In the yet another grossly unreported story with worldwide implication and reverberation - the NY Sun reveals what's really behind the current cash crisis.
David Allen sent it and weighed in, "James Grant makes his living off interest rates he does not believe anyone should have the power to set them....."
IMAO, we never should have abandoned the Gold standard and I am thrilled big brains are talking and writing about it. It's all too late but even so, you cant correct something if you cant diagnose and identufy what initially went wrong.
Walter Bagehot Was Wrong James Grant NY Sun
In the United States this election year, the galloping socialization of the mortgage market proceeds with hardly a peep of discussion, let alone protest. Thus, mortgage originations by the government-sponsored enterprises reached 81% of overall originations in the fourth quarter of 2007, up from 37% in the second quarter of 2006. In the first quarter of this year, Fannie copped a 50% share of originations, double its take in calendar 2006. But in comparison to the biggest GSE, Fannie and Freddie might as well be standing still.
In Boston, before a Mortgage Bankers Association audience on May 6, the chairman of the Federal Housing Finance Board, Ronald Rosenfeld, noted that the Federal Home Loan Banks, which his agency supervises, are closing in on $1 trillion in outstanding loans, or "advances" ($925 billion currently are outstanding, up by $300 billion since last June). "The FHLBs," Reuters reported of Mr. Rosenfeld's remarks, "are facing increased risk due to the concentration of loans to big financial institutions that recently 'decided to become very involved in the FHLB system,' Mr. Rosenfeld said. Those banks include Countrywide, Washington Mutual Inc. and Wells Fargo & Co., he said. The top borrowers of the FHLB system account for 37% of all advances, he said. 'That's an astonishing number, and an astonishing amount of concentration,' he said.
"The FHLBs can continue to provide money for their commercial bank members as long as demand persists in the market for agency debt." Foreign central banks can't seem to get their fill. In the 12 months through March, according to a recent Home Loan Bank slide show, central banks took down 40% of the system's debt issuance. Russia's central bank has shown a particularly hearty appetite for the GSEs' emissions: 21% of Russian monetary reserves are parked in the obligations of Fannie, Freddie, and the Home Loan Banks, according to a May 19 Bloomberg report.
Taking an evolutionary view of present-day monetary disturbances, we see a kind of grand comeuppance. Embracing Bagehot and rejecting Hankey, central bankers have pushed aside the classical doctrines of liquidity. In the way that financial ideas seem always to be carried to an extreme, they have pushed too hard. Under their noses, the global credit apparatus froze up, and now it falls to them to thaw it out. A measure of the difficulty of that work is the huge volume of lending that the Bank of England and the ECB, especially, have chosen to undertake; over the past 12 months, the balance sheets of the ECB and the Bank of England have grown by 21% and 19.4%, respectively. (In comparison, the Fed is a model of restraint.)
In his critique of the Bagehot doctrine, Hankey understandably failed to foresee how the financial engineers of the future would respond to the opportunities presented to them by ambulance-chasing central banks of the 21st century. According to the Financial Times, investment bankers the world over are bundling up mortgages to deposit in the special liquidity facilities created by the ECB and the Bank of England. "The Bank of England," the paper reported on May 16, "recently created a facility for UK banks to access funding for mortgages and the Financial Times has learnt that almost £90 billion ($175 billion) worth of bonds are being created to be placed there — almost twice the £50 billion initially expected when the scheme was launched only three weeks ago. ...
"Investment bankers who work in securitization," the FT went on, "say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover."
We believe that more analysts ought to be concerned about the risk that these monetary exertions will result in a new cycle of currency debasement. For ourselves, we expect it. A brilliant man was Walter Bagehot, but Hankey had the foresight.
Please read it all and get educated.
COUNT THOSE SQUARE FEET IN GOLD Amity Shlaes, NY SUN
American leaders tell themselves that citizens aren't interested in the nuances of the dollar's value. The yuan exchange rate? That is something Treasury Secretary PaulsonAnnapolis, Md. deals with at summits like the one this week with China's Vice Premier, Wang Qishan, at The inflation rate? Federal Reserve Chairman Bernanke grapples with it. The rest just live with the results.
The politicians deceive themselves. Each American brain is constantly updating and editing its own personal dollar index. Americans also try out their theories about their greenbacks in all fields, including mundane thickets of contract law cases.
Just such a case involving a 400,000-square-foot building in Cleveland is now being decided in the U.S. Court of Appeals for the Sixth Circuit. The case illuminates the American government mischief with the dollar over the past century so well that it might even be worthy of the attention of Mr. Wang.
This story begins more than nine decades ago, when Americans were sanguine about the prospects for their country's growth. But they were also concerned about two sources of dollar anxiety.
