What does the Fed know?

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Folks, let's close shop. There's nothin' t'worry 'bout. It'll cost us only a year's worth of cigarettes and booze.

Kelley optimistic Y2K won't trigger economic upset

Friday, October 30, 1998

By VINCE GOLLE, Bloomberg News

HOUSTON - Potential computer problems expected as the clock turns to Jan. 1, 2000 won't cause major disruptions in the U.S. economy or the nation's banking system, Fed Governor Edward Kelley said on Thursday.

"I'm cautiously optimistic that the United States will weather the Year 2000 storms without major disruptions to economic activity," Kelley said in a speech at Houston Baptist University.

"Some of the more frightening scenarios aren't without a certain plausibility, if this challenge were ignored," Kelley said. "But it's not being ignored. An enormous amount of work is being done in anticipation of the rollover of the millennium."

Kelley also said that while monetary policy can't by itself offset any computer disruptions caused by the turn of the century, the Fed stands ready to provide cash to the country's banking system.

"We will, of course, be ready if people want to hold more cash on New Year's Eve 1999, and we will be prepared to lend whatever sums may be needed to financial institutions through the discount window under appropriate circumstances or to provide needed reserves to the banking system," Kelley said.

The problem is that most older computers were programmed to read a two-digit year date. As a result, computers could mistake Jan. 1, 2000, for New Year's Day 1900, prompting machines to either crash or transmit bad information. Kelley's remarks didn't include a mention of the expected economic impact of the technology glitch, nor did it mention the overall economy or interest rates.

A key element to any forecast for 2000 is the degree to which a computer failure at one institution can affect other systems. Kelley says he believes that any disruptions will likely be isolated. If, however, they prove more widespread, then an outright decline in the nation's gross domestic product is possible, he said.

"Let me quickly stress that I don't think this recession scenario has a very high probability," Kelley said.

The economy is already experiencing the effects of the Year 2000 problem, as companies strive to replace or update computer systems, Kelley said. Increased spending by businesses to address the problem has contributed to the growth of U.S. hardware and software companies.

"Ultimately, we are largely shifting the timing of these investment expenditures," Kelley said. "Today's added growth is likely borrowed spending at some time in the future."

Moreover, the Year 2000 problem will probably have a noticeable impact on inventory management next year. Kelley said he expects "businesses will want to hold larger inventories of goods as insurance against Y2K-related supply disruptions." That will boost orders and production next year, though inventories will be pared back in the first half of 2000, he said.

During Sept. 17 testimony before the House Banking Committee, Kelley said a "vast majority" of U.S. banks are making satisfactory progress in their efforts to respond to the year 2000 computer software glitch.

Approximately 1,600 banking institutions reviewed by the Fed, about 4 percent have been rated "needs improvement" for their response to the computer problems posed by the arrival of the millennium and fewer than 1 percent have been rated "unsatisfactory," Kelley said

"Banking organizations are making substantial headway toward Year 2000 readiness and, with some exceptions, are on track to meet" the Federal Financial Institutions Examination Council guidelines, Kelley said. The FFIEC guidelines call for completion of internal testing of mission critical systems by the end of this year.

Kelley said Thursday costs associated with fixing the Year 2000 computer problem could trim U.S. growth by 0.1 or 0.2 percentage points in both 1998 and 1999.

-- 321 (1@2.3), October 30, 1998


Try reading his public comments made in late '97 and early '98. Very different! Comments before the Professional Bankers Association

-- Rancherdick (angusdude@yahoo.com), October 30, 1998.

uh, are you referring to the same Fed currently engaged in the frantic "whack-a-mole" game described below?

Inside Wall Street Oct 22 1998 3:33PM CST Archives...

The Real Story Behind the Fed Ease By Paul Lam Senior Markets Writer

Contrary to what most would like to believe, the Federal Reserves abrupt decision to cut interest rates on Oct.15 was not so much due to concerns over a slowing economy or credit crunch. The action, which came 16 days after the first 0.25% rate cut, was outside the normal context of a Federal Open Market Committee meeting, which does not convene again until Nov. 17. It was a response to an immediate meltdown threat of the banking system.

