Opinion

Felix Salmon

Where will the ECB’s billions go?

By Felix Salmon
December 22, 2011

The market has had a full day now to digest the results of the ECB’s debt auction, and Floyd Norris, for one, is wildly enthusiastic about them. The ECB’s strategy, he writes, “may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process”.

Norris’s bullishness is based on what you might call the Sarkozy trade — the idea that a huge amount of the ECB’s new lending will end up being invested in Eurozone government debt. He calls it “an obvious, virtually risk-free, option” for the banks who borrowed ECB funds:

It would be nice if some of it were lent to the private sector to spur growth and investment. But the logic of putting it in two- or three-year government notes is obvious.

Well, it’s not that obvious. Here’s the math: if you take all the new ECB money which entered the market yesterday and subtract out all the maturing ECB debt which needed to be rolled over, you end up with some €210 billion in new funds — a number which is startlingly close to the €230 billion of European bank debt which is coming due just in the first quarter of 2012.

And for the time being, the ECB is the only entity in the world willing to lend European banks €230 billion. Which means that the prudent course of action, for Europe’s banks, is to use this ECB money to pay down their own debts. Doing so would address a big funding risk, and would also help derisk their balance sheets in the eyes of the world and of Basel.

The big question, then, is how long the ECB is going to be doing this kind of thing. If this operation is a signal to the market that the ECB will be the lender of last resort to European banks for at least the next couple of years, then the banks don’t need to worry so much about their own financing needs and can lock up the funds in two- or three-year government bonds as Norris and Sarkozy anticipate. On the other hand, if this is more like Federal Reserve quantitative easing — something designed to be temporary rather than quasi-permanent — then banks will be looking to help themselves before they help others.

Gavyn Davies, for one, is clear on this point: “we should call a spade a spade,” he writes. “This is quantitative easing on a significant scale.” And he has the chart to prove it:

ftblog199.gif

I suspect that the ECB is not going to be happy seeing this line rise indefinitely. The Federal Reserve’s balance sheet is bloated enough, after two rounds of QE, and it now stands at $2.85 trillion. The ECB is just getting started on this round — the next disbursal of 3-year debt comes in February — and already its balance sheet is well over $3 trillion and rising.

Greg Ip has been talking to the ECB, and has come back from a trip to Europe with a blog post saying that its lending is “eternal and infinite”. Which carries its own risks:

The longer Europe muddles through, the more banks’ demands on the ECB will grow. Even if the ECB can, legally, become the sole source of funding for peripheral euro-zone banks, is that sustainable politically? At some point won’t the leaders realise that lacking all private-sector confidence, their banks can no longer finance a growing economy? At that point, they will conclude the euro is not sustainable and prepare to exit, and the ECB’s limits will have been reached.

So there’s clearly a limit somewhere. If I were running a European bank, I’d fill up on ECB lending now, when it’s plentiful, because you never know for sure when that limit might be reached. That’s what happened yesterday. But I’d definitely think twice before turning around and lending it all back out again to Italy or Spain. Yes, that trade is a profitable one. But the one thing that European banks need more than anything else right now is liquidity. Profits come second.

Comments
26 comments so far | RSS Comments RSS

it’s much worse than QE, Felix, because the European Banks are stepping in the middle and taking all the profit. With QE, the ECB would get the “Carry” – not that it really needs it. Here, the banks get the carry.

What’s hilarious is how angry most Americans are about the Fed’s involvement in our financial system, while what the ECB is doing is many orders of magnitude more egregious in terms of outright bank subsidies.

Norris’ point about how this is exactly what the Central Bank’s role SHOULD be made my eyes bulge – it’s exactly the OPPOSITE of what the Central Bank’s role should be.

Norris correctly concludes in his final paragraph that this won’t really solve anything, though.

