The debt guarantees, loans, preferred stock buys, and commercial paper purchases are really adding up. Get your mind around the enormity of what's happening in banking as a result of the financial crisis.
Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
That's a staggering number. What I want to know: Can the Fed inflate the money supply far enough to turn the price deflation into an inflation?
You hear a lot about the US Treasury's TARP program. But the Federal Reseve has lent more than 3 times the amount of money the US Treasury has provided.
Wall Street analysts, congressional overseers and the media have parsed every detail of the Treasury Department's financial rescue program -- $250 billion and counting.
Largely outside public view, however, the Federal Reserve is lending far more than that amount -- $893 billion, roughly the equivalent of the annual economic output of Mexico -- to help a wide range of institutions weather the economic storm.
As of last week, the Fed's loans included $507 billion to banks, $50 billion to investment firms, $70 billion for money market mutual funds, and $266 billion to companies that use a form of short-term debt called commercial paper. It is considering a new program that would make billions more available to prop up consumer lending: auto loans, credit cards and the like.
The changes away from previous trends at the macroeconomic level are breathtaking. The mortgage-backed securities (MBS) market has collapsed. Any mortgage lending can only be done by financial institutions that have enough money on deposit to fund new mortgage loans.
But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.
It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.
Housing prices were inflated and need to fall further until ratios of housing prices to incomes and other housing price indicators fall closer toward historical trend lines. The collapse of the MBS market helps to drive that needed correction.
In the face of a rapidly contracting economy and falling prices the new Presidential Administration is looking to do a big spend to prop up the economy.
Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years.
So far all the efforts to put Humpty Dumpty back together again are not working. Goldman Sachs expects the economy to start contracting at a 5% annual rate.
Last week, Goldman Sachs said it expects the economy to shrink even faster by the end of the year, at a 5 percent annualized rate. Meanwhile, the Dow Jones industrial average dropped 5.3 percent for the week; and the nation's largest bank, Citigroup, sought government assistance to avoid collapse.
Obama's economic stimulus probably isn't going to help. He'd do more good if he cut taxes in half and then the Fed bought up all the T-bills needed to finance the tax cut.
|Share |||By Randall Parker at 2008 November 24 09:41 PM Economics Credit|