Open Thread: Rescue Me!

(Since I hate embedded sounds, you can play this if you choose: Rescue_Me)

As we noted earlier today, the Fed, along with a slew of other Central Bankers, warmed up the whirlybirds and went out and about for a little joyride.
Contrary to some accounts, they were not responding mad pleadings of JC. Rather, the Central Bankers around the world responded to a sudden surge overnight of interest rates. When the US and Eurpean rates suddenly spiked — far above their Overnight Lending Rates — the central bankers are compelled to act.  Early Friday, markets had pushed the rate charged on overnight loans between banks to 6%. By day’s end the Bankers’ maneuver brought it down to 5.25%.

Here is a round up, courtesy of Real Time Economics, of their actions the past few days:

Federal Reserve
Thursday: $24 billion
Friday: $38 billion (tranches of $19 billion, $16 billion  and $3 billion)

European Central Bank
Thursday: €94.84 billion ($130 billion)
Friday: €61.05 billion ($83.56 billion)

The Bank of Canada
Friday: 1.64 billion Canadian dollars ($1.55 billion).

Bank of Japan
Friday: one trillion yen ($8.39 billion)

Swiss National Bank
Friday: two to three billion Swiss francs ($1.68-$2.51 billion) [estimate]

The Reserve Bank of Australia
Friday: 4.95 billion Australian dollars (US$4.18 billion)

The Monetary Authority of Singapore
Friday: 1.5 billion Singapore dollars (US$986.1 million)

The authorities in Malaysia, the Philippines and Indonesia intervened in foreign-exchange markets to support their currencies against the U.S. dollar.

Any thoughts as to how far this goes? Will the Central Bankers keep the liquidity infusion flowing? What’s the impact on Markets, the Economy, Risk appetites?

What say ye?


Central Banks React to Liquidity Crisis
WSJ, Real Time Economics Blog, August 10, 2007, 11:12 am


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What's been said:

Discussions found on the web:
  1. schaz commented on Aug 10

    Where’s my popcorn?

  2. peter richardson commented on Aug 10

    Spikes in the Fed Funds rate (FFR%) come when there are specific banks that are in
    an overdraft situation in the interbank
    clearinghouse system and are forced to
    borrow from banks with surplus funds. This
    problem results from late payments and/or
    defaults from bank clients. There can be
    systemwide overdrafts as occured in 1982
    when many of the old LDC and OPEC blocs
    defaulted on the old CHIP system. The Fed
    then added reserves and directed major US
    banks to put up funds since overdrafts cannot be carried overnight. I imagine there
    could be worldwide fund redemptions and
    some liquidations which could be straining
    the banking system, forcing the central bankers to pony up enough in reserves to
    cover all the overdrafts and keep individual
    banks from dumping investments and/or calling in loans. These large reserve
    injections by central banks are temporary
    and stop gap and cannot be made routine.
    The size of the pot created thus far
    suggests to me that the central banks need
    to come forth and spell out clearly the
    difficulties the banking system is
    experiencing and further to say precisely
    what can be done about it.

    The problems are centered in the financial
    services area around structured debt and
    hedge positions that cannot be unwound in
    an orderly fashion because the low quality
    assets involved are receiving no bids.
    Investors who have money in a variety of
    funds that use leverage especially do not
    know the real net asset values of their
    investments in troubled funds.

    If confidence is not soon restored via
    other investors who see value in deeply
    oversold assts, central bankers and
    country regulators will have to decide
    whether to provide long term financial
    facilities that accumulate the very
    distressed assets and restructure them over time.

    The best thing now is for Bernanke, Trichet
    et al to come public and discuss what they
    are facing in terms as specific as possible,
    and to make a case for whether market
    forces can successfully carry the day and/
    or whether new protective facilities will be needed.


  3. Ross commented on Aug 10

    I assume these are not permanant reserves. The question might be what happens when they are withdrawn? If they are permanant, and continue, you might consider borrowing to buy a farm!
    A lot of hedge fund managers bought the farm already!