Posted by KidDynamite | Report as abusive
 

I saw that movie a few years ago. A big country’s financial system and economy were in chaos, so its central bank started loaning money to banks for virtually free, and the banks loaned all the money back to the government, at much higher rates. The economy never really improved, though, as many people who lost their jobs or saw their income drop never recovered, but the people running the banks saw their income rise dramatically, as the banks they ran started turning huge profits.

Economic activity, whether real activity like investing in new businesses or ventures, or even imaginary activity like just swapping of existing homes, didn’t increase either, so some people started to blame the political leader who came into office just after everything crashed. Lots of other people got angry because a small percentage of the population greatly benefited when the banks had big profits from loaning the government’s money back to the government, with no risk, while they remained unemployed or had lost their life’s savings. The leader’s opposition party was trying to decide who should run against him in the next election, with all of them saying they need to cut taxes and spending, even though that would not cut unemployment.

I didn’t see the end of the movie, though. It started to get monotonous as the opposition party refused to negotiate, saying they either got their way or they would let the country collapse. Occasionally the leader caved in, offering incredible concessions that infuriated his own party, but was still turned down. It was like watching a train wreck in slow motion (like in another movie, The Fugitive), except this wasn’t made up, so I stopped watching. There’s a sequel coming out next year, I’m guessing there will be more train wrecks, and people won’t live happily ever after.

So once again, the Europeans are copying an American movie, a disaster flick, no less.

Posted by KenG_CA | Report as abusive
 

KenG: I don’t think it’s America redux. And I think that’s exactly the problem.

You can make the case that providing huge liquidity injections to the financial sector made sense during in 2008. America was a fundamentally solvent country riddled with insolvent banks. Fix the banks, fix the problem.*

Europe’s issues reflect a deeper structural rift. The insolvency of the financial system is largely a reflection of the insolvency of the periphary governments, and their inability of the governments to engineer an real devaluation large enough to make their economies competitive again.

You can provide European banks all the cash in the world, but it won’t make Greece’s growth dynamics better, or make Italy’s demographics more stable. The best you can hope for is that a mess of banks rush to profit off a quick carry trade, and give you a few more years of breathing room. But as Felix said, that’s contingent on the banks deciding to double-down on periphery debt. Not exactly the call I’d make, if I were running risk management . . .

*In the narrow “The financial system is imploding,egads” sense. Obviously this left the bulk of our real problems unresolved.

Posted by strawman | Report as abusive
 

Good points, strawman.

Europe has an old/aging population, even more so than the US. They also are depending on far greater promised social insurance benefits. We have demographic problems ourselves. They have DEMOGRAPHIC PROBLEMS writ large.

They truly have no way out.

Posted by TFF | Report as abusive
 

The current economic crisis, though it is always stated in terms of money, is the result of actions, taken by millions of people decades ago; and, those actions have largely continued the same since. What am I talking about? The refusal to let nature take it’s natural course, and allow more babies to be born.

With a very low number (about 138) babies born for every 200 adults (overall current average for Europe) this is a sub-replacement level which is leading to a Black Death level of population loss in decades ahead. And, with around 550 million inhabitants, but losing around 2 million of them each year, this current loss (with past losses) is what is making sovereign debt unsustainable.

Here is how the whole thing works—

1 = Nations prosper

2 – Socialism introduced

3 – Socialism grows

4 – People quite having as many children, due in large part to the promise that “somebody else” (i.e., government) will take care of them in their old age made implicitly or explicitly in propaganda put out for and by socialist programs.

5 – Local economy enjoys for a couple of decades or so a ‘childless dividend’. That is, since women are not reproducing themselves, and having only one, and occasionally 2, a few even 3 or so children. And, usually they do this thanks to contraceptives, abortion, and because they want to work and make more money. Many couples do not marry, decreasing the certitude for a mother that the father (or would be father) will hang around and help a mother fund and raise children. Hence, mothers become less likely to have as many children as they might have otherwise.

6 – more debt is often incurred by people due to the “good times” economy

7 – insufficient numbers of babies born before translates into fewer numbers of wage earners and tax payers raised.

