Venturing further into the deep end of the finance pool here -- and I sure hope somebody who actually knows how to swim will show up soon -- Naked Capitalism presents an interesting thesis from James Bianco of Arbor Research:
His note illustrates a point made by FT Alphaville a couple of weeks ago that we have harped on since, namely, that central banks' efforts to provide liquidity to the money markets are not simply ineffective, but in fact counterproductive.
Bianco has put together a tidy and cogent analysis. He was looking for further insight and comment, so I hope readers with some perspective will speak up in comments.
From James Bianco (boldface his [yellow, mine--lambert]):
The Fed’s massive and numerous liquidity facilities are making things worse. The problem is more than banks unwilling to lend to each other, they are also unwilling to borrow from each other. Banks can get all the funding they need (and then some) from their central bank so they do not need to seek a loan from another bank. I believe it has gotten so bad that they don’t even bother to make a decent market for inter-bank loans anymore. No reason to, they don’t need them anymore as central banks have replaced them. ...
[From the tabulated LIBOR data], notice the huge spreads from bank to bank... They suggest this is not a real market anymore. Real markets do not have this wide a variation. If it was a real market, these banks would have rates all similar to each other... Prior to August 2007, it was unusual if the variation between the highest and lowest reporting bank was more than 1 or 2 basis points. Now it is regularly above 100 bps. As we like to say, a number so big no one understands it ...
Too much central bank liquidity has destroyed the inter-bank lending market. This would be an “inside baseball” issue for the banking system except LIBOR is the benchmark for the “real economy” to get a loan. LIBOR is written into contracts and we have no good substitute. If LIBOR is screwed up, then the real economy pays because it needs Libor to get a loan.
This also means the market’s new favorite idea of having G7 countries guarantee all inter-bank loans will do nothing. If enacted, banks would still be missing an incentive to use the inter-bank loan market because they can get all the funding (loans) they need from their neighborhood central bank and at a much lower rate.
Heh. LIBOR's broken because we nationalized the inter-bank loan market, and the real economy is paying the price? Sweet!
NOTE For the importance of LIBOR, see here.
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on the new change in focus now--
White House Overhauling Rescue Plan ---
http://www.nytimes.com/2008/10/12/busine... --
"...The new approach, which would have the government inject capital directly into the nation’s banks, is one that administration officials had publicly opposed until just a few days ago.
Administration officials said they still planned to buy up assets, largely through a series of “reverse auctions” in which financial companies would compete to sell their securities to the government.
... “Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure,” Mr. Paulson told the Senate Banking Committee on Sept. 23. “This is about success.”
... he carefully noted that the government would only acquire nonvoting shares in companies. ..."