  4. Steve Barry commented on Aug 10

    Since the Fed said Tuesday that things were fine, they have lost all credibility. That can’t be good.

  5. Ross commented on Aug 10

    Hey Mark, I’ll take the turkeys and sell you half my hay meadow in Hunt County. I’ll even through in an eigth override on the mineral rights.
    This situation reminds me of a scene in a James Garner movie ‘Wheeler Dealers’. Great flick and the shams and nonsense are remarkably the same. Yea, popcorn and this movie over the weekend.

  6. toddZ commented on Aug 10

    i heard a story on Bloomburg radio this afternoon about BBB mortgage paper trading at 4 cents on the dollar!

    is there a buyers strike, or just an unwillingness to recognize current prices?

  7. Cherry commented on Aug 10

    Orlando, it is a little soon to say that we have had a correction.

    Maybe a 4,000 plunge over a 4 week timeframe is coming, but just hasn’t yet.

    You need to take attitudes and break peoples wills.

  8. chad commented on Aug 10

    I’m new to this, but doesn’t throwing good money at bad rates just make them worse later on? How does increasing liquidity slow inflation? Why shouldn’t there be a decent spread between risk levels? I’d hold on to your turkeys and hay.

  9. Grodge commented on Aug 10

    The infusion will halt the deflationary influence of the credit and housing collapse.

    That leaves only the inflationary factors.

    The dollar drops further, but perhaps not as quickly as the euro.

    Bottom line is to hold hard assets: gold, silver, maybe ag commodities. Oil probably won’t do well if the economies are fractured.


  10. Bullion commented on Aug 10

    This is why a crash, with the magnitude of the past ones(let alone 1929), is no longer possible.
    Cantral banks will come to help.

    The way is up, up

  11. whipsaw commented on Aug 10

    inOrlando said:
    “Isn’t it dumbfounding that all this liquidity action has occurred with the broad market off by a mere 6.5%?”

    On it’s face, I’d agree, but if the right people/institutions have gotten caught leaning the wrong way, it doesn’t surprise me. What does surprise me is how open ended the Fed’s public commitment is, a reminder that it’s a hell of a lot harder to make a short dollar than a long dollar.

    If we’re guessing what happens next, my entry is one or more liquidity injections over the next week that bring things back up to where they were on Wednesday. After that, a gradual slide amidst more yammering about cutting rates and a cut in either Sept or Oct, then big rally into the end of the year.

    I am not implying that there is any justification for injections, cuts or rallies, only guessing what will happen based on the dynamics of a system that is mainly artificial to begin with.


  12. Winston Munn commented on Aug 10

    This, to me, is the correct explanation as to what is happening:

    “Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness… Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic… The final outcome of the credit expansion is general impoverishment… Some people may have increased their wealth… but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode.”

    Ludwig von Mises

    Short term, it’s who knows bad.

    Mid-term, meaning 5-10 years, it’s game over bad.

    Long term, it’s Roman Empire bad.

  13. Sammy20 commented on Aug 10

    I can’t believe Kudlow had people claiming this wasn’t a bail out…unreal.

    The Fed will keep pumping money and all these people saying that the fed shouldn’t lower rates are missing the fact that if they do not all those ARM’s reseting this fall are just going to make things that much worse.

    This is the problem many of us have been anticipating. Buy the PM’s and sit tight…this is going to get a lot worse…wait till the investors statements come out, home owners mortgages reset, lawsuits become prevelant, taxes revenues fall dramatically and pension funds start making there losses known. The Fed’s creditbility is about to plunge with the money they will be dropping.

  14. MDDwave commented on Aug 10

    Where does this Central Bankers influsion flow to? Who has the advantage to this “new money”? Does it help these poor little hedge funds that have all those losses?

  15. m3 commented on Aug 10

    wow. everyone’s bearish.

    how’s this for a change of pace:

    the risk aversion will spur buying in treasuries, which will be bullish for the dollar.

    the yield curve will steepen, allowing a better spread for the banks to make money from.

    oil prices are falling, which is good news, and would fall further with a strengthening dollar.

    oh yeah, core inflation is slowing down (WOO-HOO), so the fed has room to ease (WOO-HOO x2).


    it’s not so bad.

