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Bank Excess Reserves Projected To Climb By $700 Billion In Five Months As Fed Liquidity Management Becomes Unfeasible

Tyler Durden's picture





 

As Zero Hedge accurately predicted, on Thursday there will be no $25 billion 56 Day Cash Management Bill auction, as part of the just announced roll down of the Fed's SFP (or SFB as it is known elsewhere) program, which will bring down holdings of associated debt at the Treasury from $250 billion to just $5 billion in 8 weeks. Previously we predicted that the impact of this activity will be nothing short of a doubling of POMO but did not discuss the impact on bank excess reserves. Over the weekend, Barclay's Joseph Abate analyzed the impact of the termination of SFP as well as the ongoing QE2, and came to the conclusion that excess reserves, which at last check had been just about $1 trillion (well below where they should be based on recent asset purchases, another topic we have discussed) are about to surge by a massive $700 billion over the next 5 months! What this means is the market will simply factor in even a greater impossibility for the Fed to tighten liquidity when the moment comes (which we believe will be pretty much never) forcing those evil speculators to push all commodities to even greater record highs (yes, rice included), forcing us to get even more bullish on the continuation of the recent round of global food-price hike driven revolutions.

From Jo Abate:

The Treasury announced Thursday morning that it would let the SFB program wind down gradually beginning next week. The program was created in 2008 as a means for the Federal Reserve to drain bank reserves with the help of the US Treasury. Under the program, the Treasury sells 2m bills and deposits the cash raised in its account at the Federal Reserve. In this way, cash moves from the bill purchasers’ bank accounts (more specifically, their banks’ reserve accounts) to the Treasury balance at the central bank. The program has locked up $200bn for almost two years.

Since these bills count as marketable debt, they add to the US Treasury’s running total under the debt ceiling. With the Treasury fast approaching the ceiling, it needs to create room under its remaining capacity in order to keep its coupon auctions regular. Allowing the SFB program to expire is the first step in what we expect to be a series of moves the Treasury will make as Congress debates spending and delays raising the ceiling.

The Treasury will allow the SFB program to roll off gradually – each week, $25bn of these bills will be retired without replacement, so that the program should end by March 30. The Treasury has decided to leave a token $5bn in SFBs outstanding at that point – largely as a placeholder, presumably so that it can bring the program back in the future.

At the moment, of course, the Fed is far from draining reserves. Its asset purchase program will increase reserve balances this spring. We look for bank reserve balances to climb to $1.4trn by the end of March – up from $1.084trn as of Wednesday – with half of the increase coming from the expiration of the SFBs and the rest from the Fed’s Treasury purchases. This forecast assumes few additional surprises in the Fed’s balance sheet between now and then. But the Treasury’s cash balance can be pretty volatile on a weekly basis, as tax and spending flows typically cause significant volatility. That said, with reserve balances likely to reach $1.4trn by the end of March, we look for the effective Fed funds rate to fall by 2-3bp – to around 14-15bp.

The conclusion demonstrates why the traditional Fed liquidity tightening mechanisms will soon be completely useless.

We believe that the Fed’s current tools (reverse repos and term deposits) might be able to soak up $700bn in bank reserves. But with reserve balances likely to reach $1.7trn by the time the Fed is ready to begin draining the pool, an extra tool such as the SFB program might prove useful.

We wonder what happens to already unmanageable liquidity concerns after QE3 is announced, some time in June...

 


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Mon, 01/31/2011 - 14:04 | Link to Comment tony bonn
tony bonn's picture

yes, the fed is a financial terrorist spreading famine, chaos, and crisis with each click of its money/credit creating mouse....how many more countries will remove their usa puppet regime as a result of the sociopathic and psychopathic mind of the commisar?

Mon, 01/31/2011 - 14:06 | Link to Comment EscapeKey
EscapeKey's picture

The liquidity can surely be drained by postponing QE3 (selling it as "we have no need for QE3", only then later to resume the POMOs), and use the reserves to buy every available treasury.

