AuthorTopic: Da Fed: Central Banking According to RE  (Read 21190 times)

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Re: Da Fed: Central Banking According to RE
« Reply #165 on: September 15, 2018, 11:20:55 AM »
I was wandering around the daily goldbug rants, and (lo and behold) I found someone else who agrees with my thesis. Pretty good analysis, imho.

It's a "buy" @ $700/oz.

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Re: Da Fed: Central Banking According to RE
« Reply #166 on: September 15, 2018, 11:59:00 AM »
It certainly is, but I'd  be willing to buy the first bounce off a bottom resembling the Oct. 2008 move. It might be $800, or even $900.
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🏦 What Made The Financial Crisis Go From Bad to Disaster
« Reply #167 on: September 16, 2018, 02:00:54 AM »
https://www.forbes.com/sites/hershshefrin/2018/09/15/what-made-the-financial-crisis-go-from-bad-to-disaster/#7347baa516c3

16,167 viewsSep 15, 2018, 02:30pm
What Made The Financial Crisis Go From Bad to Disaster
Hersh Shefrin

I write about how psychology impacts financial and economic behavior


Even before Lehman Brothers failed ten years ago this weekend, the financial crisis was bad. But it was the failure of Lehman Brothers that tipped a bad situation into an absolute disaster, and brought the global financial system to the brink of collapse.

The Lehman Brothers corporate sign in polished metal is seen displayed in the window of an auction house in London, Friday, Sept. 24, 2010.  (AP Photo/Kirsty Wigglesworth)

Lehman Brothers did not have to fail, and the decision to allow it to fail was psychologically driven. For some years, I have thought it likely that this was the case, having written about it in my book Behavioral Risk Management, and having taught the lesson to my risk management students at NYU.

Now a new book by Laurence Ball, titled The Fed and Lehman Brothers, documents the factors that drove the decision to allow Lehman to fail. The book offers a compelling counterpoint to the official explanation for why  Lehman Brothers was allowed to fail.

The official explanation is that because the value of Lehman’s collateral and net worth was so low, the U.S. government lacked the legal authority to save the firm. This view has been strenuously argued by the principal decision makers who chose not to rescue the firm, former Treasury secretary Hank Paulson, former Fed chair Ben Bernanke, and former head of the Federal Reserve Bank of New York Timothy Geithner.

Hank Paulson, chairman and founder of the Paulson Institute and former U.S. Treasury secretary, second right, speaks while Ben S. Bernanke, former chairman of the U.S. Federal Reserve, left, and Tim Geithner, former U.S. Treasury secretary, second left, listen during a Brookings Institution discussion in Washington, D.C., U.S., on Wednesday, Sept. 12, 2018. The event is part of an initiative to document how and why the U.S. government's responses to the financial crisis of 2007-2009 were designed the way they were. Photographer: Zach Gibson/Bloomberg
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My view is that individual psychological issues impacting Paulson, and group psychology issues impacting the dynamics that characterized the communication among the three principals, were the true drivers of the decision. In my book Behavioral Risk Management, I discuss Paulson’s fear that a decision to rescue Lehman, following the decision to rescue Bear Stearns some months earlier, would result in him being remembered as “Mr. Bailout,” thereby leaving his conservative legacy in tatters.

In his book, Laurence Ball describes the communication dynamics among Paulson, Bernanke, and Geithner. Although the authority to save Lehman belonged to the Fed, not the Department of the Treasury, by sheer force of personality, Paulson persuaded Bernanke and Geithner that the default position should be to let Lehman fail. This strikes me as a classic case of groupthink, where members of a group are reluctant to challenge the position put forward by a strong leader.

The psychological issues around saving Lehman, both the event itself, and the subsequent spin, are incredibly interesting. Availability bias, which is a psychological bias about the overweighing of information that is easily recalled, can be very strong. Paulson, Bernanke, and Geithner have worked very hard at delivering the message that Lehman Brothers could not have been legally rescued. Paulson complains that despite their efforts, they still are not believed. If he is correct, then their collective effort to exploit availability bias has failed. Still, until the publication of Ball’s book, there was very little written in the press about what truly drove the decision to let Lehman fail.

