money Stock

Money Velocity

It also got me wondering is that this is a frequently and widely known tool that the Fed uses to jump start the economy – increasing money aggregates/quantitative easing.  It’s also seen that it doesn’t have much effect on the velocity of money.  So, what can they do to actually increase the velocity of money as intended?  I wonder if it’s how the Fed presents itself when making and enacting these decisions.  Many people dislike the Fed with its ambiguity, perceived lack of hold on the economy, the tools that influence the public regarding the Fed (cough: Ron Paul). 

One thing that Dr. Robert Reich keeps complaining about is the two economies: one booming and the other still suffering.  The booming one, naturally, is the financial markets, investors, CEOs, Wall Streeters, etc.  The still suffering is the folks on Main Street.  It makes me wonder if those on wall street understand what the Fed is doing since the decisions, reactions and thought process is familiar to the folks that have a firm pulse on the market has some effect to its success, while the main street folks are lost in how quantitative easing really helps them.  What is seen for main streeters is the high unemployment rates, the losses in their 401ks, the nose dive of their home’s worth.  How can they even begin to understand the goals of the Federal Reserve when quantitative easing means nothing tangible to them? 

I’m not sure if my thought process or argument is coming across understandable.  I can’t be bothered at the moment, I’m sick.

VoxEU wrote an article regarding elevating the FHLB, refining and adjusting its purpose, and discussed a little bit about its importance.  I am so happy to see it getting some light shed on it.  The FHLB is a silent but powerful support system to our banks.

Mark Thoma, an econ professor of The University of Oregon, picked up on the article.  He had no comment or much knowledge on the FHLB system, which proves the lack of understanding even in the academic, “in-the-loop” circles.

Here was my comment to his post, for education purposes:

I’m happy to see that this article is starting to get around. It had been surprising that there hasn’t been any publicity in regards to the FHLB’s importance to the banking system.

The way that the FHLB is set up is, in the best of terms, “all-encompassing.” In order for a bank to borrow term advances/loans from the FHLB, it has to pledge it’s mortgage portfolio. The amount you can borrow depends on the type of loan (conforming, jumbo, “subprime”, 2nd home, etc) that is pledged, and there are separate haircuts for each.

The FHLB can impose adjustments to haircuts to different loans. During the height of the crisis, this became a concern because the majority of many banks’ wholesale funding is from the FHLB. An increase in haircuts equal a decrease in borrowing capacity. Also, an increase in defaults or slips in status of loans equal decreases in borrowing capacity.

It’s troubling when borrowing is limited further because the FHLB is the cheapest wholesale funding out there compared to brokered deposits, term repo agreements and other wholesale options. Banks can borrow overnight often below the fed funds effective rate, as well as cheap longer term funding up to 20 years. Constricting this sources forces banks to use brokered deposits to fund loans or investments, which is expensive both in terms of rates paid as well as FDIC assessments.

On top of this, the FHLB requires banks to buy stock in order to be a member. How much stock a bank has also limits the amount it can borrow. If banks want to borrow more against the loans you pledged, they will have to buy a % in stock. I know some (maybe all) banks have stopped paying dividends on stock.

The FHLB also issues debt, which is very common for a bank’s investment portfolio to hold, and is viewed the same way as other GSEs.

Essentially, banks are often shareholders, borrowers and lenders to the FHLB. When regional home loan banks have issues, i.e. Seattle or Atlanta, it’s a cause for great concern to the longevity of the banks which are supported by the HLBs.

A little Christmas cheer – I had a lot of fun with this.  I also took some writer’s liberty/creative license in making this work.

On the twelfth day of Christmas,

My true loathed gave to me

Twelve trillion netting,

Eleven more banks a-failing,

“Ten” percent a-seeking,

Nine banks repaying,

Eight-y five % debt ‘n’ digging,

Seven bailouts ‘n’ counting,

Six quarters of recession-in’

Five squawking gov’nors,

Four percent for loans,

Three inflation hawks,

Two strong doves,

And a chairman in the hot seat.

This is not an “I told you so” moment, since it was pretty expected, but needless to say, only last week did I write a post about this:

http://online.wsj.com/article/SB125668489932511683.html?mod=WSJ_hps_LEFTWhatsNews

Yay a new comment! woo!  Here’s what Mike said, in regards to my post about Mr. Volcker:

“What do you say to the crowd who thinks the Fed is responsible for the boom and busts since 1913?