It can furthermore be spun as an indication of a "strong rebound", "proof of a recovering economy" and other such rubbish.

All lies, of course, and it changes nothing but a few headlines, but should be good for pumping the market another 1,000 points or so.

Mon, 01/31/2011 - 14:14 | Link to Comment HamyWanger
HamyWanger's picture

Draining liquidity???

That would cause a terrible collapse.

Ben should keep printing, as it seems to be very efficient yet. And only gold bugs are offended by this, the general population doesn't care, with reason.

Mon, 01/31/2011 - 14:23 | Link to Comment morph
morph's picture

Pyramid schemes always seem like a great idea at the start too...

Mon, 01/31/2011 - 14:44 | Link to Comment Arch Duke Ferdinand
Arch Duke Ferdinand's picture

Whatever happened to Wikileaks Assanges January 2010 release of a US Major Bank's emails?

Mon, 01/31/2011 - 15:10 | Link to Comment tickhound
tickhound's picture

The emails were "better than expected"

Mon, 01/31/2011 - 14:23 | Link to Comment tickhound
tickhound's picture

"...the general population doesn't care, with reason"

Get it right... The general public doesn't KNOW, nor do they understand, for designed reasons.

Mon, 01/31/2011 - 14:29 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

SFP is piling-on wouldn't you say? 

The morts haven't even figured out POMO yet.

Truth be told, they haven't even figured out FRNs yet. 

Mon, 01/31/2011 - 14:50 | Link to Comment tickhound
tickhound's picture

A girl in my office just started using her new BAC credit card for the 1 percent cash back reward. She didn't realize the rate on this card was 6 percent higher than her other card. "But don't I still want the cash back," she asked? Got any "unwanted" gold, I replied? "Ill give you 50 percent cash back"

Mon, 01/31/2011 - 15:33 | Link to Comment ThirdCoastSurfer
ThirdCoastSurfer's picture

That's why that USP commercial is so funny: "Genius"!

Mon, 01/31/2011 - 14:28 | Link to Comment traderjoe
traderjoe's picture

Hamy!

Mon, 01/31/2011 - 14:05 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

When will the Fed's last bullet be pointed at it's own head? Or is this what we are witnessing?

Mon, 01/31/2011 - 14:13 | Link to Comment alien-IQ
alien-IQ's picture

as long as the policy serves to drive the price of NFLX over $300, few with access to a CNBC microphone would dare complain.

Mon, 01/31/2011 - 14:49 | Link to Comment Boilermaker
Boilermaker's picture

SPG to $200 baby!  Strip Malls are all the rage!  They're unbelievably undervalued!!

Mon, 01/31/2011 - 14:26 | Link to Comment cougar_w
cougar_w's picture

Funny thing, looks like the Fed is pointing its last bullet at everyone else.

Here's the situation; It's less like suicide, and more like Russian roulette.

Maybe we really do shoot ourselves in the head monetarily. That would be bad. But what if we can hold on until it's obvious that someone else (well everyone else actually) ends up shot in the head? The one who doesn't end up shot in the head gets all the cookies.

And would that even be evil? Everyone sat down at the hookah lounge opium den and got stoned on cheep hashish/fiat, now suddenly someone is playing that a gun but instead of having a single bullet in it, it's fully loaded and the US get to play last. Once everyone else is shot in the head ... what were the rules again?

This is how it is starting to look to me. Two oceans, and Canada and Mexico, and everyone else is stoned and shoots themselves in the head.

 

Mon, 01/31/2011 - 14:33 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Just say NO to hopium.

Mon, 01/31/2011 - 14:50 | Link to Comment cougar_w
cougar_w's picture

What about cookies though? I think those are fine. Imma have a cookie and coffee now just to make sure ...

Mon, 01/31/2011 - 15:28 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Mmmm Cookie Monster.

Mon, 01/31/2011 - 14:53 | Link to Comment faustian bargain
faustian bargain's picture

Sounds like it's one of those guns that shoots around corners.

Mon, 01/31/2011 - 18:04 | Link to Comment DavidC
DavidC's picture

One can only hope CD, one can only hope...

