… with the help of world banking 'super-friends', but stock-watchers are divided on the wash-up …
… and:
The Fed promised to provide whatever funding was needed to ensure that banks were able to continue lending to each other at its desired interest rate of 5.25 per cent and pumped $38bn (£18.8bn) into the system in three separate open market operations.
However, in 2006, at the October 25th FOMC it was noted that:
The President recently signed the Financial Services Regulatory Relief Act of 2006, which gave the Federal Reserve discretion, beginning October 2011, both to pay interest on reserve balances and to reduce further or eliminate reserve requirements.
Have to admit I didn't really think through the implications. I'm going to ask Tim Worstall, Chris Dillow and CityUnslicker if they'll comment on this and tell me if the following thinking is faulty:
1. By eliminating reserve requirements, I presume that means the statutory reserves with the Fed, i.e. the funds to bale out defaulting banks;
2. By eliminating this requirement, obligation is also eliminated, i.e. a defaulting bank goes down on its own, the 1929 situation;
3. A bank going down can either recover funds or close its doors but whereas, in 1929, this mean a run on the bank and therefore closures, in this situation it would mean calling in of credit and other debt on a proportional basis.
4. In other words, the reason there was no major crisis this time was because the Fed baled out the economy. But according to the already signed new regulations, they're not going to assist next time.
This is one way the credit squeeze can begin.
The other thing I want to know is, given this scenario, where is the smart money going to be put in the next two years?
Not sure I agree with your logic. By eliminating reserve requirments all teh Fed may mean is the reduction in the need for a % capital base.
ReplyDeleteinstead with no requirement the currency is entirely paper based and it will be possible to simply print new money to give to the banks. The government could even allow the banks to issue their own money without any sort of depository requitements.
This means the complete end of the gold standard and bretton woods type agreements. It has serious implications for the agreements such as Basle II.
On the downside, issuing money in this way could easily become a huge fuel for inflation and clearly monetartists will be aghast at the prospect.
On the other hand, if this was in place now the banks themselves could have rescued the situation without the need of government help.
As an addition, the extra money created will allow a longer run on the dollar; something America needs to help reduce its huge foreign debt.
So my guess is the smart money won't be in US treasuries by 2011.
I'd like you to know, CUS, that I greatly appreciate your summation, particularly given your current domestic situation. The logic you attribute to me is merely a layman's and of course I'd prefer a professional assessment, whiich you've provided. Thanks.
ReplyDeleteInteresting post but I don't understand all this high finance stuff.
ReplyDeleteI'm not sure the boys do entirely either ;-)
ReplyDelete"The government could even allow the banks to issue their own money without any sort of depository requitements."
ReplyDeleteNot unless they change the laws on currency releases (only the US Government can release monies).
The 'bail' out wasn't as much as you are making it to be James, yes we would have had a recession (as you HAVE to have after a period of growth) but the DOW would maybe have dropped another 4-500 points (yes it's a big drop, but nowhere close to liquidating the country).
The 1/2 point drop in the prime rate this week did more than the decision to bail out the banks on reserve limits.
Thanks Welsh, Wolfie and Lord Nazh. I'm going to hold back from answering the two gentlemen here.
ReplyDelete