James Grant on the Fed's hike

Simple, clear, easy to understand, and hugely important. Watch:

http://video.cnbc.com/gallery/?video=3000466793

The ECB thing

The inquiry:

This is what I've gotten so far... let me know if this makes sense. 

The gist is that the central banks of the world, implored no doubt by the ECB, intend to create programs to allow banks cheaper access to short term USD funding.  The ECB already does this but will now extend the duration of their loans.  One of the concerns the ECB is juggling has been the pending liquidity crunch in Eurobanks holding a ton of bad Sov. paper.  These banks haven't been able to access repo funding markets at rates that weren't damaging their already fragile capital levels (leverage was so 2007... right?... right?... oh...) so the central banks of the developed world have essentially colluded to provide funding at rates and durations at which the free capital markets would not provide.  I am not clear on the time frames here...

WWB response:

The ECB does not have enough liquidity or capital to replace the US$ liquidity lost by the euro banks… that to include the Euro and US repo markets; the ECD markets; the ECP markets; and the USCP markets (probably not available for euro banks now I suspect (hit CP GO for a look) or if it is it won’t be next week). One questions whether the ECB + Germany + France + Othereuro + [limited?] US support is adequate.

So, the US Treasury, Fed and few remaining semi- solvent euro sovereigns are probably funding for now the Euro Central Bank via some non-visible means like private gold loans or swap lines of various types or other undisclosed transactions, this a bridge to the unstated & unknown Uber plan… a mega GLOBAL TARP, a liquidity facility underwritten by undercapitalized sovereigns to prop up the Euro banks with no capital and a boatload of bad sovereign debt.   

The reason you can’t conceive of how it works or makes sense is that it doesn’t. It cannot work unless Germany, France and all the others including the US all play for size (recall the word “overwhelming” by Timmy G, you know the fellow who said there was "no risk" of a downgrade for the US?). You are thinking, "no way US taxpayers would support committing of huge amounts of scarce US (read that taxpayer) capital to such a venture!"

Consider that Timmy G, Fed, and Treasury are not concerned with that quaint notion. It is likely we're already in for size, such and duration to be expanded and defined later. Since it's election time, and Congressional inactivity is always a good thing, how about a Congressional hearing? A little transparency on swap or currency line usage or risk limits? 

Back to the ECB thing. This is the final rounds of injecting CTBPApynm (Capital To Be Pissed Away, perferably yours, not mine) before the euro thing likely grinds to a halt. 

They may have bought some time … a few weeks, possibly days, or months (who knows since there is no disclosure of the means, magnitude, or duration of the temporary support)… to raise capital for the banks which, if successful, will also be CTBPA. 

So,

1. inject temporary capital
2. threaten negotiate with Euroland
3. hope you can get out
4. discover you can’t
5. repeat 

Repeat, that is, until the a) viable sovereigns (France & Germany & some US) go all-in or b) until you hear “BLAMMO” which will be the sound of serial Euro bank failures working their way up the collateral base, which will be insufficient. In the latter case, the losses will be realized by commercial entities and specific sovereigns to the fullest extent possible. Those sovereigns will then default or restructure because they’re broke and also have no access.  In the former case, the standards of living will decrease by a significant multiple of the unrealized losses. Think of that as a reverse, large scale negative Keynesian multiplier less further large scale costs for friction, agency, and corruption.

Update on Saturday, October 1, 2011 at 05:48AM by hb

The WSJ explains the ESFS. What is the sound of one hand clapping? Of one flipper flopping?