8 – due to a declining number of people entering the work force, there are fewer wage earners to buy products

9 – for the same reason, there are fewer taxpayers to fund sovereign socialism programs. Nations must either reduce outgo to retirees, make them work longer and retire later, go into further debt, or any or all of the above.

10 – The burden increases ever on wage earners and tax payers, making it even more difficult and unlikely that they will have more children. In fact, they will then likely have fewer children. And then the problem is greatly increased.

11 – With far fewer babies born a generation ago, and the generation before that, far fewer babies can be born now, since there are far fewer women to bear them than there would have been.

12 – This is all comparable to a farmer who had vast fields and grew much grain. But, gradually, due to the fact that he sold and/or dug into and ate ever greater amounts of his seed crop (the part of his crop that he plants to grow more crop each ‘generation’), doing this year after year, pretty soon, he is not doing much more than just eating his ‘seed crop’, since nothing much is left to plant!

13 – Europe is currently in a ‘too low fertility trap’. That is, the burden on those couples who are in the age of their lives (20 – 40) when most babies are born, in paying taxes, is so high, they continue generation after generation to ‘generate’ fewer children, since the financial and care burden on them to provide for one or two generations above them, and try to ‘bring online’ another generation below them (their own children), they are unable to do this. And society as a whole never gets back up to even ‘exact replacement’ levels, let alone growth levels that would allow business again to expand, an economy to grown, and nations to get to a point where there are enough wage earners and tax payers to pay off their debts!

Posted by diligentdave | Report as abusive
 

Strawman, the situation in Europe may not be the same as it was in the US in 2008, but they are attempting to use the same solution – enriching banks while re-distributing debt. That is going to end badly, not necessarily for their economic and fiscal issues, but for the same reasons it was unpopular here – it’s wildly unfair to provide risk free profits to a small segment of society while making everybody else sacrifice.

As for whether the problem is fixable, I think it is. The EU has to accept they are one big economy, and use deficit spending as a form of a tax on the wealthy, who refuse to pay more in direct taxes. Europe doesn’t have to continue to grow; nations only need growing economies when they have a growing population. They can find a stable operating point for their economy, but it will require that less wealth is extracted and accumulated. If people don’t want to accept higher taxes on those with the means to afford it (and this goes for the U.S.), then the only way to provide the services that people demand is to print money. The cost of that printing is paid by the wealthy. The EU is big enough that it can get away with printing money; every other western economy has similar debt issues. They will have to stop when the developing nations (o.k., China) stop subsidizing all the things they import from them, but at that point, they won’t need to import as much as the currencies will (hopefully) be normalized.

Posted by KenG_CA | Report as abusive
 

The US is in a somewhat similar situation. White people in the US have averaged, though, between 170 – 180 babies born for every 200 adults (about 211 are needed just for exact replacement). But, due to the large number of illegal immigrants, mostly those from Mexico and Central American nations, current fertility rate is just above 200 babies born for every 100 women, since these “illegals” have, on average, more children than whites do.

However, kicking illegal aliens out of the US will cause US fertility rates to start edging ever lower, towards those rates in Europe.

Since it is impossible, in the long run, to grow an economy without also growing a population (sure, Germany has done it, but not everyone can be a net exporter, if every nation, or most every nation, is not having enough babies. And which is becoming ever more the case), then the US’ situation will become ever more tenuous.

China, Hong Kong, Macao, South Korea, Japan, Australia— all of these nations are ‘there’ too. All of them have sub-replacement levels of children being born.

With ever more women in the workforce, fewer stay home long enough to have very many, if any, children. For a generation or so, a generation or so makes more money. But this only lasts for a relatively short period of time.