I argue that serious discussions about the financial crisis need to take place against the backdrop of Hyman Minsky’s ideas about financial instability. The Mr. Bailout issue did not cause the financial crisis. Rather, it was all the issues that Minsky stressed, such as excessive debt, imprudent shadow banking activities, Ponzi finance, asset pricing bubbles, and weak regulation. The Mr. Bailout issue only served to make a bad situation that much worse.

It is natural to ask what lessons all of this has for where we are today. In my view, answering that question sensibly requires that we start with the issues Minsky emphasized.

The Federal Reserve Bank of New York provides much important data and perspective about debt levels in the U.S. Earlier this year, the bank’s President and Chief Executive Officer William Dudley, told us that in the aggregate, American households are much better prepared to withstand a systemic shock than they were ten years ago.

At the same time, Dudley offered some caveats, specifically mentioning student loan debt. In this regard, the bank’s website provides some sobering statistics. Between 2006 and 2016, student indebtedness grew by 170 percent. Moreover, the default rate on this debt has grown substantially. Consider students who left college in the years 2010 and 2011. Among this group, 28 percent have defaulted on their student loans within five years. The corresponding default rate was 19 percent for those who left school in the years 2005 and 2006.

Looking abroad, there are many causes for concern. Turkey, Italy, and China spring easily to mind. In respect to China, our current trade war with them is inducing them to respond by reversing their policies for making their economy more stable. China's former Central Bank governor Zhou Xiaochuan resigned last October. He has been warning that China risks facing a Minsky Moment, by which  he means falling asset prices, capital flight, and a financial crisis that the Chinese government would be unable to prevent.

China is the second largest economy in the world. A Chinese financial crisis will set chain reactions in motion, so that their financial crisis would become our financial crisis.

Then who knows what the next Mr. Bailout event will be that would take a bad situation and make it much worse.

I have been a behavioral economist for over 40 years, lucky to be studying how psychology impacts the way the financial world works. Currently serving as the Mario L. Belotti Professor of Finance at Santa Clara University, I earned my Bachelor of Science Degree from the Univ... MORE

Hersh Shefrin, Professor of Behavioral Finance, Santa Clara University and author of Beyond Greed & Fear, Behavioral Corporate Finance, and Behavioral Risk Management
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💸 What Can Cause the Next Mortgage Crisis in the US?
« Reply #168 on: September 17, 2018, 01:48:55 AM »
https://wolfstreet.com/2018/09/16/what-can-cause-the-next-mortgage-crisis-in-the-us/

What Can Cause the Next Mortgage Crisis in the US?
by Wolf Richter • Sep 16, 2018 • 54 Comments   
The soothingly low mortgage delinquency rate is a deceptive indicator: the New York Fed weighs in.

Mortgage delinquencies at all commercial banks in the US inched down to 3.14% in the second quarter, the lowest since Q2 2007, according to the Federal Reserve. But after those soothingly low delinquency rates in 2007, something happened. By Q3 2008, the delinquency rate hit 5.2%, and in Q4 2009, it went over 10%, and stayed in the double-digits until Q1 2013. This was the mortgage crisis. And we’re a million miles away from it, thank God. Or are we?

This chart compares home prices in the US (green, left scale) to delinquency rates (red, right scale). Delinquency rates started surging after home prices started falling. The inflection point is marked by the vertical purple line, labeled “it starts”:


Home prices began falling in 2006. By 2008, some homeowners were seriously “underwater” – they owed more on their house than the house was worth. When they ran into financial trouble because they were in over their heads, or because one of the breadwinners in the household lost their jobs, or because they’d lied on their mortgage application and never had enough income to begin with, or because they were investors who couldn’t make the math work out anymore, or whatever, they were stuck.
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In a rising housing market, they would just sell the home and pay off the mortgage. But they couldn’t sell their home because it was worth less than the mortgage, and default was the only option.