DavidC

Mon, 01/31/2011 - 14:05 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Long revolutions.

Mon, 01/31/2011 - 14:10 | Link to Comment whatz that smell
whatz that smell's picture

what's the liquidity multiplier when the time horizon is a nanosecond?

Mon, 01/31/2011 - 14:10 | Link to Comment FunkyMonkeyBoy
FunkyMonkeyBoy's picture

The USA (and most other parts of the world) are going to go down BIG time, all because of the criminal actions of a few and the apathy of the many.

You don't recover from fraud of this magnatude and return to normalcy. New World Order, fascist world government is about to be served by Design.

Mon, 01/31/2011 - 14:30 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

about to be served? It's already here numbnuts.

Mon, 01/31/2011 - 14:30 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Spot on FunkyMonkey. The thing is, like a pendulum swing, the hang time can feel like never never land.

That is precisely where we are today. In the hang zone. fraud everywhere, nothing fits together, square pegs and round holes abound.

To think of normalcy as we knew it quite recently, is a pipe dream. A crack pipe dream that is.

ORI

http://aadivaahan.wordpress.com/2011/01/31/then-again-people-choose-yoga-over-gurdjieff/

Mon, 01/31/2011 - 14:11 | Link to Comment the grateful un...
the grateful unemployed's picture

pretty sure the Fed can create deflation in about 15 minutes, 100% certain

Mon, 01/31/2011 - 14:21 | Link to Comment Dr. No
Dr. No's picture

Agree.  Which is why Ben et al choose to continue the QE2 tightrope as long as possible.  They always have the deflationary tools (granted they are in a closet, full of dust and not one is sure exactly how to turn them on) which could be used in the event the FEDs power is being undermind by inflation.  The deflation tools are faster reacting than the inflationary printing.  Ben et al are academic economist and do not want to go down in history like the reichmark.  They will pull the plug once it gets out of hand.

Mon, 01/31/2011 - 14:38 | Link to Comment thepigman
thepigman's picture

It already is out of hand, so Berspanky
clearly ain't the brightest bulb on the
block.

Mon, 01/31/2011 - 14:45 | Link to Comment SheepDog-One
SheepDog-One's picture

Bernank was the perfect dim bulb minion with a doctorate.

Mon, 01/31/2011 - 14:51 | Link to Comment Dr. No
Dr. No's picture

They all are.  All FOMC board members.  They are academics who read text books.  They do not want their name in the history books as being baffoons nor do they want their pension values to be cut significantly.  High inflation will accomplish both.  Ultimately they will stave off hyperinflation because of these factors.

Mon, 01/31/2011 - 14:49 | Link to Comment MachoMan
MachoMan's picture

Not here so much...  egypt, et al, on the other hand...

Mon, 01/31/2011 - 15:50 | Link to Comment the grateful un...
the grateful unemployed's picture

In broad terms the number one deflation tool is price controls. Its the spread between the premium in commodities on spec, and what the markets are willing to pay. In the end you have to crush the spec (with rate hikes first) and then watch prices fall. So if Ben sees an iddy biddy bit of inflation, he unleashes a torrent of deflation by raising rates. 

Mon, 01/31/2011 - 14:31 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

No doubt, but it wouldn't be called deflation, more like complete fucken collapse.

Mon, 01/31/2011 - 14:33 | Link to Comment Dr. No
Dr. No's picture

Details, details.

Mon, 01/31/2011 - 15:07 | Link to Comment Dirtt
Dirtt's picture

Create deflation?  Or just recognize it?

If we all stopped pretending the RE collapse is properly accounted for...

Mon, 01/31/2011 - 14:11 | Link to Comment Cleanclog
Cleanclog's picture

I'm thinking they should dub it their SPF program . . . so they won't get burned.