We have NEVER been faced with a self-induced fertility crisis like this before. This also likely portends war (like we had in WWI & WWII) at some point. Even if people agree mentally with one another on a course of action, legitimize it and condone it in what they think and say, it does not change the laws of nature or of nature’s God. Entire civilizations will be brought ‘back to earth’ just as much as someone walking off a cliff or jumping out of an airplane. And, with the fall as steep as it is, and without any real parachute, the landing is likely to be very hard indeed. (Such landings are rarely survivable for either individuals or civilizations)!

Posted by diligentdave | Report as abusive
 

KenG,

My friend, size does not matter. An imploding population has economic repercussions. And one cannot simply ‘print’ one’s self out of debt, especially if one’s population is shrinking.

Money is merely a measure of human activity. Do not confuse the symbolic representation of that activity with the activity itself. Money cannot change bed pans, or change a baby’s diaper. People have to do that.

One needs money to buy a home, but money itself does not buy, fill, furnish, or use a home. People do.

Posted by diligentdave | Report as abusive
 

diligentdave, money is an artificial creation of man, with an arbitrarily assigned value. As long as people accept whatever value it is assigned, it can and will be used to facilitate the trade of homes, and their furnishing, changing bed pans or diapers, and everything else that people use it for today.

Size does matter when you want to print your own money, otherwise the U.S. wouldn’t be able to get away with printing so much of it. The same is true for the EU, which finds itself in the position of not being able to come up with enough of the artificially created virtual substance – so it needs to artificially create some more of it.

Posted by KenG_CA | Report as abusive
 

@KenG_CA – your first comment perfectly typifies what I was talking about in my comment. the ECB is actually doing what people THINK that the Fed is doing… but the Fed is doing nothing of the sort…

Posted by KidDynamite | Report as abusive
 

KidDynamite, are you saying the Fed hasn’t loaned hundreds of billions to banks? And that banks haven’t loaned hundreds of billions to the government?

Posted by KenG_CA | Report as abusive
 

KenG, but the problem is economic, not just financial, though the financial reflects the economic situation. And yes, in a way, money has an arbitrarily assigned value overall. But what one can get for one set of that ‘arbitrarily assigned value symbol’ versus goods and services, is not necessarily arbitrarily assigned.

The US is big and gets away with it more because of what the US has to offer in goods and services, and not just size of country. Indonesia is a big country, population wise, but could not get away with it, because, relatively speaking, it has much less to offer others in terms of goods and services.

China also gets away with it, and has for decades. But, China is almost as opaque in this area as North Korea is in so many areas.

But the reason that interest rates have risen on sovereign debt in Europe is due to lack of population growth. Not enough babies going back many years, means many fewer wage earners and tax payers now, and in the future. That is the risk! Not enough bodies to pay either the principle nor the interest on debts incurred in the past. And so, spending, including on pensions, payrolls, etc has to be not only brought into line with current income, must be slashed below receipts so debt can and will be paid back.

It is likely that socialism will, sooner or later, have to become a thing of the past. Every nation with an ‘advanced economy’ is in sub-replacment mode fertility wise. And, with insufficient demand for goods and services, and insufficient supply of workers and wage earners to pay for retirees’ benefits, it will all go belly up sooner or later.

First world nations can become 3rd world nations just as quickly as 3rd world nations can become 1st world nations. It IS a 2-way street.

The Robbing Hood approach doesn’t work, either, in the long run. Stealing from the “rich” does not cure the problem. It generally makes things worse in the long run. I would agree that the disparity between rich and poor is ever more unsustainable. But punishing the rich is more likely to lead only to government officials controlling it, which leads to tyranny by government with ever less real wealth produced.

Neither Communism nor Fascism are the answers to solving the problems in Capitalism. There are problems there. But confiscatory taxation also is NOT the answer!

Posted by diligentdave | Report as abusive
 

DD, When I say big, I mean the size of the economy is big, and Indonesia’s economy is not big, compared to the developed world. The US gets away with printing money because so many countries have their reserves in dollars. Britain has a widely distributed pound, which it can print at will, and Japan has the yen, which it also prints when necessary. The EU needs to do the same.