Gold/Silver are sound investments to preserve wealth against inflation. You just have to look at a graph of the dollar vs gold since the Fed started”

There is an inverse correlation between the price of gold/silver and both the dollar and the stock market.  People do tend to dive into gold when there is a scare in the market.  But to correlate that with the Fed is imprecise.  The Fed’s main purpose is to address runs on banks – exactly what it stopped for BofA, Citi, etc.  Granted, many may have not liked the government role in supporting these huge banks, but what would have happened if you got a notice in the mail demanding payment of all your credit card debt? now? at this instant? (some of this is happening to a moderate extent) Or what if you had investments in these banks’ wealth management group, and could not get to them?  How would that affect you?

Pretty badly, I assume.  The Fed provides liquidity to the banking system, as these financial intermediaries need the movement to support small business with loans, and give safe keeping to deposit clients.  There are definite criticisms about some of the Fed’s moves, but it’s doing it’s job.  Everything is subject to human error, mind you.

I’m getting off topic – yes, people buy gold as a safe guard, but as it goes up, it gets too late to pile in, doesn’t it?  It seems unreasonable to want to buy gold now, as the stock market (mind you, not the economy) starts recovering.  There are sectors that are doing well, but this is my point – be smart.  Do research.  If you really care about the growth of your wealth, you wouldn’t follow the crowd.  Yes, it is about appetite for risk, but gold doesn’t have to hold all your investments.

…that the following ad is indeed sneaky?  Care to guess why?

(ad found on nytimes.com this evening, 10/19)

Ally is the result of a brilliant marketing transformation for …get this… GM’s bank – GMAC.  The same one that received $5B in capital injection from TARP, at a cost of a ridiculous 8%.

There’s a reason why “Ally” can offer you a high rate (as written about here) – it needs it.  And 1.7%, it’s cheap compared to the 8%.  So, this “new” bank is able to raise deposits much cheaper than the TARP money it took.  I wonder what its next step is…repay TARP?

Side note – I think we can all agree that the bank’s commercials are hilarious and well-crafted.  Always gets laughs at work.

“Anna Molly” – Incubus.
I need to start doing this again – title posts coincidentally with a good song.

Anyways – a better title would be “When there is smoke, there is fire.”  I should have written about this a while ago: rates.

Who out here in this blogosphere, or anywhere mind you, shop a little for interest rates for your savings/money market/CD accounts (maybe even checking if you dig deep)?  I know you can pretty easily with bankrate.com.  I even knew a [[smart]] guy that would shop for higher rates constantly, and would always find a rate higher than his student loans in order to pay for the interest.  I wonder how he’s doing now…

Anyways, I wanted to write about how published rate offerings for different banks may suggest how they are fairing this tumultuous economy going on here.  Please direct yourself here for a second - it’s HSBC’s published rates, frequently changing.  Scroll down to the various CDs they offer, from 3 month duration up to 2 years.  

Anything pop out at you that’s a bit off?  It seems logical for higher rates for the longer term, as it’s considered more risky the longer you lock in your money in a CD, and the bank should pay for that.  The shorter the term, the more liquid it is, the lower the theoretical risk.  HSBC’s rates pretty much follows that, except for their 2 year term CD at 1.60%.  It’s below the 1 year at 2.00%.

This is a micro banking definition of an inverted yield curve.  A normal yield curve would have interest rates increase as the duration of the CD increases.  This represents the risk for reward theory mentioned a second ago. 

When looking at irregularities like HSBC’s rates, it can give you some insight to how the bank currently managing itself.  Looking at these rates, I would have the initial thought that HSBC doesn’t really need immediate, short term funding (shown with the very low rates for 3 & 4 month CDs), nor do they need much longer term funding (shown with the lower rate in the 2 year term).  Where the bank is willing to pay for money is the intermediate terms that they offer, the 1 year, 13 months and 15 months.  Perhaps they are having some difficulty gauging themselves through that 12 -18 month cycle, or maybe they are quite weak in that ‘bucket’ of time.  Whatever it is, they are willing to pay up for these terms for some reason.

When I’ve rate surfed in the past, I’ve noticed huge differences in immediate short-term (less that 6 months) rates versus long term.  These banks were begging for short term funding, perhaps couldn’t get it anywhere else (might have no one willing to lend to them).  Anomalies, for sure (hey! back to the song of the post!).  But should be taken into consideration while rate shopping for your money.