  16. sk commented on Aug 10

    Listening to various shows on CNBC and various articles in the MSM there’s a real misconception out there as to what the FEDs actually bought today – people are talking bailouts, buying subprime MBS, unfreezing the mortgage market and so on.

    Their transactions today were 3 day transaction; they bought AGENCY(Fannie Mae etc ) MBSs, not that secondary market subprime tranche based stuff, as well as AGENCY debt and Treasuries, with the understanding that the seller will buy the same back 3 calendar days later and cough up somewhere between 4% and 5.25% interest – that’s all.
    Fed link at :

    and the clarification of what collateral they took is at:

    So what happens Monday ? I have no idea – should be interesting though.

    Meantime, why is the MSM so ready to misrepresent things ? Lazy? Just plain ignorant ? conspiracy ? Anything for a “juicy story” ?


  17. BobbyP commented on Aug 10

    I have noticed the Russell 2000 has gone from leading the down draft to holding up better than the DJIA & SP500.

    Is this just a bet on the FED cutting rates?

  18. bam commented on Aug 10

    Dear taxpayers,
    Thanks for the low interest federal loan. Don’t worry, those CDOs are going to work out for you in the end.
    You guys are the best!

  19. Sammy20 commented on Aug 10

    The issue isn’t the conditions/terms of the money provided….the issue is that it needed to be provided and the markets needed to be reassured that the money will keep being provided.

    If someone gives me money and tells me to go ahead and do whatever the hell I please cause there will be more money where that came from regardless of how much debt I pile up….That is the definition of moral hazard and a constant reminder that a bailout exists.

  20. Phorgy Phynance commented on Aug 10

    How far does thisgo?

    Over on The Big Picture, Barry Ritholtz asks
    Any thoughts as to how far this goes? Will the Central Bankers keep the liquidity infusion flowing? Whats the impact on Markets, the Economy, Risk appetites?
    What say ye?
    I think there is still pain t…

  21. BeachGuy commented on Aug 10

    The core problem will not go away: billions of CDOs sold and held around the world in leveraged accounts are worth a lot less now than they were at the beginning of the year.

    Furthermore, it isn’t clear at all what many CDOs are worth at anymore. Short of the impossible task of poring over ever underlying asset, determine “true” ability to pay principal+interest, default risk, fraud, losses, etc., buyers have not idea how much to pay for a AAA or BBB- CDO tranche composed of MBS.

    We are in a state of fear. We have not hit panic. I suspect we’re going to hear of more fund blow ups in the next few weeks. The dollar may take a hit. Volatility is back.

  22. sk commented on Aug 10

    re: Sammy

    But this is part of what they’ve stated they will do for hmmm years and years(1986?) – ever since they abandoned monetary supply ( M3, hmmmm MZM too once upon a time I think )targets and started using interest rate targets.. The mechanism for maintaining the target rate is precisely this type of open market operation – so when the rate went too much past 5.25% they had to do this to bring it down again – they do this type of thing all the time – I grant you in a more organized fashio – not 3 times in a day, nor at a such an odd time, nor issues statements , nor specifically invite and take AGENCY MBS collateral..

    That last action looked like smoke’n’mirrors to me – the problem isn’t in AGENCY MBS – its the tranched crap from the secondary market that has issues..

    So.. I’d see it not as pumping money in, rather they brought the interest rate down using their time honored technique – from the money perspective its all temporary – money IN today OUT on Monday – they’ll have to do some stuff on Monday again.