Interest rates have risen in Europe because people are afraid the governments there will default, so it costs more for those governments to borrow. The US can still borrow at a low rate, because the dollar is the reserve currency of the world.

None of this has anything to do with socialism, nor is Europe a collection of socialist states.

That economies must continue to grow even if their population doesn’t is a fallacy. The shrinking percentage of the population that is working does not have to be an issue, as technology has reduced the amount of labor needed to sustain a society. We don’t need everybody to work 40 hour weeks any more, and if the work load was more evenly distributed among the population, we wouldn’t have as much unemployment, and welfare. And if so much of the wealth created by the parts of the economy that are working wasn’t being extracted and hoarded and not being used, there would be more money in circulation.

Posted by KenG_CA | Report as abusive
 

@KenG_CA – I’m saying that it hasn’t happened anything like you picture it your mind, despite it being an oft-repeated mantra of the layman.

I’m not going to give a tutorial in this comment thread, suffice it to say that 1) the Fed doesn’t “lend” to banks on an ongoing basis and 2) there’s a reason the Banks can’t take overnight emergency liquidity and turn around and plow it into 30 year Treasuries – I’m sure you’ll be able to figure that one out on your own.

with the ECB’s 3 year loans, however, that problem goes away. banks CAN do exactly that – borrow from the ECB and put on whatever carry trade they like.

ps, have you read this: http://kiddynamitesworld.com/did-you-hea r-the-one-about-the-29-trillion-dollar-b ailout ?

Posted by KidDynamite | Report as abusive
 

diligentdave, you see the problem quite clearly, but I do believe there are ways out of the dilemma *if* it is understood and addressed in time.

In any given year, the working population produces goods and services that the entire population consumes. This production is redistributed through government transfers and through accumulation/spending of savings. The government can print all the cash it likes — but unless it is used in ways that expands production, we are still left to redistribute the same pool of goods and services that we started with.

Taking a longitudinal look, as individuals we typically “save money” in our youth (i.e. trade current production in exchange for rights to capital goods or future payments), then “spend money” in our retirement (the reverse). At the individual level that works very nicely, but it assumes and depends on the existence of an appropriate counterparty. When accumulating savings, you need to find a counterparty who is interested in spending their savings. When spending your savings, you need to find a counterparty who is willing to forgo current consumption in exchange for accumulated wealth.

The Baby Boomers (1946-1960?) started saving heavily in the 1990s (when the leading edge was in their 40s-50s) and will reach retirement age over the course of the next decade-plus. Over the last twenty years, we’ve seen the effect of a shortage of sellers — the Boomers have piled cash into the investment markets pushing stocks, then real estate, and now bonds to record levels. They are trading rights to the same (more-or-less fixed) future economy, but paying more for it than ever before. As a result, their “investment returns” have been and will continue to be thoroughly mediocre. So much so that many Boomers are happy if their savings only erodes by 1% or 2% annually.

Over the next twenty years, you will see a surplus of “sellers” and a shortage of “buyers”. The Baby Boomers will try to sell their accumulated investments — and there simply won’t be enough people in the next generation, with enough surplus income, to buy them all. That spells “fire sale” prices, and returns that are even poorer than the mediocre returns that Boomers are presently anticipating.

The details of how this plays out depend on whether the government prefers falling asset prices or rising inflation. (I would make a strong argument for the latter — it is far less economically disruptive.) But you can’t squeeze blood from a stone, and it will be tough to redeem the Boomer’s savings from the production of a generation that is smaller.

Solutions:
(1) Increased productivity and the decline of socialism may spur US workers to save a greater percentage of their income (thus providing the Boomers with a counterparty). The subsequent generations actually aren’t THAT much smaller than the Boomer generations, even if the birth rate fell off dramatically. (Or we could see a similar effect with rising socialism, as the government enforces greater transfers.)

(2) International flow of capital, production, and population can somewhat soften the demographic dilemma. This would be an easier solution if Japan, Europe, and China weren’t all even farther along the decline-side than we are.