The chart above shows the relationship between home prices and delinquencies. In a rising housing market, delinquencies will always be low but are not an indicator of future default risks. But home prices are an indicator of default risk.

“Borrowers’ ability to withstand economic shocks depends importantly on housing equity,” the New York Fed explained in its new Economic Policy Review. “This dynamic played a key role in the 2007-09 recession, when surging mortgage debt followed by falling home prices put many homeowners ‘underwater’ on their mortgages.”

When home equity turns “negative,” that’s when serious trouble begins. The New York Fed:

    Over the first half of the 2000s, U.S. household debt, particularly mortgage debt, rose rapidly along with house prices, leaving consumers very vulnerable to house price declines. Indeed, as house prices fell nationwide from 2007 to 2010 and unemployment rates soared, mortgage defaults and foreclosures skyrocketed because many households were “underwater”…

But the national averages don’t do a good job. About a third of homeowners own their homes free and clear, and there is no risk associated with them. Another third of homeowners owe relatively small amounts or very manageable amounts on their homes, after years of having made payments without cash-out refinancing. And they’re not a risk factor either. They can always sell their home and pay off their mortgage, even if home prices drop 40%.

The risk lies at the remaining third of the homeowners, the most vulnerable, the most leveraged, those that bought recently at the highest prices, those that refinanced to cash out their home equity….

Then there’s the issue of home prices dropping a lot more in some regions – and this is averaged out in the national statistics. The New York Fed (emphasis added):

    At a more disaggregated level, the time series of our leverage metrics clearly reflect the dramatic regional home price dynamics that others have observed, with the widest swings in prices found in the “sand states”: Arizona, California, Florida, and Nevada. Studying these states illustrates one of the key lessons from our analysis: Looking at measures of leverage based on contemporaneous housing values will often lead one to misestimate the vulnerability of a housing market to shocks.

    Homeowners in the sand states were much less levered in 2005 than those in other regions, yet as home prices reverted to their mean, the leverage of these homeowners rapidly increased and extremely high mortgage defaults followed.

The paper warns: “Most importantly, higher leverage, and in particular a household being underwater on its mortgage(s), is a strong predictor of mortgage default and foreclosure.”

In fact, according to research cited by the paper, negative equity is a “necessary condition” for mortgage default:

    Negative-equity loans represent a pool of default risks: If the borrowers are hit with liquidity shocks resulting from, say, a lost job, then default may be the only viable option. Positive-equity borrowers faced with liquidity shocks, on the other hand, are generally able to sell the property and avoid default.

Thus, “household leverage” blowing out is not a function of the mortgage, which doesn’t change much, but a function of the home price, which can decline sharply. This increases household leverage due to market forces, without even any input from the household. It happens on a case-by-case basis, and the national averages fail to predict this condition.

Even if they don’t default, households that have become overleveraged due to declining home prices impact the broader economy, the New York Fed points out:

    They may cut back consumption in response to a negative shock, in part because they lack “debt capacity” that could help them smooth consumption.
    They’re often unable to refinance to take advantage of lower mortgage rates.
    They may reduce spending on property maintenance or investments.
    The may not be able to move when opportunities arise for them elsewhere.
    High leverage in conjunction with down-payment requirements further reduces transaction volume and prices, “thereby generating self-reinforcing dynamics.”

And the differences, as real estate in general, are local, according to the report: “In cities where more homeowners are highly leveraged, house prices are more sensitive to shocks (such as city-specific income shocks).”

