This link is to a post on the Calculated Risk blog with a pretty well-known chart from Credit Suisse that shows monthly mortgage rate resets: http://calculatedrisk.blogspot.com/2...set-chart.html

With subprime resets looking very high throughout 2008, I agree that the foreclosure peak probably will not come until next winter around Q1 or Q2 2009, and I don't think the government's subprime rescue plan will be of much help.

Just for the sake of discussion, do you think there is anything that can be done to forestall a significant drop in consumption?

That mortgage chart is very unnerving. The future according to that is very grim. But conversely, I really don't think consumer spending will deter that much to affect the economy as the mortgage issues will. I think we're too spoiled to do without the nice stuff and eventhough people will lose their homes, they'll rent or shack up with someone, but will still spend on non-necessary items. If they had learned proper money management to begin with, they wouldn't be in the mess they're in now, and I don't think losing their home will smarten them up. (or the banks).

The stop-out rate under TAF is likely to be higher than the FFR. Under the prior Discount Window policy the discount rate was lower than the FFR.

Please see our 'Collateral FAQs' at http://www.frbdiscountwindow.org/cfaq.cfm for additional information, or click here.

Please contact us at FRBDiscountWindow@chi.frb.org if you have questions.

Based on the collateral it accepts, TAF is already overly indulgent.

I'm fairly sure that the Fed expanded the accepted range of collateral for borrowing at the discount window, no? If my memory serves me correctly, they announced that they would accept most types of ABCP as collateral at 85 percent of face value. Or am I confusing this with something else?

Yes a surprising variety of debt instruments, marked-to-market & not market-to-market. But I can't feel sorry for anyone that played the game.

A healthy economy has downward price flexibility.

We will have more crisis and given that no one learns from their mistakes, there're likely to be worse.

I posted the web site with the collateral requirement details.

In this week, Watch What the FED Watches special report, we argued that the world's central banks have their credibility at risk if they fail to fight the current liquidity crisis.

This Monday, the U.S. Federal Reserve auctioned an unprecedented $20 billion through its Term Auction Facility on the latest attempt to help the U.S. credit markets to emerge from the crisis in the subprime sector. However, despite the repeated efforts by the world’s most important central banks to inject liquidity in the global financial system, short term interbank lending rates remain well above government bond yields of similar maturity.

In sum, despite the recent easing on financial conditions, the outlook on the credit market remains bearish and we think the Federal Reserve will cut interest rates by 25 bps when the FOMC holds its next meeting in January 30, 2008.

93 out of 7238 commercial banks participated (# not including non-bank, GSEs, etc.)

Disproportionate splits between repo lending (largest market via FED WIRE -- lacked necessary collateral?) , Eurodollar borrowings (CHIPS & FED WIRE – exceeds FF market size -- rates too high), direct borrowings with bank funding desks (thru correspondents or retail-oriented banks –- visibility/security?), & concentrated brokered (match-making) anonymously arranged.

Brokered loans are settled upon lender’s acceptance of the identity of the counterparty/borrower. Transaction is finalized when the lender instructs it’s district’s Reserve Bank to debit its reserve account and credit the reserve account of the borrowing institutions all recorded via the FED WIRE.

In brokered FFs market trading, a net-lenders’ risk exposure is normally limited by using established credit lines & spreading out the rates & amounts of available loan-funds and diversifying their counter parties.

TAF auction rate @ 4.65% [$20b] = price discovery. Reflects cost of funds at year-end where the demand for loan funds is at its peak. Fed is tight?

Discount rate @ 4.75% largely symbolic

FFR @ 4.25% for credit worthy borrowers

ECB @ 4.21% [$502 b] 390 banks at bids from 4% to 4.5%

USD-LIBOR rate @ 4.25% (1 month Euro dropped .50% after auction) part of sub-market for FFs, reflects TED spread?