(3) Frag retirement! Work until you are 72 (which may soon become the norm) and the Boomers will rely less on spending savings.

Posted by TFF | Report as abusive
 

KD, the Fed loaned money to banks outside the overnight program, as reported widely earlier this year (http://www.bloomberg.com/news/2011-08-2 1/wall-street-aristocracy-got-1-2-trilli on-in-fed-s-secret-loans.html for one story).

Interest rates on short term treasuries are low now, but they weren’t in 2009. According to the Congressional Research service, banks were earning from 2 to 3+% by lending to the government in 2009.

The Federal Reserve also says they had an emergency lending program for banks that ended in 2010, which coincidentally coincided with the beginning of a decline in the profits for many banks.

Banks were reporting increased profits, even though they had cut business lending and mortgages, and individuals were paying down credit card debt. Where do you think they were making all that money, the stock market?

I read your post that you linked to, and your point is valid, but the Fed said the emergency lending program peaked at $1.5 trillion. so it wasn’t just the same $100 million loan rolled over every day (and wouldn’t it be great if we could all roll over interest-free loans every night).

And I think you’re being naive if you think banks don’t engage in the risky borrow short term/lend long term behavior. That’s what started the whole mess.

Posted by KenG_CA | Report as abusive
 

KenG_CA – yes – all those programs where the banks were allowed to pledge ABS and other assets fit under the category you describe. They are also all terminated.

the American public thinks that right now banks borrow from the Fed for near zero and buy Treasuries. That is outright false, and it’s the view that I thought you were expressing.

and yes – of course maturity mismatch started the whole mess – and it’s exactly why the banks didn’t take discount window loans from the Fed and plow it into 30 year T-bonds. There is no chance at all that MS borrowed $150B in emergency funds from the Fed and bought long term treasuries.

but the ECB IS enabling banks to do just that (well, not 30 year, but 3 years, at which heft carry trades are possible)! Some people say that the Euro banks will not do this carry trade – we’ll see, I guess.

ps – that $1.5T number was at one (peak) moment in time – it wasn’t a lasting, long term number.

Posted by KidDynamite | Report as abusive
 

KD, I could have been clearer, but I only meant that the Feds poured money into banks to resolve the crisis, and the banks bought government debt with that money, just like what the ECB hopes will happen in Europe.

It’s not surprising that they don’t do much of this any more, for they are almost all reporting lower profits – which implies that a big source of profits in 2009/10 was this non-program.

I know the $1.5T # was the peak, but I used it to show that this wasn’t a case of a giant number just being a loan rolled over and over.

I would think the euro banks have no choice; maybe they’re afraid of their governments defaulting, but if they don’t do this, they will have lots of bad things happen anyway. But I don’t expect banks to behave rationally, I only expect bank execs to do what’s best for themselves personally, and that doesn’t always align with what’s best for the banks.

Posted by KenG_CA | Report as abusive
 

KidDynamite, am afraid KenG_CA thinks that Bloomberg are a model of reporting – which sadly in a way they are these days – as opposed to deliberately misleading and dishonest. He also believes China has this huge pot of money just waiting to be spent whenever they feel like it and his reaction to basic facts is presumably why his parents never told him the bad news about Santa Claus and the Easter Bunny.

Posted by Danny_Black | Report as abusive
 

Danny, the story was in multiple publications, tell me which one you approve of, and I’ll look for it there next time.

So China’s been running massive trade surpluses, but somehow all those dollars have just vanished, huh?

So what basic facts have you presented? your own opinion doesn’t qualify as fact.

Posted by KenG_CA | Report as abusive
 

KenG_CA, except as noted before China IS NOT running a trade surplus anymore and they have a huge debt overhang. I assume you piled into LEH in Sept because they had over 600bn in assets right? They also had alot of dollars in the bank too. Much be rock solid!!