It all boils down to this: There can be no mortgage crisis unless home prices decline enough in some markets. And given how inflated home prices are in many markets, and that mortgage rates are now climbing, any reversion toward the mean of home prices in those markets would cause the delinquency rate to do a beautiful “déjà-vu all over again,” so to speak. That low national delinquency rate these days, often touted as a sign of low risk in the housing market, has zero meaning as an indicator of risk for the most vulnerable households when the prices of their homes begin to drop.
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💰Who Bought the $1.47 Trillion of New US National Debt over the Past 12 Months?
« Reply #169 on: September 19, 2018, 02:31:04 AM »
https://wolfstreet.com/2018/09/18/who-bought-1-47-trillion-of-new-us-national-debt-past-12-months/

Who Bought the $1.47 Trillion of New US National Debt over the Past 12 Months?
by Wolf Richter • Sep 18, 2018 • 9 Comments   
China, Japan, other foreign investors, the Fed, US government funds? Nope.


Foreign private-sector investors and “foreign official” investors – central banks, governments, etc. – whittled down their holdings of US Treasury Securities by $21 billion at the end of  July, compared to a year ago, to $6.25 trillion, according to the Treasury Department’s TIC data released Tuesday afternoon.

Over the same period, the US gross national debt – fueled by a stupendous spending binge and big-fat tax cuts – soared, despite a booming economy, by a brain-wilting $1.468 trillion, in just 12 months.

So, with foreigners having shed $21 billion over the 12-month period, who bought this $1.468 trillion in new US Treasury debt?
Here’s who didn’t buy:

China’s holdings of marketable Treasury securities have remained roughly stable despite the arm-wresting match over trade, with its holdings at the end of July, at $1.17 trillion, up $4.7 billion from a year earlier.

Japan’s holdings fell by $78 billion year-over-year to $1.035 trillion, continuing the trend since the peak at the end of 2014 ($1.24 trillion):

Russia, always a smallish holder of Treasuries compared to China and Japan, has liquidated 90% of its holdings, bringing them from $153 billion in May 2013 to just $14.9 billion in July:


China and Japan have long played an outsized role as creditor to the US government. But their importance has been declining for years due to the growing pile of the US debt, and the simultaneous decline of their holdings. This caused their combined holdings (green line) to drop from nearly 13% of total US government debt at the end of 2015 to 10.4% in July, with Japan’s holdings (blue line) accounting for 4.9%, and China’s (red line) for 5.5%:


The Runners-up

Of the 12 largest holders of US Treasuries, after China and Japan, seven are tax havens for foreign corporate and/or individual entities (bold). The value in parenthesis denotes the holdings in July 2017:

    Ireland: $300 billion ($312 billion)
    Brazil: $300 billion ($271 billion)
    UK (“City of London”): $271 billion ($230 billion)
    Switzerland: $233 billion ($244 billion)
    Luxembourg: $222 billion ($213 billion)
    Cayman Islands: $196 billion ($240 billion)
    Hong Kong: $194 billion ($197 billion)
    Saudi Arabia: $167 billion ($142 billion)
    Taiwan: $164 billion ($184 billion)
    Belgium: $155 billion ($99 billion)
    India: $143 billion ($136 billion)
    Singapore: $128 billion ($112 billion)

The Americans are the only ones left.

By the end of July, the US gross national debt had reached $21.31 trillion, up $1.47 trillion from July last year – as I said above, a truly brain-wilting increase for a booming economy. Here’s who bought or shed this paper over those 12 months:

    Foreign official and private-sector holders shed $21 billion, reducing their stake to $6.23 trillion, or to 29.2% of the total US national debt.
    The US government (pension funds, Social Security, etc.) shed $44 billion, reducing “debt held internally” to $5.70 trillion, or to 26.7% of the total.
    The Federal Reserve shed $128 billion through the end of July as part of its QE Unwind, reducing its pile to $2.337 trillion by the end of July, or to 11.0% of total US national debt.
    So if everyone shed, who bought? American institutional and individual investors, directly and indirectly, through bond funds, corporate or state pension funds, and other ways, owned $7.05 trillion, or 33.1% of the total US debt at the end of July, having added $1.66 trillion to their holdings over those 12 months!

