Stilltitled

“I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated.”

—Henry Paulson

“This is taking a giant step toward a cure and a giant step toward creating some clarity in the market. This needs to be drafted very carefully. What’s needed is something large and systemic”

—Alan Blinder

Recent Fed & Treasury Programs

Earlier in September, they took over Fannie & Freddie

14 – Sep – 2008 :: Fed & Treasury refuse to bail out Lehman and leave AIG to their own devices.

15 – Sep – 2008 :: Term Auction Facility availability to Investment Banks is continued and widened to accept additional, riskier securities, outside of the initial mandate, including equities and distressed securities.

15 – Sep – 2008 :: Treasury provides $85b to AIG, wipes out 80% of the equity and essentially nationalizes the company. $28b is drawn down by Wednesday, the 17th.

17 – Sep – 2008 :: Treasury expands Fed’s balance sheet by $200b, from their starting point of $800b. Essentially, the Treasury put $200b on deposit with the Fed, which allows the Fed’s balance sheet to support more lending. This is different than “printing money,” which is regarded as a consequence of what happens when Fed lowers rates and increases available credit. Instead, the Fed is re-allocating capital acquired by the Treasury through auctions of government bonds or their deposits. More than half of the $800b on their balance sheet at the start of the crisis had been exchanged for riskier securities through the increasingly generous term auction facilities.

18 – Sep – 2008 :: The Fed agreed to provide $247b in dollars in exchange for Pounds, Euros and Yen from the respective central banks. This satisfies the need for dollars from local commercial banks.

18 – Sep – 2008 :: The Treasury announces their intention to auction $100b of additional government bonds. Given the overwhelming demand for US government securities, these will likely be well received and modestly financed.

18 – Sep – 2008 :: Treasury temporarily guarantees $50b of money market funds from the Exchange Stabilization Fund, following the breaking of the buck at Reserve, BNY Mellon and Putnam. Investors already have pulled a record $89.2 billion from money-market funds 17 – Sep.

19 – Sep – 2008 :: SEC temporarily stops short selling of financial stocks and limits naked shorting

19 – Sep – 2008 :: The Primary Dealer Credit Facility (PDCF) already passed $60b outstaning for the week by Wednesday.

On the table:

• Fed to provide interest to depositors, such as commercial banks. Congress has agreed to do so, but not until 2011. This could cost the Treasury $1.4b over 5 years, but it would encourage commercial banks to increase their deposits at the Fed
• GSEs to increase their purchases of mortgage-backed securities (MBS). “These two enterprises must carry out their mission to support the mortgage market.”

• Treasury to expand the MBS purchase program announced earlier this month, a complement to the efforts of GSEs to facilitate mortgage availability and affordability

“We’re talking hundreds of billions. This needs to be big enough to make a real difference and get to the heart of the problem.”

• —Treasury Secretary Henry Paulson

Absent bold action, matters could well get worse.

“Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions.”

The moral-biological language of financial collapse…infection, decay, tissue.

Back to Rogoff and the Nordic Banking Crisis

Was Glass Steagall to blame? Is that a disingenuous question?

The Federal Reserve, which normally takes the lead in fighting recessions, can’t do much this time because the standard tools of monetary policy have lost their grip. Usually the Fed responds to economic weakness by buying up Treasury bills, in order to drive interest rates down. But the interest rate on Treasuries is already zero, for all practical purposes; what more can the Fed do?

—Krugman

All things connected with emerging markets will become toxic waste. The emerging-market liquidity squeeze will intensify ferociously and, much to the shock of most commentators, recessions will unfold in the emerging-market universe.

Amid recent chaos, few realize that the next phase of de-leveraging has only just started. A key pump for global markets and emerging economies — global foreign-exchange reserve growth — is only now beginning to reverse. All things emerging-market related will crumble as the great unwind moves into a new phase.

—Albert Edwards, global strategist at Societe Generale SA in London.

BNY Institutional Cash Reserves, a $22 billion fund, fell to $0.991 a share on Sept. 16.

“[We have] isolated the Lehman assets in the fund into a separate structure,” Ivan Royle, a spokesman for BNY Mellon.

An anonymously reported projection from the state budget office shows Wall Street’s meltdown could cost New York up to 40,000 private sector jobs and $3 billion in tax revenues over the next two years, two state officials said today.

• State Budget: $120 billion, including federal funds
• Jobs: New York has about 7.25 million private-sector jobs
  • 6,500 jobs lost in July
  • Employment has already declined in five of the first seven months of the year
• Wall Street generates 20% of the states revenue
  • According to an analysis by the FT, in late August, the financial services had already shed more than 30,000 jobs over the past ten months
  • According to State Division of Budget spokesman, Jeffrey Gordon, more than 27,000 employees have already lost or are at risk of losing their jobs as a result of closure or lay-offs.

—NYSUN

“This has been the worst financial crisis since the Great Depression. There is no question about it. But at the same time we have the policy mechanisms in place fighting it, which is something we didn’t have during the Great Depression.”

—Mark Gertler, a New York University economist who has worked with Ben Bernanke