  23. dblwyo commented on Aug 10

    Let’s put ourselves in the Fed’s shoes for a minute & recall their jobs are to 1) manage the economy around the speed limit – which gets most of the attention. But also 2) to make sure financial markets are orderly and don’t seize up and 3) oversee the regulatory mechanisms that are required to keep the Jay Goulds of the world from taking the rest of us to the cleaners. The last statement indicated really that they’re perfectly comfortable with what is essentially a neutral stance while recognizing a widening housing problem AND a liquidity squeeze (not a credit crunch which is when non-price restrictions keep any money from flowing [recall Reg Q and disintermediation ?]). It’s funny that not too long ago everybody was complaining that they left rates too low for too long and not everybody’s whining :). The Fed can’t control the fundamental speed limit of the economy but can try to keep it as close to that potential as possible which means dampening down inflation on one side and demand shortfalls on the other. They’re doing a fantastic job in the face of uncertainty. At the same time notice that the $ is very weak AND China is beginning to export inflation. Econ policy targeted rates need to stay up. Meanwhile we have an asset bubble based on bad diligence plus leverage & more bad diligence and discipline. That all needs to work out (recall Moral Hazard).
    As it happens though the mechanism for actually managing rates is the same one for ensuring the system doesn’t seize – and the discount window is always open but only used when Fed funds rates are lower than inter-bank loans. Given the shortfalls in ready liquidity in this last week the central banks are doing exactly what they’re supposed to do and releasing funds into the system to maintain the target rate. The two are separate but highly inter-linked decisions. But don’t read – as best I can tell – the injection of liquidity to keep the wheels greased as any change in policy. Which, as BR noted earlier, shouldn’t be done or we’ll get the buyout, buyback and over-leveraged asset boom driven by bad credit that’s been needing to be cleaned out for a while now.

  24. yc32 commented on Aug 10

    apparently, lending to consumer who could not get loan is bailout, and lending to banks who could not get loan is not. So, there is no bailout.

  25. TP commented on Aug 10

    So, we have added roughly 1,278 billion dollars of liquidity into the global market. Markets have continued to unravel.
    I say the bailout happens over the next few months (I would guess longer). Hopefully, the government will stay out as much as possible and we get some good buying opportunities.

  26. John Thompson commented on Aug 10

    I don’t know that it’s a bailout yet either. I mean, the banks still pay 4 % whatever cheap rate (discount is freebie from fed portion of taxpayer bailout as the fed charges the Tres Dept more?) The question is, can and will these loans be paid back to the Fed and by whom?

    It’s all just paper until it must be paid back. Isn’t that the crunch? Pay us back some that you don’t have ’cause yours is all just paper?

  27. schaz commented on Aug 10

    Who needs popped corn here? Anyone……….. popcorn!

  28. yc32 commented on Aug 10

    on FOX, someone essentially said that the difference between Republican and Democrat is: Republicans want government to help banks and brokers when they got into subprime and faced difficulty. Democrats want government to help consumers who got in subprime and faced difficulty. And the former is the right way to go, as shown by Fed’s action and Bush’s rejection of a bailout. nothing new, right?

  29. Winston Munn commented on Aug 10

    I believe most everyone is overlooking the seriousness of recent action and the problem with which this liquidity infusion was meant to deal.

    Central Banks do not lend directly to hedge funds, mutual funds, retirement accounts and the like. Central Banks lend to banks.

    Banks do not loan money if adequate collateral is not held. The banks were not responding to a demand from borrowers.

    What’s left?

    This liquidity crisis looks like a bank liquidity crisis – caused by demand withdrawls. A good old fashioned bank run.
    And these banks only held a fraction in reserve.

  30. ECONOMISTA NON GRATA commented on Aug 10

    I don’t quite understand how anyone can see a buying opportunity with this uncertainty hanging over the market. Yes there will be tech bounces as the shorts overextend themselves. However, corporate earnings are yesteerdays news so far as I’m concerned, just like “global liquidity” is now yesterday’s news.

    There is substantial factual evidence that has been presented to us, that will demonstrate that in fact, we are in the early stages of a systemic (credit) leverage crisis collaterolized by synthetic assets of questonable value. Thiis is not limited to the “contained” unwinding of the housing bubble and the the related consequences in the MBS market. This is in fact a general malaise of the entire global financial system, a severe hangover, you might say, followed by a bout of anxiety and then depressiion.