Why?  Well, if there is a huge discrepancy within their short term versus long term funding (i.e. 2% for 3 month CD versus 1% for 3 year…I wouldn’t think that’d be out there though, at least for the major banks), this screams “we need money! now!”

I want to drive home that if a bank overall is paying significantly higher rates compared to those around them during a time like this, it should be highly questioned.   I’d currently be wary of smaller, community banks doing this.  Their troubles are less publicized, and therefore issues may not be immediately apparent other than published rates to the general public (although you can pull up public FDIC call report filings -10Qs for banks- and dig in yourself if you’re so inclined).   It’s a decent gauge on how a bank is doing – to see what they are willing to pay for.

Granted, this may not apply in a better rate/economic environment.

Dear Timothy Geithner,

It’s tough to say how well you will do as Treasury Secretary for the Obama administration.  Clearly you are qualified.  Yet it’s quite “coincidental” how you misinterpreted your tax obligations (and you even worked for the Treasury, come on…).

But that’s beside the point.

Read this article »

With the amount of economic blogs I follow, I was bound to face a cringing reality that some of my ideas are not all that original after time has passed.

One topic I’ve written a couple of papers on is the topic of one blog I am fond of reading – Econompic Data. He talks about one currency, and the issues it poses on a single monetary policy for multiple countries. In particular: the eurozone.

Back in my time in Prague, I looked at how bond prices converged after the adoption of the euro in 1999. A year or so after, I looked at what issues the Czech Republic would face when adopting the euro (monetary policy being one of them).

There are many requirements to join the EMU to begin with – inflation, FDI, public debt and budget deficit, interest rates, exchange rates, etc. I was more concerned with interest rates, with the government needing to raise more debt, at a higher rate, at a rate not within the bounds of the EMU. As seen in 1999, the spreads between countries’ bond prices widen, not as expected. Meaning one country was seen as riskier than another. Wait, that’s not supposed to happen, right? A euro is a euro is a euro, it shouldn’t matter what country issues it, right? But it does. And it’s evidence that a single monetary policy can not float all boats.

Econompic quotes about 10 year spreads of Belgium over Germany widening, as has the Dutch, Spanish, Italian and French (fyi Germany has traditionally considered the benchmark with it’s former deutschemark being one of the strongest in Europe). Even wider if we go shorter on three month maturities.

This makes me wonder though how all countries are comparing to each other, without Germany, since Germany’s economy is slipping a bit with no effort to lend a helping hand. Actually – maybe that’s what’s going on. German investors are nervous, buying government bonds, buying down the yield as what’s happening in the US. Perhaps that is why many countries’ spreads are widening. Not because European countries have a cheaper bond, but because Germany is currently more expensive to hold. The wider spread in the shorter term is evidence of that. It shows that perhaps maybe right now it’s a bit shaky to invest elsewhere within Germany, but later on it’s considered more of the benchmark.

Am I making sense in this mild stream of conscious?

I totally forgot the original thought I had. Oh well, good enough of an argument for me!

Finally – sorry – the last pillar of the basel II agreement.

The third pillar – it’s pretty simply – it requires banks to be more translucent with their reporting, allowing markets to get a better grasp of what’s going on inside the bank.

Let’s take a step back on the topic – why do I care?  Not just because banking is a rather important topic of conversation lately.  This is an international document that lacks the ability to be enforced.  Different cultures, different government regulations that affect banking more directly rather than an elusive, global document.  It’s worth talking about, getting familiar with, just as international accounting standards are being adapted to global companies. 

But overall – this is pertinent to current times.  I’d like a clearer definition of what a bank considers its assets before I invest.  I’d like to know how Lehman Brothers developed its CDOs and derivative products. Or how banks managed their risks, what they were exposed to, what to expect for risk in the future and how it’s pieced together.  

Smart people can develop complicated financial models to outsmart the market, to dissipate risk and create a win-win situation.  But let’s have regulations that piece together all of these, to understand CDOs and what-if situations of unwinding them.  Of conceiving irresponsible rating agencies inflating MBSs or plain company bonds.  Well, I guess I’m getting a little ahead of myself.

But a clearer presentation to the market of internal activities would allow the possibility of smart people to conceive these possibilities of failing banks, poor loan practices and the overall ripple effect on others.

I don’t think it’s too much to ask for a free market with free information.