According to informed sources, the Fed had been injecting liquidity into major banks even before the Oct. 15 ease. Federal Reserve repo tenders, which are repurchases of Treasury securities held by banks in return for short-term cash, a common way to add liquidity to the banking system, rose by 35% during the two weeks prior to the surprise rate-cut.

The Oct. 15 ease, on top of the recent surge in liquidity available to banks, reportedly came after urgent requests from the president of the Federal Reserve Bank of San Francisco, who told Federal Reserve chairman Alan Greenspan of extraordinary demands by one member bank in its region.

Reliable sources indicate that this demand for repo funds had been provoked by a credit squeeze in the interbank market against Bank of America (BAC:NYSE). Bankers believe that the bank's troubles are far more serious than what is being told to the public. Bank of America made a $357 million loss write-off due to its participation in the troubled hedge fund D.E. Shaw, and bought $20 billion in outstanding securities and derivatives contracts from that hedge fund in order to prevent its demise. The grave danger on Oct. 15 was of a breakdown in the interbank payments system, which could have easily led to a global systemic collapse.

While investors around the world rejoice the Feds action by outrageously bidding up stock prices, the more alarming message is that the emerging markets crisis has now fully reached the G7 financial systems.

http://www.wallstreetcity.com/commentary/commentary_full_story.asp?Com mentaryID=872

-- a (a@a.a), October 31, 1998.

"If the system goes, it doesn't matter whether your money is in a sound bank, or a weak bank. You will lose it. If the system DOESN'T go, it doesn't matter whether your money is in a sound bank or a weak bank, because if you choose the wrong bank, the FDIC will pay you off, as long as the system is in tact.

What it adds up to is this: the potential to bring down the American banking system is already in the system. There is a potential for bank troubles to trigger a desperate flood of paper money to save the banking system, triggering hyper-inflation. It is my opinion that the government will not politely stand by and watch the system go, but will attempt to flood the system with cash reserves in order to meet the depositor demand when the ultimate calamity occurs; which is, of course, the depositor run on the banks." Howard Ruff "From A to Z," Page 33, 1980. My friends he was predicting this type of scenario 18 years ago! Maybe it will happen, maybe it won't.

-- Bardou (bardou@baloney.com), October 31, 1998.

Great article, a. Just the sort of thing that I look for lately, given the "negative growth potential" the world economy has. I got an syntax error message but figured it out (I have experience with sin taxes, living here in Utah). Here's a link--

Max.Dixon@gte.net), October 31, 1998.

--here in this next post. (what in the HTML happpened?)

http://www.wallstreetcity.com/commentary/commentary_full_story.asp?Com mentaryID=872

I believe there's some commentary in this page somewheres.

-- Max Dixon (Ogden, Utah USA) (Max.Dixon@gte.net), October 31, 1998.

>Howard Ruff "From A to Z," Page 33, 1980. My friends he was predicting this type of scenario 18 years ago! Maybe it will happen, maybe it won't.<

My absolute dearest Bardou,

I used to be a zillionaire in Germany. But I was very poor. Masses of zillionaires started a WWII because their net worth shrivelled to zilch within a very short time.

After Ruff's hyperinflation scenario, he predicted deflationay depression a few years ago. What is he predicting now?

P.S. Uncle Deedah, please pay attention to this, s'hit will hit, y2k or s'not.

-- Trying to forget (seenit@ww2.com), October 31, 1998.

My dearest try to forget: I have no idea what Ruff is saying these days. Is he still alive? In his book, there are several articles written by none other Gary North. Reading through the pages, I see the same scenarios and advice on what to do WTSHTF. Much of what he says is still applicable to Y2K.

-- Bardou (Bardou@baloney.com), October 31, 1998.

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