Mon, 01/31/2011 - 14:12 | Link to Comment tahoebumsmith
tahoebumsmith's picture

They have backed themselves into a corner and now this is all they have left. Without the FED and the continued circle jerk ponzi the government would become insolvent. I can't believe they took us here in only a few short years.When the POMO pump dries up, there will be no more market and the US will go into default with absolutely no way to cover their incompetance. The world reserve currency will be ditched and the dollar will finally lose its credability. Time is running out and they know it.

Mon, 01/31/2011 - 14:37 | Link to Comment Boilermaker
Boilermaker's picture

You seem skeptical about the rally today.  I don't understand that.  Clearly, this is legit.

Mon, 01/31/2011 - 14:44 | Link to Comment SheepDog-One
SheepDog-One's picture

The 3% rally in oil you mean?

Mon, 01/31/2011 - 14:15 | Link to Comment Yen Cross
Yen Cross's picture

Yea I caught the 5 moniker.  Now we know where indirect bids come from. The golden bank of every soverign entity that bids against itself.

Mon, 01/31/2011 - 14:16 | Link to Comment Carl Marks
Carl Marks's picture


http://afterall.net/themes/default/images/elements/lines/redline.png); margin-top: 0px; margin-right: 10px; margin-bottom: 0px; margin-left: 0px; padding-bottom: 5px; padding-left: 65px; position: relative; width: 595px; overflow-x: hidden; overflow-y: hidden; background-position: 65px 100%; background-repeat: no-repeat no-repeat;">Richard John Neuhaus on American Exceptionalism http://afterall.net/themes/default/images/elements/lines/orangelinethin....); text-transform: uppercase; width: 595px; padding-top: 2px; padding-bottom: 8px; padding-left: 65px; background-position: 65px 100%; background-repeat: no-repeat no-repeat;">FIRST THINGS 107 (NOVEMBER 2000): 69-88. Americans have at times "theologized" their history, seeing this experiment as an instrument — maybe even the instrument — of God's unfolding purposes. That way of thinking has been out of fashion for some time now. When it was in vogue, it was sometimes attended by a doctrine of American "exceptionalism" so exaggerated that American purposes were depicted in angelic hues, untouched by the ambiguities, corruptions, and lust for power associated with mere mortals... The caution is always in order. Those who think of themselves as angels may end up by giving themselves license to do things that are, in fact, quite beastly.

Mon, 01/31/2011 - 14:26 | Link to Comment Cdad
Cdad's picture

It looks like criminal syndicate Wall Street banks are gong long electronic market manipulation this morning, which actually means that they are going short certain things that are suddenly priced entirely out of reach for regular market participants, which then causes them to algorithmically buy said manipulated item.

Today's broken, electronically manipulated charts are DXY and $VIX.  But I'm sure this all makes perfect sense in a way that I am too lowly to understand.  After all, it is only my currency and my portfolio insurance represented here, and I should probably never mind what my lying eyes keep revealing to me and simply have faith that, at some point in time, M. Shapiro will finally stop meeting with J. Dimon and L. Blankfein for her daily mind washing sessions...and she will finally get around to putting out a real report on that whole flash crash thingy...which, as I just mentioned, is all starting to happen again in certain elements of our market.

And if I am right, you are going to see a complete reversal on the US dollar, and a complete ramp up in the Vix...but you probably should not worry about any of this as clearly I am just a relic of the past, and I don't even have any I-crap.

What a joke of a market.  Unbelievable.

Mon, 01/31/2011 - 14:38 | Link to Comment SheepDog-One
SheepDog-One's picture

I hate watching Bernank day after day mash something down to ramp BS equities. But he's about finished, his policies are causing govt overthrows, and Israel today is worried by Egyptian rioters in the streets saying next theyre coming for them. This post sucks, yes its true, but things are out of control for this bearded clam Bernank...cant ignore countries of starving people directly caused by your policies how the hell this assclown sleeps is beyond me.

Mon, 01/31/2011 - 15:00 | Link to Comment blindfaith
blindfaith's picture

Why on earth would you continue to believe that this man cares about the starving.  He cares about his wall street masters and buds...period.  This is about robbing the country blind while regular Americans drink beer and watch the football game.