Interest and exchange rate - gains are often more lucrative than investment in goods and services manufacturing.. The USD-LIBOR interbank market is an un-collateralized international banking market

TED credit risk spread (interest rate differential between t-bill rate vs. Libor rate) or proxy for international money market liquidity

93 commercial banks exchanged $20b in collateral for 28 day loans (until after year-end) with the Term Auction Facility (the Federal Reserve). These depository institutions were probably forced out (didn't qualify for the lower FFs interest rate, & elected not to borrow at the higher discount window cost, & didn’t have other sources of fundings, & were unable to arbitrage). Unless these were major banks (hold a substantial percentage of all earning assets), and or their individual borrowings dis-proportionately large, this seems like a manageable number.

The FF market is where un-collateralized (unsecured) interbank loans (excess reserves) are lent (debit to reserve account) & borrowed (credit reserve account at its district's Reserve Bank) for short durations/maturities. When the transaction matures the funds are returned (principal + the interest earned).

I agree, this does sound manageable, but I also think we need to see if these kind of funding needs still exist once we get into the New Year. Until then, I'd be hesitant to downplay the dour status of the financial markets.

It may seem controversial, or you may be just confused, but the 2/27/07 market crash was Bernanke's fault. The Chinese stock market fall did not trigger other countries financial markets to fall.

Bernanke is smart, unlike some of his colleagues, e.g., Arthur Burns, William Miller, Paul Volcker, Milton Friedman, & Alan Greenspan. He recognizes his error last year and he is actually overcorrecting. Bill Gross of PIMCO is wrong. We haven't entered a recession & we are not going to experience stagflation for any extended period of time. All is well as can be expected after the Greenspan "put"?

Bill, that's called disintermediation. The unwinding of the credit bubble (or disintermediation), will be followed by collapsing production in the private sector. And the way disintermediation is counteracted is by getting the commercial banks out of the savings business.

Disintermediation for the commercial banks can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the "trading desk" to prevent bank credit contraction as a consequence of its depositors withdrawals.

[% change 1 year ago]

All Banks - Commercial Bank Credit = 10.5%
Total Loans & Investments all Commercial Banks = 11%
Total Investments all Commercial Banks = 11%
US Government Securities at all Commercial Banks = (-8)%
Other Securities at all Commercial Banks = + 35%

Bank Credit increased by a factor of 2.7x from 04/01/89 to 11/01/07. The monetary significance of such a vast growth in bank credit derives from the fact that commercial banks create new money (initially demand deposits) on a dollar-to-dollar basis when they make loans to, or buy securities from, the nonbank public. Since commercial banks create new money (demand deposits) why didn’t demand deposits increase by over 764b rather than 15b in this period? The answer: largely because of the massive diversion of approximately 202b of demand deposits into time deposits (less the expansion in bank net worth & the sale to the public of various types of non net-worth securities). Demand deposits were also reduced by an expansion of 547b in the nonblank public’s holding of currency.

The point is the DIDMCA of March 31st 1980 allowed the (thrifts) S&Ls, MSBs, & CUs the option to classify any or all of their deposits as checking accounts. This resulted in legalizing the universal use of drafts to transfer the ownership of share and savings accounts. Therein lies the problem. In the process of converting these institutions into commercial banks there was an unquantifiable diversion of newly created money (demand deposits) into time/savings deposits at what were formerly financial intermediaries. This is the reason why the supply of money became unknown & unknowable. The growth rates in the supply of new money and credit were obscured by both the diversion of money into savings/time deposits and as to whether bank liabilities originated from the outside of these new depository institutions (an increase in the supply of loan-funds) or from within these banks (an increase in newly created money). And this is the underlying reason why Greenspan was oblivious to the origins/signs of inflation which were ultimately responsible for the housing catastrophe. I.e., monetary policy seemed to reflect a total myopia concerning these developments.

During this period newly created demand deposits were diverted into time deposits; not because they were saved, but because of the structural changes in the banking sytem that made most of these time deposits a type of auxiliary money. It should be remembered that there is a one-to-one relationship between time & demand deposits. An increase in time deposits depletes demand deposits by the same amount, either directly or via the currency route, and vice versa.

These unique, and inflation-causing changes in monetary policy and the structure of the banking system were the consequence of an almost universal misconception of the economics of time deposit banking, and the basic differences between commercial banks and the financial intermediaries.