And here’s how that rapidly growing elephantine US debt is now divvied up:


American private-sector investors are buying with a new-found passion. Yields have risen quite a bit, though they remain below the rate of inflation for everything up to three-year maturities: The one-month yield closed today at 2.05%, the one-year yield at 2.58%, the two-year yield at 2.81%, and the 10-year yield squiggled over the 3% line again, to close at 3.05%.

The fact that the 10-year yield is still so low, compared with short-term yields, shows that there is huge demand for long-term maturities. If there were less demand, the yield would have to rise to lure new investors into buying (prices fall when yields rise). And anytime the yield rises just a little bit on the 10-year, these new buyers emerge in force and that demand pushes the price up and pushes the yield back down. And this demand for US Treasuries is not coming from foreign entities, the Fed, or US government funds, but from American investors.

And investors are buying anything to get higher yields. Today’s megadeal, the ninth-largest ever, is one of the riskiest, and reminiscent of the deals in 2006 and 2007. And they’re still blowing off the Fed. Read… Just How Wildly Exuberant is the Junk-Credit Market? 
 
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🏦 Danske Bank CEO quits in a $234 billion money laundering scandal
« Reply #170 on: September 19, 2018, 03:44:22 AM »
Is there anyone in the Bankstering Biz that DOESN'T launder money? ???  :icon_scratch:

RE

Danske Bank CEO quits in a $234 billion money laundering scandal

    Danske Bank Borgen resigns over possible money laundering
    Danske says 200 bln euros flowed through Estonian branch
    Vast majority of flows were suspicious
    Bank failed to heed warnings from regulators, whistleblower

Published 3 Hours Ago Updated 1 Hour Ago Reuters
      
   
Ole Jensen | Corbis | Getty Images

Danske Bank's chief executive Thomas Borgen quit on Wednesday in a money laundering scandal which involved 200 billion euros ($234 billion) flowing through its Estonian branch between 2007 and 2015, most of which was suspicious.

"It is clear that Danske Bank has failed to live up to its responsibility in the case of possible money laundering in Estonia. I deeply regret this," Borgen said in a statement which detailed failings in compliance, communication and controls.

Regulators and the financial community will scrutinise the Danske Bank report, which follows calls by Brussels for a new European Union watchdog to crack down on financial crime after a series of scandals involving anti-money laundering controls.

Dutch bank ING this month admitted criminals had been able to launder money through its accounts and agreed to pay 775 million euros ($900 million) to settle the case.

A third of Danske Bank's stock market value has been wiped out in the last six months, mainly driven by concerns over a possible inquiry by U.S. authorities and the penalties this could entail.

Danske Bank said its investigation into the affair concluded that Borgen, Chairman Ole Andersen and the board of directors "did not breach their legal obligations towards Danske Bank."

While Danske said it was not able to provide an accurate estimate of the suspicious transactions through its Estonian branch, it said the non-resident portfolio included customers from Russia, Azerbeijan, Ukraine and other ex-Soviet states.

The report found that Danske Bank failed to take proper action in 2007 when it was criticised by the Estonian regulator and received information from its Danish counterpart that pointed to "criminal activity in its pure form, including money laundering" estimated at "billions of roubles monthly".

And when a whistleblower raised problems at the Estonian branch in early 2014 the allegations were not properly investigated and were not shared with the board, Danske said.

While it took measures to get its Estonian business under control in 2014, these were insufficient, the report said.

Danske Bank also said it had decided not to migrate its Baltic banking activities onto its IT platform, because it would be too expensive. Accordingly, the Estonian branch did not employ Danske's anti-money laundering procedures.

U.S. authorities earlier this year accused Latvia's ABLV of covering up money laundering and the bank was promptly denied U.S. dollar funding, leading to its collapse.

While Danske does not have a banking licence in the United States, banning U.S. correspondent banks from dealing with it would amount to shutting it out of the global financial network.

The bank, whose shares fell as much as 5 percent following the release of the report, also lowered its expectations for annual net profit to 16-17 billion Danish crowns, from a previous range of 18-20 billion.
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