[kankin]

WASHINGTON (AP) — The Federal Reserve says it will begin purchasing up to $500 billion in mortgage-backed securities early next month in an effort to bolster the U.S. housing market.

hey just another 500 billion, no problem.

When does inflation hit?

[Heineken]

I read (in a Kitco article) that there is something like $500 TRILLION in funny money out there. So printing off another $0.5 T won't save us.

[Cloud9]

It's kind of like going out and buying new furniture and a new car just before you file bankruptcy. Party on dudes!

[bratticus]

They appear to be buying stuff with T-bills. How long does that take to turn into cash and therefore hyperinflation?

[smallpoxgirl]

They appear to be buying stuff with T-bills. How long does that take to turn into cash and therefore hyperinflation?

T-Bills don't turn directly into cash. What they do is suction money out of the corporate and municipal bond markets. So Paulson's friends get billions and no one else can sell bonds. They're very much robbing Peter to pay Paul here. Peter didn't make a big enough campaign contribution.

Bernake has talked about trying to start buying up those T-Bills to try and push some of that money back into the bond markets. If that starts happening, then that's inflationary.

[bratticus]

They appear to be buying stuff with T-bills. How long does that take to turn into cash and therefore hyperinflation?

T-Bills don't turn directly into cash. What they do is suction money out of the corporate and municipal bond markets.

Ahh...

Muni Sales Dry Up as States Face $42 Billion Deficit

By Jeremy R. Cooke and Michael McDonald

Dec. 31 (Bloomberg) -- The worst year for municipal bond investors since 1999 may further reduce demand for tax-exempt debt just as state governments face the biggest budget deficits in at least a quarter-century.

State and local borrowers sold $385 billion of long-term bonds through yesterday, down 9 percent from 2007, according to data compiled by Thomson Reuters. Next year, sales will drop more than 6 percent to about $364 billion, the least since 2004, based on an average of estimates from London-based Barclays Plc, Merrill Lynch & Co. and Loop Capital Markets LLC.

The combination of the worst financial crisis since World War II and the collapse of the $330 billion auction-rate debt market will leave 41 states and the District of Columbia with shortfalls just as financing sources diminish. Merrill Lynch’s Municipal Master Index, which tracks 14,000 bonds, fell 4.6 percent this year, the first decline since a 6.34 percent drop in 1999. The biggest underwriters are merging or leaving the business.

“It’s been an absolutely horrible year,” said Robert MacIntosh, a money manager at Eaton Vance Management in Boston, who oversees $17 billion in tax-exempt bonds. He said he’s never seen such turmoil in the $2.67 trillion municipal debt market during more than 25 years in the business.

... snip ...

[pogoliamo]

I read (in a Kitco article) that there is something like $500 TRILLION in funny money out there. So printing off another $0.5 T won't save us.

No need to have a dollar printed out for every dollar in derivatives in existance. So the logic you apply doesn't hold water.

Regardless of the amount of derivatives outstanding what needs to be printed will be printed and we will all be "saved" very soon.

[smallpoxgirl]

Yeah. The numbers really don't reflect the level of risk, particularly with credit default swaps. For one thing, unlike equities, most derivatives are counter-party agreements, so they're a zero sum game. If a company goes bankrupt, it's stockholders and bond holders just plain lose money. That money is gone. *poof*. A credit default swap on the same company though, doesn't result in disappearing money. When the CDS gets activated, party A has to pay money to party B. The money doesn't go away. It just changes hands.

[Quinny]

Not that different to a company going bust, if suppliers overcharged they have benefited, wages too high workers benefited, prices to low customers benefited.

But in this casino -

Does anyone have a clue who the winners and losers are?

And what the margins/imbalance were?

[DaleFromCalgary]

Remember when everyone was making a fuss about the Iraq war costing $500 billion? Now it's just pocket change.

[ReverseEngineer]

Yeah. The numbers really don't reflect the level of risk, particularly with credit default swaps. For one thing, unlike equities, most derivatives are counter-party agreements, so they're a zero sum game. If a company goes bankrupt, it's stockholders and bond holders just plain lose money. That money is gone. *poof*. A credit default swap on the same company though, doesn't result in disappearing money. When the CDS gets activated, party A has to pay money to party B. The money doesn't go away. It just changes hands.

