There’s always something to howl about

Do You Like a Good Scary Story? Read This One Anyway…

I am not, by any stretch, a conspiracy person.  I think the probability of a conspiracy succeeding is inversely tied to the number of people involved.  That makes me especially dubious of government conspiracies.  The bottom line for me is this: people are smart, groups are dumb.  If you want to understand something just follow the money.

But I am getting a little scared.

You may have heard about the various bailouts and financial manipulations the government is engaged in lately.  It has been in the news.  There was a $750 billion bailout, followed by another $500+ billion bailout.  A number of investment banking firms were bailed out (and, curiously, some were not) while AIG continues to be handed money.  Banks are being force fed money and there are more stimulus packages on the way.  All done, we are told, to save us from a world economic collapse.

But is it true?  This week the Fed lowered the fed funds rate… again.  Lowering the rate didn’t do a damn thing a month ago, so why are they trying again?  Here’s a better question: Why are they lowering the rate at all?  Lowering the fed funds rate effectively lowers the “cost” of money.  When do you lower the cost of something?  When their is a demand problem.  From everything you have read, do we have a demand problem or a supply problem?  We are being told that everyone needs money and no one will lend it.  So why in the world would you lower the price of money?

Let’s leave that alone for a minute and move on to the credit crunch.  As I mentioned previously, the world economic collapse is precipitously close and liquidity is the problem.  “No one is lending money.”  “Commercial paper has dried up.”  “Our financial system is grinding to a halt because cash is being hoarded.”  I have not taken the time to actually go out and find these headlines and link to them.  I trust this is now such common wisdom you will take it on face value.  But take a look at the following graph:

Interbank Loans

That represents the loans, in billions, flowing between banks.  It is near record levels!  Money is not flowing between banks?  I don’t get it.  Alright, let’s leave that alone for a minute too.

What about commercial paper?  What about the actual short term debt that allows companies to function.  This is the greatest problem we have, right?  We are being told that if the government can not get this money flowing again quickly there will be a devastating effect on the economy: companies closing down, unemployment going up, recession turned in to depression and so on.  Sounds dire doesn’t it?  But take a look at this graph:

Commercial and Industrial Loans

Yes that’s right.  Here again we are looking at record levels!

Take a closer look at the source for these graphs… the Federal Reserve.  The same Federal Reserve that is telling us the sky is falling is publishing information (albeit not with any fanfare and not easily digestible) that contradicts the very statements they are making to justify their actions.

So lets summarize: we have the Fed lowering the cost of something that is already in high demand.  We have the government printing and pouring billions of dollars into some businesses that are already lending each other money at record rates… and parsing others out to corporations who have secured “most favored” status.  We have the Treasury forcing billions into banks that are already lending money to each other at record levels, whether they want it or not… and taking ownership shares in those banks.

Is it just me?  Or is this an old fashioned power grab?  Could there really be a conspiracy to move us to the “one world economy” non-sense that is slowly bringing European nations to their knees?  I admit, I am one of those weird people that follows economics and the markets.  I “get” this stuff.  But I don’t mind telling you that what I am seeing and what I am hearing does not make sense.  I am no longer confused…  I am scared.  Are you?  Are you paying attention?

(These graphs were first brought to my attention on the must-read Coyote Blog.)


10 Comments so far

  1. Michael Wurzer October 31st, 2008 11:31 am

    This is great information, Sean, thanks. Facts are critical when politicians and other power brokers start screaming for more money without cogent explanations. The complexity of the markets merely means we need better explanations. If they can’t be clear and convincing, that’s a sure sign they don’t truly understand the problem or have some other agenda. A sign of a smart person is if they can explain their field to a non-expert and ask good questions, which you’re doing here.

  2. John Kalinowski October 31st, 2008 2:09 pm

    Sean- Doesn’t make sense. You must be missing something in your analysis of these numbers. I’m definitely not an expert, and I’m just spewing my thoughts, so let me know what you think.

    There are people much smarter than us who would be screaming if what you’re saying is true. Aren’t all the sudden spikes at the end of your graphs from all the capital that’s been injected into the system in the last couple weeks?

    Just because the total value of loans was at an all-time high this year, doesn’t mean they had the ability to make the payments on those loans. Banks and other companies had huge amounts of money borrowed against mortgage securities (which would make your graphs hit the high numbers this year) but when those securities’ values tanked, they didn’t have the collateral they thought they had. This doesn’t mean their commercial and industrial loans went away, the value just flat-lined as shown on the second graph.

    It also looks to me like the interbank loan values were heading south pretty fast before that sudden spike caused by the government’s intervention. They spiked up considerably, and appear to be headed back down right at the end of the first chart. Maybe banks are holding on to the money they just received, and not lending it like they are supposed to?

    Doesn’t look like a conspiracy to me, just a game of musical chairs where the music suddenly stopped and no one had a chair, and then the government suddenly through in a whole new stack of chairs. Now everyone (the banks) is holding on to their new chair, and won’t share.

  3. Sean Purcell October 31st, 2008 2:20 pm


    I appreciate the compliment. I just wish I had some answers to these questions.

  4. Sean Purcell October 31st, 2008 2:37 pm


    Doesn’t make sense. You must be missing something in your analysis – One does not always follow from the other.

    There are people much smarter than us who would be screaming if what you’re saying is true – I will cede that there are people smarter than me. Beyond that, I do not agree with your implication. The fact that you don’t hear someone screaming doesn’t mean they aren’t. Or do you hear people screaming but devalue their intelligence? To reject an hypothesis because others have not already suggested it is not very productive.

    I won’t go through your comment point by point but rather say this: there is not doubt that the graphs spike after the liquidity influx (that is the one thing that does make sense). My point is that the volumes on both graphs are at record levels. Even with a flattening we would still be looking at record levels. What kind of catastrophe occurs because volume falls off the record level?

  5. John Kalinowski November 1st, 2008 6:12 am


    If everything in place depends on those record levels, and they suddenly drop off, you’re talking about a big problem. Especially if the drop of is accelerating, not just falling at a steady rate. Fear is also a major factor, and tends to make everyone and everything overshoot in either direction.

    Still don’t believe in the conspiracy theory, though I do believe politics come in to play, as they’re all trying to get attention so close to the election.

  6. Sean Purcell November 1st, 2008 9:30 am


    I agree with you: if a happy economy depends on “record levels” and those levels fall off, we are talking about a problem… quite possibly a big problem. But, what we are not talking about is a “frozen” market. The bailouts (approaching $2 trillion!) did not happen because we had a big problem. They happened because the credit markets were frozen. No one was lending to anyone and we were looking at a meltdown of our financial system – or so we were told. This led to cash bailouts of astounding levels and the rapid nationalization of our financial and banking industries.

    Now I know that is a bit of hyperbole. These idustries were not completely nationalized. But you can’t be a little bit pregnant. The power grab was not only unprecedented (and unwarranted) but most notable for its swiftness.

    I still can not comfortably say I believe in conspiracy theories (see the first paragraph of my post), but that does not prevent me from being more than a little scared by what just happened.

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