You are absolutely right about those reserves. Huge FX reserves always means the economy is rock solid. It is the reason I piled into the US in 1929 – the US had the largest reserves in the world at the time – France in 1931 – again huge reserves – and Japan in 1988 – again largest FX reserves in the world at the time. After all it is a huge piggy bank just waiting to be spent right?

As for Bloomberg’s reports, as a regular reader here you have had the flaws in their reports regularly pointed out. You have had links posted where the “top-secret” programmes were announced on-line, at the time. By my count at least 4 times. Virtually all financial “reporters” simply cut and paste from each other. Just like me lending you 100GBP overnight for a month is not the same as lending you 3,000GBP for a month, quoting a number of “journalists” that have simply lifted their story from Bloomberg doesn’t mean you have multiple sources.

I will try and make KD’s argument as simple as possible in the vain hope you are not too ideologically biased to understand it.

ECB lends for 3 years. Guaranteed. No worries about some backlash cutting the programe, no worries about change in leadership. That money doesn’t have to be paid back for 3 years. You go out and buy higher yielding debt in the same currency with the same maturity. Ideal carry trade. Even credit risk is low because you can even post some of that debt as collateral for the loan.

FED lends overnight. You buy higher yielding debt maturing in 3 months, tomorrow the FED is shut down by pepper-spray resistant literary criticism assistant professors and you are screwed. For someone who was apparently so awake in the last 3 years, you seemed to have missed the dangers banks run borrowing at the ultra short end and investing it in illiquid longer term, higher yielding debt.

Posted by Danny_Black | Report as abusive
 

Danny, if Lehman could print its own currency that all of its clients would have accepted, they would still be around. Or don’t you think the ability to print your own currency has any value?

I didn’t say the Chinese economy was rock solid because they had a lot of reserves,although maybe that’s how you comprehended what I said. But I don’t think they’re economy is being held up with “artificial stimulants”, as the referenced post claims.

OK, you don’t like Bloomberg, and I know you wouldn’t accept the NY Times, so tell me what source I can quote next time that you will find acceptable?

I get the 3 year ECB deal, but maybe you didn’t read all of my comments. In 2009 and 2010 (not to mention late 2008), the treasury was paying 2-3% on very short term debt, at the same time the Fed was loaning money for free, for longer term periods (that program was discontinued last year). And, as I pointed out to KD, the peak value of all longer-than-overnight debt that the Fed issued under its emergency program was $1.5 trillion. That wasn’t the cumulative value of roll-over loans, but the instantaneous value of outstanding loans that weren’t due the next day.

But at least we agree that SOPA is wrong.

Posted by KenG_CA | Report as abusive
 

“they’re” in the second paragraph should be “their”. Because I know you will point that out.

Posted by KenG_CA | Report as abusive
 

@KD,DB, and KenG

At this year’s norther trust focus confrence their outstanding economist Paul Kaserial said that banks are recapitalizing themselves by borrowing overnight and buying longer dated treasuries and pocketing the spread. He had some real wiz bang charts to back it up.

The fed might be doling out overnight money rather than 3 year money but when they say that the rate will be low for an extended period likely to last through 2013 then that starts to look like a 3 year loan to me. If anything the ECB was more honest and transparent about it.

Posted by y2kurtus | Report as abusive
 

KenG_CA, yeah, we can agree on SOPA and according to what y2kurtus is saying there is a non-trivial probability i was taking nonsense anyway… Merry Xmas.

y2kurtus, sure the point of a carry trade is that you relatively certain – after hedging some risks – that the lower rate you are borrowing at will stay low relative to the rate you are lending at. But again as the crisis showed there is a big difference between being sure, relatively sure and being absolutely certain. With the ECB there is rock solid certainty on that funding.

Also if any banks really are doing that trade in size then I would be short them. Out to 5 years, the spread is pretty tight to be taking that punt.

Posted by Danny_Black | Report as abusive
 

Are we having 3 zero’s too many in the graph?

Posted by jmv2010 | Report as abusive
 

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