    I for one anticipate thngs going from bad to worse, to worse, to awful and would suggest that anyone with a sound mind, should stand back, examine the current landscape and act accordingly….

    Have a nice weekend,


  31. MTHood commented on Aug 10

    There’s a lot of uncertainty out there. People want answers.

    And so . . .

    I call on Larry Nusbaum to reappear . . .

    And set our minds at ease . . .

    Come home, Larry, come home!

  32. Groty commented on Aug 10

    I’m not sure how the world’s central banks injecting emergency liquidity into the system solves the problem that the greedy fucks on wall street created over $1 trillion of securities that nobody can value. If they can’t be valued, nobody gets redeemed. Fucking money market funds who thought they were buying AAA rated paper are suspending redemptions. That’s how serious it is.


  33. Grodge commented on Aug 10

    I can see Economista’s concern, but then I’m usually a pessimistic soul anyway.

    sk and dblwyo make good points that the infusion of liquidity was less malignant and does not undo the moral hazard of bad investments. But short term, interest-free loans are still adding liquidity where perhaps it does not belong.

    Winston sees the long term as “Roman Empire bad”, and I’m not sure I’m THAT pessimisstic.

    My concern is that despite the big buckets of capital dumped on this conflagration by the ECB and the US Fed, the fire is still roaring.

    Is there any way to know who exactly was buying on Friday and who was selling? My hunch is that the big boys were taking advantage of this short reprieve to dump their remaining securities.

    Given a worse case scenario, where should small investors put their capital? Certainly not US dollars. Gold? Yen funds? By selling US stocks and putting it into a money market, one is just exchanging one declining asset for another.

  34. David Merkel commented on Aug 10

    I think it is less significant than advertised. These are only temporary injections of liquidity, and unless the central banks are willing to enter loosening cycles, the policy will not amount to much.

    Also, remember that loosening monetary policy only stimulates healthy portions of the economy, and is incapable of stimulating areas with bad balance sheets, because credit spreads dominate there.

    Temporary confidence issues aside, this all is useless.

  35. yc32 commented on Aug 11


    fed’s action has removed a big uncertainty from the market. before fed’s action, creditors to the bank don’t know if MBS banks hold worth anything. if enough creditors are worried, it may create a “run on the bank” situation.

    after fed’s action, creditors know they will be protected, because if they ask the money back, they will get it, as banks can exchange MBS for cash from fed, even if those MBS worth nothing. fed essentially prevented a “run on the bank” situation and signaled they would bailout banks who didn’t have cash but worthless MBS.

    when smart money realized this, they started buying financials, hence index reversal. Now, financial media or so called experts won’t tell you this, because they are either clueless (many journalists are majored in literature), or try to profit from this.

    even bloggers will not give you such analysis unless your pay for premium subscription. ever wonder why you only see numbers, charts, and emotional shouts on blogs? because that’s what increases eyeballs.

  36. Idaho_Spud commented on Aug 11

    Larry Nusbaum is very busy these days… he no longer has time to comment here.

    Larry is laying the path for a book tour by the great Alan Greenspan. In fact, Larry is busy promoting his new book. Be sure to order a copy to put beside “Dow 36,000 The New Strategy for Profiting From the Coming Rise in the Stock Market”

    p.s. I think this book is all about how to profit in real estate. Talk about poor timing…

  37. pd130 commented on Aug 11

    There’s a dj where I am who, I swear, refers to news of the day through selections, but with a light, deft touch. Friday night’s opening number was Fontella Bass, alright, but “Breath of Life” (World Sax Quartet);)

  38. Jose Padilla commented on Aug 11

    “fed’s action has removed a big uncertainty from the market. before fed’s action, creditors to the bank don’t know if MBS banks hold worth anything. if enough creditors are worried, it may create a “run on the bank” situation.

    after fed’s action, creditors know they will be protected, because if they ask the money back, they will get it, as banks can exchange MBS for cash from fed, even if those MBS worth nothing. fed essentially prevented a “run on the bank” situation and signaled they would bailout banks who didn’t have cash but worthless MBS.”