That is only assuming Party A HAS the money to pay Party B. Like any insurance scheme, it doesn't take into account EVERYBODY losing their house in a Tsunami. The insurers can't pay off. They also go broke. Then the folks who carried these contracts on their books as part of their assets also go broke, since they don;t get paid off. Then all the people they owe money to go broke also....

Reverse Engineer

[bratticus]

No need to have a dollar printed out for every dollar in derivatives in existence.

Minted not printed

Government Wants You to Use Dollar Coins, Not Bills

MSNBC LA News
Tue, Dec 30, 2008

The U.S. Mint is encouraging the public to embrace dollar coins, for both economical and environmental reasons.

A paper bill wears out after only a couple of years, compared to 30 or 40 years for a dollar coin.

... snip ...

[smallpoxgirl]

That is only assuming Party A HAS the money to pay Party B. Like any insurance scheme, it doesn't take into account EVERYBODY losing their house in a Tsunami. The insurers can't pay off. They also go broke. Then the folks who carried these contracts on their books as part of their assets also go broke, since they don;t get paid off. Then all the people they owe money to go broke also....

I guess I'm not really clear what the actual exposure is. Like I said, I think the total dollar value of the contracts is pretty misleading. As I understand it, most of the players in that game are pretty strongly hedged. Most of the people writing the CDS's also bought a lot of CDS's. In order to make a cascading failure scenario work, you really have to say who is in net long positions and who is in net short positions. I haven't heard any sort of data on that.

[Cid_Yama]

The first of those threats was a complete breakdown of the global financial system. It very nearly happened, or at least we convinced ourselves that it nearly happened, shortly after Lehman went down. "Do you realise," one of my neighbours whispered in late October, "that if Hank Paulson [of the US Treasury] had not bailed out AIG [the insurance giant which provided cover for much of the paper issued by Lehman and other troubled banks], all the ATM machines in the world would have been switched off the next day?" I heard the same rumour soon afterwards from a distant, unconnected source, and when I played it back to people in the financial world they nodded sagely, as though it were obviously true. None of us really knows, but if banks had suddenly refused to issue cash, it really would have been the maelstrom: there would have been instant global chaos, looting, violence, political upheaval.
link

[dohboi]

But throwing mass quantities at everybody is not the solution.

The gov needs to start a process of house cleaning.

Obama has a sliver of chance to get this right.

The problem is not that there is not enough money, but not enough confidence.

So throwing more money at the problem without other radical measures will never begin to address the problem.

There has to be at least the pretense that someone is investigating the books of these banks and other entities and closing down (or nationalizing and selling off) the ones that were most corrupt.

Only that will provide any hope that any confidence will be restored.

Ultimately, we need a new system, one made for a world of ever-diminishing energy and resources rather than ever-increasing...

Is anyone working on this, even theoretically? Mostly I've heard about steady-state economics, but that possibility is past. We need an economic model based on ever-diminishing resources.

We need money printed on high acid paper that gradually dissolves and is not replaced. This could be tied to some similarly reducing asset, but I'm not sure that is necessary. Credit in the usual sense is pretty much over in this or really any scenario.

By the way, I had heard figures exceeding a quadrillion dollars in unregulated derivatives. Since they are unregulated, I'm not sure how anyone would know. I doubt this amount of leverage will go away without doing massive harm to economies around the world.

Ultimately all that money represents trust that it will be paid back. When all that vanishes, so does trust that anyone can ever loan money to anyone and ever get it back.

Again, the exact dollar figures, IMHO, are ultimately irrelevant. What is being sucked out of the system in mass quantities is trust and confidence in the money, lending and the market itself. What is replacing it is massive fear.

Frankly, fear (or its more prudent cousin, caution) is preferable to the uncontrolled rampant greed that has characterized the world market and that has destroyed the planet. But fear and fundamental distrust will not be the basis of an economy that looked anything like the one that was in place up to a few weeks ago.

Sorry to ramble--too much coffee.

Best wishes to all in our ever-more-interesting new year.