Yes - but relax The crisis will not explode right now I will leave it up to you to figure out the catalyst that will do it
The major interest rate reductions by the Fed have been instituted to mitigate the banking and credit crisis. The stocks and futures markets are a secondary consideration. You will see from many on ET and often at large that this has not been fully understood. Nor does the Fed want to spread panic as to the underlaying danger to the whole banking and credit system. In Britain the Governor of the Bank of England caused a run on a major bank by his own gross mishandling of the situation. He did not appreciate that he should accommodte nation wide banking liquidity when the whole system comes under such enormous crisis pressure.
People often say that the Fed is not there to save the markets, but to provide stability in the economy. My opinion is that people who follow this rule as a cut in stone commandment might be taken for a surprise sometimes. Its a fact that there are many conflicting interests in the now global economy, and like it or not, the Fed has to take all of those interests into consideration. People who believe that the Fed is virtuous, pristine organization whose only concern is the smooth operation of the economy, and is absolutely not affected even one iota by any other condition in the market might as well as go ahead and believe that the government is only protecting the best interests of the nation, and also the easter bunny and santa claus. That being said, fed cuts recently are appropriately timed with sever lack of liquidity, which obviously correlates with fluctuations in market prices. After all less liquidity almost always means bad conditions for the economy, and therefore prices usually correlate with the overall economic condition.
Great! A murder mystery. Just what I need to spend time on figuring out. Give me a break. Either you have a theory on what might cause the next shock or you have nothing and just want to sound smart.
I could not have said better myself... http://market-ticker.denninger.net/2008/02/special-weekend-edition-are-banks-out_03.html **************************************************** Special Weekend Edition - ARE THE BANKS OUT OF RESERVES? Let me preface this by saying that I'm not at all certain I understand what I'm looking at here correctly. I've been fighting with this all weekend, and don't wish to alarm. But perhaps "alarmed" is exactly what we should be right now. Reference? Right here Specifically: Date total(2) non- required excess Monetary credit, total primary secondary seasonal borrowed(3) NSA(4) base(5) NSA------------------------------------------------------------------------------------------------------- 30p 41639 -8751 40179 1460 821298 50000 390 385 0 5 What are you looking at here? This is the last line of the Fed's "Statistical Release" from January 31st. All figures are in millions. The link to their page is above. The "Total" is the total amount of reserves in the Fed System (among all member banks), and is approximately $41.5 billion. The required reserves, based on the amount on deposit, is $40.2 billion (roughly.) So far so good. But notice that "non-borrowed" number - the negative 8751? What does that mean? Well, after much study and trying to get the numbers to all add up, the light went on. Let's add up a few things for everyone. The TAF credit, which is the amount that Fed Banks have borrowed in total through the TAF facility through January 30th, is 50 billion. We also have other primary and seasonal borrowings, which are quite small (and normal) of $385 and $5 million, respectively. Now let's get out our trusty calculator and add things up. 50000 + 390 (385 + 5) - 8751 = $41,639. The books balance. But do you notice anything about this bookkeeping? Literally all of the banks' reserves, on balance, are in fact Fed Credit from the Federal Reserve! WHERE IS YOUR MONEY THAT YOU DEPOSITED? Now normally only 10% (or is it 5% now - it sure looks like it, when you look at the monetary base!) of what you deposit is "held back" in reserve. This is, in fact, the very foundation of a fractional reserve banking system, and whether you agree or disagree with that as a foundation, it is what it is and it is what it has been since The Federal Reserve was set up. But unless I'm reading this table incorrectly, there not only is no reserve of depositors money currently being held the banks are in aggregate nine billion in the hole with respect to what is supposed to be held - having replaced all of it, and then some, with the TAF Auction Credit! So this leads one to an obvious - and disturbing - question: Where did the reserve that was supposed to be held back from our deposited funds go, and where is it now? Oh, and why has the deterioration been so dramatic - going from basically all of your reserves being depositor money two months ago to now being less than "none"? The follow-up to that question, by the way, is even more serious: Exactly how far can "non-borrowed" reserves go into the hole and how, and when, will they no longer BE in the hole? Are fire-sale style asset sales in the offing - in the very near future - in order to rectify this little problem? I don't have either answer, but I'd sure like to know what those answers are. And by the way, just so you don't get the wrong idea - this does not indicate that the banks are insolvent. Note that "required reserves" is less than "available reserves" - in other words, the capital is there. But what it does indicate is that the banks are continuing to lend into a locked "hard money" environment - that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going. Why is this important? Because if it does not immediately reverse - within the next month or two - we are staring down the barrel of a near-immediate credit initiation collapse. That is the "debt default deflationary spiral" that I and others have been concerned may be served up upon America. The Fed cannot continue to shovel $50 billion every two months into the banking system indefinitely. Either the "hard money" comes back, or the game is over - and soon. How does the "hard money" comes back? TRUST MUST BE RESTORED. And that cannot happen until those who are holding trash are forced out into the open and take their marks - and losses. So far this has not happened, and until it does, trust will not return. PERIOD. The clock is ticking, and the timer is showing a lot of zeros in the window.....