This massive diversion of demand deposits into time deposits was wholeheartedly supported by the bankers, sanctioned by the monetary authorities, and "sanctified" by the Keynesian theories held by virtually all economicsts. Keynes' General Theory of Employment, Interest and Money (1936) was their bible. On page 81 of Macmillian's 1949 edition, Keynes informs us that it is and "optical illusion" to suppose "...that a depositor & his bank can somehow contrive betwen them to perform an operation by which savings can disappear into th banking sytem so that they are lost to investment...".

The Fed ignored transactions velocity (it's no longer published), and based its open market policy on the spurious assumption that the proper volume of money could be achieved through the manipulation of the federal funds rate. Not only did this Fed policy result in the pumping of an excessive volume of legal reserves into the banking system, but also the base for monetary expansion was further enlarged by extensive reductions in the assets eligible for reserve requirements (through an unprecedented increase in the money multiplier).

Time deposits standing alone are not inflationary. In fact, they are the equivalent of demand deposits with a transactions velocity of zero. But they are inflationary when they become in effect interest-bearing demand deposits. Neither the bankers nor the Fed seemed to realize the economics of making time deposits so liquid that they were, for all practical purposes, a net addition to the effective money supply (auxiliary money).

The inflationary impact of these monetary flows is not revealed by either the producer or consumer price indexes. They relect, in only a marginal amount, the inflation that has taken place in real estate. Soaring real estate prices have been "validated" by these enormous flows, and have provided most of the inflation premium which has propelled this asset bubble. Rampant speculation and a deluge of irresponsible borrowing and lending have, as a consequence, characterized the industry.

Thus far, the Fed has been able to maintain the liquidity credibility of the banks and thrifts. How long can this necessary degree of confidence be maintained? There is no answer but the crucial test is yet to come.

The Fed cannot dig us out of this hole, although the Federal Reserve Banks could buy up the entire federal debt since Fed credit creation is no longer constrained by gold or gold certificate reserve requiements or reserve ratios. The Fed could, but it dare not. Even if the reserve ratios (minimum ratios of legal reserves to bank deposits) were raised to 100%, the debt would be monetized to the extent to which the Federal Reserve Banks increased their holds of governments. That is to say, the public's holdings of money increases pari passu with the expansion of Reserve Bank credit. Furthermore, by raising reserve ratios to 100%, the commercial banks would become financial intermediaries no longer able to create money, serving only as conduits between savers and borrowers.

Hello everyone,

I noticed this forum few weeks ago and I think it's really quality, so I decided to join you.

Two weeks ago you discussed about Federal Funds Implied Probability – FFIP function on Bloomberg and I would like to know if you are familiar with any similar function for other central bank target rates? And are there futures on BOE, ECB, BOJ, SNB, RBA target rates?

Thank you for your answers

Thanks for joining us in discussion Audit, we love having new members!

As far as I know, there is no Bloomberg function like FFIP for other central banks, though it would be extremely useful. However, your post reminded me that we haven't uploaded an image of FFIP in a while, so here it is. FFF are pricing in a 68% chance of a 25bp cut in January, and as these probabilities wane, we see the Dow climb (and vice-versa). It'll be interesting to see the market's reaction to this morning's Durable Goods data at 8:30 EST. They're expected to rebound quite a bit and may (misleadingly) offset some of the dour sentiment regarding holiday sales.

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There are indeed functions for other major interest rates, but there are unfortunately no real equivalents to Fed Funds Futures for other major central banks. This would normally not be a major issue, but overall interbank lending duress has made market yields significantly less useful in gauging market expectations for future BoE, BoJ, RBA etc etc rate moves. In other words, current interbank lending rates--those typically used to price in interest rate probabilities--currently contain a significant credit default risk premium. The clear distortion makes it difficult to gauge true market expectations for major central bank actions.

Thanks very much for your interest and question.

Well, it seems as though the Dow fell significantly and took Fed Funds Futures with it. Markets seemed spooked by the flare-up in global geopolitical tensions following former the former Pakistani PM's assassination, and disappointing Durable Goods/Initial Jobless certainly didn't help matters.

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