    My understanding is that the Fed did not buy the MBSs, it took them as collateral. The idea being that this will give the markets time to settle down, the banks will be able to sell their MBSs at reasonably prices and the Fed will be paid back. But what if the markets don’t settle down? It certainly seems to me it’s going to take more than three days. How do the banks pay back that 35 billion dollars (+ interest)?

  39. David Pearson commented on Aug 11

    It’s not the Fed’s action that matters, but what precipitated it.

    Why are the banks so short of liquidity? Look no further than the need to bolster reserves after marking down hedge fund loans. These have to be marked down as margin calls cannot be met in illiquid markets. Sure there are other reasons but this is at the epicenter.

    I laugh when I see people tabulate the impact of ABS/CDO’s on IB’s without taking into account the prime brokerage balance sheet.

  40. UrbanDigs commented on Aug 11

    The fed will NOT ease interest rates until:

    1. Jobs Data comes in weak
    2. US Dollar gains some support

    Last I heard, the fed’s main job focus is:

    1. Price Stability
    2. Promote Economic Growth, Employment, & Sustainable Trend of Int’l Trade & Payments

    In times of extreme stress, the fed will act intra-meeting to pump/restrict liquidity into the financial systems. Their job is NOT to bail out tradable markets, bad bets by hedge funds, poor decisions by homeowners, and the like.

    We have had years of ultra cheap money, and it takes years for those low rates to ultimately impact the economy; which is what you see now. It will take another year or so to see the full impact of all the slow, but incremental 1/4 pt rate hikes. I hate to say this, but the fed was trying to slow things down in a calculated manner. This correction and repricing of risk is healthy and necessary. There will be losers. Consumers will get hurt. Those that shouldn’t have bought in the first place, and used exotic loans to buy a home they couldnt afford, will get hurt. Those who lent recklessly will get hurt. Those who bought the repackaged MBS, assuming they can always packaged them and resell them again, will get hurt.

    But at some point, a few big players will JUMP IN AND SEE VALUE! This will end at some point, but it might take up to a year. What we need is clarity and transparency to get through this mess.

    We need:

    1. Corporations, hedge funds, banks to BOOK THEIR HOLDINGS TO MARKET VALUE, TAKE THE LOSS, WRITE OFF THE LOSS, and announce a restructuring effort moving forward

    2. Global feds and governments to assess the overall damage so they can provide whatever liquidity is necessary to maintain the credit system; no more no less. No bail outs of bad bets.

    I doubt #1 will happen as no one wants to take these losses and are trying to ride out the wave!

  41. Barley commented on Aug 11

    yc32 has it right.

    I think we need to seperate two issues even though we know they are related:
    1. Declining markets and
    2. Liquidity

    I also think we should remind ourselves that there are assets to sell/buy and margin dollars to buy/sell.

    With this then, is it liquidity that is driving the markets or is it declining markets that are driving liquidity.

    The injection of money (across all geographies) says to me that an international bank or financial house wobbled, probably due to margin condition based on end-July financial condition and that any reliance on inter-bank financing/loans became impossible. IMHO, it must have been hech of a call to freeze the system…remember, syndication across many parties spreads risk, all at different levels and at different times so it is unlikely that multiple banks/houses faced the same immediate problem in such a short period of time. Unless of course, certian conditions arose in one small area and spread like wildfire through a complex set of derivatives/default/margins.

    What scares the begeezers out of me is when and how this extraction gets underway. These are loans not gifts. At least typically so.

  42. Justin Tindall commented on Aug 11

    Guys/Gals, thanks for the education…great stuff!