It occurred to me with 10,000 attempted security breaches per hour hitting the Pentagon (and lots of them getting thru) that at some point in the near future some hacker bunch some where is going to breach the Wall Street computers and take the whole mess down...maybe wipe clean the computers that will humpty dumpty busted once and for all. 

Mon, 01/31/2011 - 15:30 | Link to Comment Cursive
Cursive's picture

I really do have moments during my day that seem pulled right out of Mike Judge's "Idiocracy".

Mon, 01/31/2011 - 14:29 | Link to Comment Boilermaker
Boilermaker's picture

REITs have completely reversed Friday's losses....you know, just 'cause.  I knew when I saw the magical futures levitation that they'd go right at it again today.  And, sure as shit, the REITs outperformed by a factor of 3 right out of the gate.

What difference does is make anymore?  This garbage is worthless at this point.  Nobody even believes any of it now.

I don't know why the FED just doesn't have a press release that says the DOW is 15,000.  Why all the drama?  It isn't going to stoke people into getting back into this shit.

Mon, 01/31/2011 - 15:12 | Link to Comment jomama
jomama's picture

because, a lot of the upper 25%ers in the US are still hoping and praying that this thing will turn around or at least stabilize.  many have taken large losses in the last two years and if this demographic gives up the ghost all that will be left is the upper 2%.

and we all know how that ends.  of course, we are all aware it is inevitable as well...

Mon, 01/31/2011 - 14:29 | Link to Comment Dr. Porkchop
Dr. Porkchop's picture

Can I get some of that?

Mon, 01/31/2011 - 15:07 | Link to Comment jomama
jomama's picture

precisely what i was thinking.  

Mon, 01/31/2011 - 14:30 | Link to Comment 10kby2k
10kby2k's picture

Don't fight the fed. Oil up another 2-3%, CRB up and mainstream isn't alarmed?  I think I'm insane.

Mon, 01/31/2011 - 14:39 | Link to Comment SheepDog-One
SheepDog-One's picture

The media hasnt been told to be alarmed yet...bunch of silly putty brained idiots.

Mon, 01/31/2011 - 14:31 | Link to Comment plocequ1
plocequ1's picture

Its all digital. Who cares? Beware the moon lads

Mon, 01/31/2011 - 14:33 | Link to Comment Sudden Debt
Sudden Debt's picture

So American :)

Keep printing billions on a daily basis and call it recovery. WHO CARES IF THE DEBT WILL TAKE 500 YEARS TO DOWNPAY!

HE! It was 500 years ago that Columbus discovered America, and it looks like that was yesterday!

Time flies!

 

Tue, 02/01/2011 - 01:50 | Link to Comment Milestones
Milestones's picture

Not totally-time really flies when you're having F U N!!! Another scotch.     Milestones

Mon, 01/31/2011 - 14:35 | Link to Comment Sudden Debt
Sudden Debt's picture

Once all the money is gone, I bet that 50 years later when Americans will start to realize what happend, there WILL BE a DEBATE to find somebody to blame.

Madoff will do. He's already in jail and will surely be dead by then.

Mon, 01/31/2011 - 14:36 | Link to Comment Cdad
Cdad's picture

So, like I said, I would get out right now.  If I learned anything during the 2007-2008 period in time, we are about to eat a savage reversal in equities.

You would think those flashes would be liars...but they aren't.

Mon, 01/31/2011 - 14:42 | Link to Comment SheepDog-One
SheepDog-One's picture

I sense the same thing, while everyone is now convinced the equity ramp has only just begun and made of Adamantium, one nite soon we will see Asia futures crash and stay there while the dollar ramps up, vix goes crazy...wtf oil up $7 in 2 days and it hardly makes a headline? The new normal is a bunch of weak bullshit.

Mon, 01/31/2011 - 15:09 | Link to Comment blindfaith
blindfaith's picture

headlines???? how is oil up $7 in two days going to compete with Opera finding her long lost sister?  PLEASE, let get our priorities straight.

America's newest industry is made up numbers.  Go ahead, take one...we'll make more.

