Or at least, it’s not working in the way that it’s being made out to.
If the objective - or rather, objectives - of the world’s governments through their suite of emergency financial measures is to sustainably normalise markets and stabilise the world economy, then they are palpably failing.
What the bailouts are doing is bailing out: at an incredible rate. The headline result of that is a normalisation, but of course, it’s artificial. The real test of the success of the bailout would be working out what would happen if you took it away again.
_______
Consider, for example, the launch - and apparent success - of the Fed’s commercial paper facility. On Monday, new issues of longer-term CP soared ten-fold: 1,511 issues with a value of $67.1bn.
And yet, if you look at the CP market as a whole, the effect of the CPFF seems to be negligible. The below is weekly issuance by volume (in millions of dollars):
Week ending Oct 3 186,607
Oct 10 192,082
Oct 17 212,397
Oct 25 168,626
Oct 31 213,737
And when you factor in, on top of that, the fact that when the Fed reported its weekly balance sheet stats yesterday, it showed that the CPFF had bought $145bn of CP from Monday to Wednesday alone, its clear that underlying the rosy uptick is a continuing collapse in the CP buyer universe.
For now that matters not a jot. The Fed is there to keep the market liquid, and thus hopefully alleviate liquidity risks for corporate America. The problem though, is that longer term, the Fed must rather be hoping that the buyers will return to the market, and it will be able to ease its CP funding facility.
Will this be the case? It does not seem so. Money market funds are not in great shape right now. And it doesn’t look like that’s a short-term liquidity/fear issue. The Fed has even backstopped the MM funds ($99bn, currently drawn down). There are larger cyclical issues at play that just make MM funds unattractive things to run, and unattractive things to invest in.
As FT Alphaville noted earlier, the Fed cutting rates severely impacts MM manager returns. On top of that, investors simply aren’t seeing the benefit in MMs anymore: there are safer things to invest in, with higher returns to boot. Then there’s the fact that MM funds were often used as depository institutions by hedge funds and structured vehicles: no longer. They’re now withdrawing it all to fund dramatic unwinds.
______
To broaden this (relatively) esoteric money-market debate point out, just take a look at the figures below, clipped from the Fed’s balance sheet by Alea:
CPFF: $144 bn (in 3 days)
TAF: $301 bn (previous $263 bn)
TSLF: $222 bn
Swaps: $541 bn (previous $520 bn)
Balance sheet: $1924 bn from $1839 bn last week
The extended discount window borrowings dropped slightly by $29 bn to $369 bn.
Total: $1577 bn to improve liquidity
SFP: $558 bn
Foreign official and international accounts
U.S. Treasury: $1,571 bn up $16 bn
Federal agency: $915 bn down $8 bn
The numbers sort of speak for themselves.
The real fear is that immense amout of liquidity sloshing around is actually doing little: that we are, in fact, in, or on the precipice of, a liquidity trap.
The OIS rates are already factoring in yet another rate cut from the Fed. But as the Fed cuts rates, the liquidity supply becomes more viscose. Just look at the latest T-bill repo failures (more info here), as reported by the NY Fed:
Fails to deliver: 2,683,588m
Fails to receive: 2,627,691m
______
Here’s a part philosophical, part-hypothetical and part-sincere conclusion:
The problem with all of the current liquidity measures - in the US and abroad - is the same as that with the Fed’s other lending facilities: those like the TAF or the PDCF, which have been in operation for over a year. The facilities do not restore confidence, they simply nurture dependence.
To wit: the Fed isn’t de-risking the market, it is merely undercutting the risk appetite of all the market’s other participants, and in doing so only further damaging the likelihood of them participating again.
Related links
An inefficient truth - FT Alphaville