  43. Jason Rasp commented on Aug 11

    Would the Fed be able to encourage the lending institutions to recharacterize the ARMs into fixed under original issue rates? Not a perfect solution at all but better than non-payers, seized properties that have no buyers, etc. Also I realize that subprime’s problem is not only about resets, but about simply not being able to pay as is…. Got to think outside the box on this. Some rules will need to bend in order to even attempt fixing this. There are many arguing to let this run its natural course. I think that is fine if you are for this being the final wedge in the “have” vs. “have not” society we are building here. History shows time and time again that some version of that story leads to the downfall of a society/government…

    I kind of like it here as is, so a hodge-podge solution would be more acceptable to fatalism.

  44. techy commented on Aug 11

    Jason i am kind of thinking in the same terms.

    i think the FED and all the banks/financial institutions will work together to make sure that when the ARMs are reset, there is not many foreclosures…..i wont be surprised if FED will foot most of the bill.

    it does not mean that the housing is not going to hurt, but not to the extent we were expecting.

    that leaves consumer spending factor….i am not sure how it is going to play out in the long run….need to do some analysis about income and debt and debt servicing costs about consumers.

    that said…i will definitely not go short on anything right now….there are trillions dollars playing against the shorties. Every government in the world wants this party to continue, its not a safe bet against all that power.

  45. Winston Munn commented on Aug 11


    Well said and quite accurate. The curiousity is what caused overnight rates to suddenly spike to 6%? Seeing that money is nothing more than a commodity and subject to the law of supply and demand, the reasonable conclusion is that cash came under increased pressure – not cash demands from markets but cash demands on banks.

    This infusion was not the bailout, but the amounts required worldwide leads one to believe that many banks were in crisis. I suspect this is only round one and eventually we will see banks that have to shut down – and then the real bailout begins.

  46. Eclectic commented on Aug 11


    It’s like you’ve found gravity and left the point unexplained, like a hanging chad.

    Here, let me help you. I’ll “quote you” and make ***my comments:

    “I believe most everyone is overlooking the seriousness of recent action and the problem with which this liquidity infusion was meant to deal.” end quote.

    ***The seriousness is that it is a practical matter of the need to provide banks with good federal funds to, for example: clear checks; meet payroll; transfer good federal funds by wire; and to meet cash withdrawal requests at teller windows and machines. In the grand extreme, failure to provide this function adequately would cause a bank run, not necessarily because depositors would initially fear loss, but simply because they need liquidity to run their lives and businesses, large and small. Of course a run would feed on itself because a sudden cash-only economy would be devastation to anyone short of good federal funds, probably short of physical species itself.

    ***Such an event would likely cause a freeze of the commercial paper market, requiring a mark-to-market work-out that might take time to clear… from hours to a few days or more, maybe weeks. So, there’s a real, at least theoretical, possibility of two market holidays being declared at one time: in banking and in money market mutual funds. I’m not sure but I think a money market holiday would require a stock market holiday as well, since the work-outs would look to serious balance sheet items of publicly traded stocks.

    ***Now, Winston, you’d have to agree (since you’ve read my theories — you being one of very few willing to launch into that abyss) that this puts real teeth in my discussions of Subjective Liquidity Classification, and it explains why such an event would likely induce the reaction that causes the upset I described in my Perceived Liquidity Substitution Hypothesis. Allowed to progress far enough, it can lead to a sort of “event horizon” in macroeconomics in which monetary policy becomes S-T-E-R-I-L-E.

    How about that for fun?… A disease with no cure? — A witch doctor with no magic?

  47. MDDwave commented on Aug 11

    If the banks “were in crisis”, then what would be the 2000 version of the 1930’s run on the banks be like? Although the principal seems to be the same, the means are so different in the electronic age.

  48. DavidB commented on Aug 11

    Fantastic thread folks. I’d add but the minds on this board covered my points.

    My only other opinion is that this will go on as long as they want it to go on to answer Barry’s question. And we will pay for it by having our cash savings diluted(pensioners and fixed income types will really pay for it!)