Mon, 01/31/2011 - 14:37 | Link to Comment 10kby2k
10kby2k's picture

The FED could buy up the excess housing inventory and Obama could hire millions to maintain and manage these properties....and then private contractors could be hired to demolish the failed project.

Mon, 01/31/2011 - 14:43 | Link to Comment SheepDog-One
SheepDog-One's picture

Just like China! And Obama is so excited we'll be more like 'our friend' China so why not...lol over my dead body.

Mon, 01/31/2011 - 14:52 | Link to Comment faustian bargain
faustian bargain's picture

.

Mon, 01/31/2011 - 15:04 | Link to Comment Spalding_Smailes
Spalding_Smailes's picture

MPEL '

Mon, 01/31/2011 - 14:51 | Link to Comment gwar5
gwar5's picture

The Fed is clearly seems to be on a one way trip. Accounting tricks won't help.

Seems likely the looters will need an exit out of USD before collapse,

Look for the dictatorpaths to pull a Ben Ali and go for gold? or,

Invent another exit out of USD to their liking, before the end?

Possible to buy everything for pennies on the post-collapse USD?

Magic money 1.0: 1933 pre-confiscation gold $20; post-confiscation gold $35 by decree.

Magic money 2.0: advantaged conversion rate to a new supranational WRC?

Mon, 01/31/2011 - 14:52 | Link to Comment thepigman
thepigman's picture

Since this ramp is global and based

on Bernank liquidity, the foreign longs

outside the US have to know what's

holding it up, right? Conclusion...they

will sell into it and despite all the

US "strength" baloney, we are 100%

correlated to the rest of the globe.

I just can't figure whether Europe or

Asia implodes first.

 

 

Mon, 01/31/2011 - 14:56 | Link to Comment FranSix
FranSix's picture

"are about to surge by a massive $700 billion over the next 5 months! What this means is the market will simply factor in even a greater impossibility for the Fed to tighten liquidity when the moment comes"

Or that we'll see negative rates.

stockcharts.com $IRX

http://tinyurl.com/4pph6u5

Mon, 01/31/2011 - 14:56 | Link to Comment OMG
OMG's picture

The market where nothing matters at all to any of the bots that are doing the trading DOW 36,000,000,000,000,000 her we come!

 

 

Mon, 01/31/2011 - 15:09 | Link to Comment alter ego
alter ego's picture

Hey Tyler.

I think you should find a better word to describe the situation.

Why don't you just  the words "unfuckeable" or  "unsinkable"

Bank Excess Reserves Projected To Climb By $700 Billion In Five Months As Fed Liquidity Management Becomes Unfuckeable.
Mon, 01/31/2011 - 15:07 | Link to Comment max2205
max2205's picture

700 B ...hmmm where have I seen that number before

 

 Finaly from Paulson to the Banks in 2 years.....good job Hank

Mon, 01/31/2011 - 15:19 | Link to Comment AldoHux_IV
AldoHux_IV's picture

The federal reserve will be dismantled (either peacefully or violently), and the treasury will be reformed as a corresponding result.  If this does not occur then what is happening in Egypt is only a small sample of what will happen to one of the world's largest economies.  At that point, you can count on a spike of revolutions worldwide.

Mon, 01/31/2011 - 15:22 | Link to Comment MyKillK
MyKillK's picture

Is the Fed still paying interest on excess reserves?

Mon, 01/31/2011 - 15:40 | Link to Comment davepowers
davepowers's picture

Yes.

Bernanke justified paying interest (in 2008, I think) as allowing the FED to 'expand its balance sheet infinitively.'

basically, the FED could buy anything from the banks and pay by simply crediting the bank's reserve account at the FED.

The payment of interest allows a benefit to the banks, who earn slightly over 3 mo tbill rate on their passive reserves. 

Interest payment is also a vehicle that allows the FED's QE programs. Some have argued that paying interest proves the FED does not want the Banks to lend more and, to the extent the reserves are not withdrawn and there is no borrowing/lending involving in the in place reserves, then that is certainly the effect, if not the intent, of the FED's interest payment program.