WRONG. The Fed can shovel as much money into the banking system as it wants. It is in charge of the money supply. It can print as much money as it wants. There is nothing to stop it if that's what they desire.
.."WRONG. The Fed can shovel as much money into the banking system as it wants. It is in charge of the money supply. It can print as much money as it wants. There is nothing to stop it if that's what they desire."... Well thats not correct, yes they can pump more money in. But there is a limit. But no its not FREE, you may see a loss in confidence and the 10yr yield and 30 year yield increase. With or with out $USD falling. So if 10yr yield rallies, guess where the economy goes....
More on the subject of why Banks need not have cash reserves http://weaseldog.blogspot.com/2008/02/welfare-payments-for-banks.html **************************************************** Welfare Payments For Banks? Ref: http://market-ticker.denninger.net/2008/02/special-weekend-edition-are-banks-out_03.html Karl Denniger seems to have uncovered something stinky in our banking system. It looks like the Fed is pumping $50 billion a month into the banks to keep them afloat. The Fiat system has been erased and the banks are lending money based on their debts, not their reserves. In other words, the deeper into the red the banks go, the more money they can lend. About six months ago, the Fed announced that they were loosening the Fiat standard. That is the standard by which the banks lend money. For every dollar that a bank has in deposits, they can create ten more dollars our of thin air for loans. Now it looks like they can create ten dollars for every dollar they borrow. This is pretty scary stuff! The faster the banks sink into the red, the faster they can increase their debt and create more money for bad loans. They indicates that the banking disaster is beyond critical mass. There is no recovery from infinitely recursing debt. We should all know by now that fiat system requires infinite growth in order to stay healthy. And so they must occasionally crash in a world that doesn't fill all of an infinite universe. Since our planet is a essentially a globe and of finite mass, there are limits to every every physical resource. Quick update, as I'm writing this, I already got an email back from Karl that I misunderstand what this means. This is my paraphrased response: I believe I understand your point. Where did the money go? Where are the reserves that guarantee our deposits? But about 6-8 months ago, Bernanke gave a banking speech announcing a suspension of the Fiat standard of 10/1. I never learned the details, so I don't know what this meant. It seems in retrospect that the banks can ignore the ratio altogether. the Fed will cover the difference. In a more recent speech, Bernanke told the banks that there were taxpayer funded bailout vehicles available, and that banks should use them. This may be what you're seeing. Taxpayer subsidies, channeled through the Fed, to keep the illusion up, that the banks are solvent. What we may learn later is that the Gov has guaranteed these loans to the banks and if they become insolvent, the taxpayer will cover their losses. In such a situation, there is no downside to the banks continuing to make matters worse. They'll profit from any bad decisions they make, at the taxpayers expense. Overall, this pretty exciting stuff! It's like look over the edge of a cliff, as an avalanche bears down on you! What a way to get the heart racing. Now, this has to get worse, but it is hard to imagine how!