    When you control the price of everything on a worldwide scale you determine who is rich and who is poor. The sooner people learn that the better off they will be

    All I’m glad about is that it gives real money advocates another free crack at telling people how crooked their banking system truly is

  49. Stuart commented on Aug 11

    All this is caused by the underlying mortgages turning sour. We’ve only gone through 13% of all ARM resets (across all classes) with the bulk of sub-prime starting in October. What happens when we’re at 25%, 50%, 65% of the arm resets. What will the default rates be then, liquidity squeeze be then, credit crunch be then. Only 13% through and we’re feeling pain now. It’s like a 9 round boxing match and we’re already wobbling…….still in the 2nd round.
    Oh ya,…that Fed liquidity injected yesterday everyone is talking about…those were 3 days repos. The banks have to pay them back on Monday. Going to be a helluva day Monday….and we’re only 13% thru the tunnel of pain.

  50. Eclectic commented on Aug 11


    Settlement is the same now in the electronic age as it was in the 1930s… it all settles in good federal funds.

    In the 1930s you didn’t have money market mutual funds. They were only developed in the 1930s I think. Today mm funds are a significant depository for what depositors assume is the equivalent of good federal funds. Typically they are the equivalent of good federal funds but that equivalency depends on the orderly conduct of the commercial paper market.

  51. Eclectic commented on Aug 11


    Sorry, meant to say that mm mutual funds are an advent of the 1970s I think.

  52. Winston Munn commented on Aug 11


    The theoretical implications are somewhat staggering; it makes one contemplate at what point theoretical and practical merge into current reality, and whether or not that blending is preventable.

    On a related but non-theoretical subject, I wrote a while back about the risk of CINA that some instituions were using. Seeing that this “mystery money” in some cases represented over 50% of net interest gains, I would not be surprised if these were the institutions that will fail or come close to failing first.

    Someone else also asked the question of what a 2007 bank run would look like – it is my opinion that we have just witnessed it, although a mild example.

    The fact that it was basically worldwide is spooky. It no longer appears a repricing of risk; it appears now to be a repricing of foolishness.

    And there aren’t any bigger fools left.

  53. Eclectic commented on Aug 11


    I think those have been re-named. They’re now: Currently Underfunded Nominal Trauched Securities.

    I’ll leave you the punchline.

  54. L’Emmerdeur commented on Aug 11

    I repeat:

    The best way to cure a hangover induced by almost a mutli-year liquidity and credit binge is… to go on another liquidity and credit binge. Hair of the dog, baby!

  55. Winston Munn commented on Aug 11



  56. Aaron commented on Aug 11

    Very interesting charts. I believe they will continue to try to do what they can by keeping the money flowing, but I’m not sure if in the long-term it will be enough. These moves could help out some in the interim, but larger moves will likely be necessary quite soon.

  57. Don commented on Aug 11

    “Since the Fed said Tuesday that things were fine, they have lost all credibility. That can’t be good.”

    Really the problem is nobody has credibility. The Rating Agencies have lost credibiltiy (“AAA”). The Politicians and the Fed have lost credibility (“contained”). Corporations have lost credibility (“no exposure, wait, this just in…, we’re bankrupt”). Kinda hard to sell IOUs in an enviroment where no one trusts anyone.

  58. Kevin commented on Aug 12

    I don’t understand it. Why do the banks need a 3 day loan from the Fed, if the banks are going to have the money+interest to pay it back in 3 days? If the banks are getting the loan in order to pay someone else is demanding to be paid, where is the bank going to get the money+interest to repay the Fed in 3 days? Can someone please explain what is going on?

  59. Winston Munn commented on Aug 13

    By emphasizing MBS repurchase agreements, it appears the Fed is attempting, with whatever credibility they have left, to influence markets into accepting a full-value valuation of these entities.

    However, the Bank of Japan had to infuse again Monday, so it is doubtful this ploy will work.

    The underlying assets are deteriorating, no matter how good the loans. I would expect more Fed action will be necessary in the days ahead. But at some point all the Fed fingers plugging the holes in the dike will not stop the collapse – it seems inevitable at this point that some banks will fail, most likely those that used the most aggressive accounting practices.

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