 

Mon, 01/31/2011 - 16:39 | Link to Comment MyKillK
MyKillK's picture

Definitely agree with you on this one. Seems like paying interest on excess reserves is a great way to keep inflation down, by discouraging bank lending, yet still providing extra liquidity to the banks through interest payments to keep the markets afloat and the imaginary recovery alive.

 

Can you imagine the inflationary tsunami that will occur once that $1.0 (and soon to be $1.5+) Trillion in excess reserves are let loose? Just like with QE, I think the Fed has dug itself into a hole it's never going to get out of.

Tue, 02/01/2011 - 01:58 | Link to Comment Milestones
Milestones's picture

Never thought of it in that light!. Thanks for the post.    Milestones

Mon, 01/31/2011 - 15:26 | Link to Comment davepowers
davepowers's picture

Abate is wrong and falling for Treasury/Fed propaganda when he says:

"The program was created in 2008 as a means for the Federal Reserve to drain bank reserves with the help of the US Treasury. Under the program, the Treasury sells 2m bills and deposits the cash raised in its account at the Federal Reserve. In this way, cash moves from the bill purchasers’ bank accounts (more specifically, their banks’ reserve accounts) to the Treasury balance at the central bank. The program has locked up $200bn for almost two years."

No, the program was initiated to provide funds to the FED to use to purchase assets, at the time MBS/GSE paper. It was a cornerstone of QE 1.

So, while the money was 'withdrawn' it was promptly reinjected by the FED and given the banks in exchange for part of QE 1.

The $200 has been wound down and reexpanded over the years. In 2010 it went from $5 billion (they keep it at that to maintain the program) all the way back to the current $200 and was used to buy US treasury notes/bonds. In other word, it funded QE 2 during 2010.

So, the 'locking up' part is bogus.

He is correct, IMO, that the winding down of SFP will be offset by the growth of excess reserves. Like with the rest of QE 1, the Fed will pay for asset purchases by crediting the reserve accounts of the selling banks.

I wish someone would do a fuller analysis of the relationship between excess reserves and financial speculation (eg. commodity speculation). If the banks aren't withdrawing excess reserves, which they largely haven't and which would require the FED to come up with the wherewithal to pay them back, how is the existence of growing excess reserves impacting bank lending? How is it impacting commodity and other speculation?

Tue, 02/01/2011 - 00:51 | Link to Comment ConfusedIdiot
ConfusedIdiot's picture

Good question, Dave Powers. Are the banks able to employ their excess reserves which are earning 1/4 percent? There seems to be confusion (accounting is confusing) regarding how the reserve holders are able to both take in 1/4% while enabling these funds to work in the US $ carry trade which is providing low cost speculative dollars to commodity, currency, and securities traders. CI

Mon, 01/31/2011 - 15:35 | Link to Comment davepowers
davepowers's picture

Again, Abate is off mark re: SFP when he says:

"We believe that the Fed’s current tools (reverse repos and term deposits) might be able to soak up $700bn in bank reserves. But with reserve balances likely to reach $1.7trn by the time the Fed is ready to begin draining the pool, an extra tool such as the SFB program might prove useful."

Using a reexpanded SFB in the future won't 'drain the pool' if it is used to reduce excess reserves. In that case, the Trasury would sell extra bills to raise money, loan it to the FED. If the FED then uses the money to reduce excess reserves, it will, in effect, be cutting a check to the banks. The banks balance sheet then changes from $200 bn in excess reserves to $200 bn in cash. That is not draining the liquidity pool. It would be making it even more liquid.

Recall Tony Cresenzi's post here from last week - so far, excess reserves are a dormant pool of funds, not withdrawn to lend. Changing that from excess reserves to cash, makes it immediately available for lending/speculating or helicoptering.

Mon, 01/31/2011 - 16:26 | Link to Comment treasurefish
treasurefish's picture

Question:  What does it mean when there is a flash crash in the VIX? Did the market stabilize for a blink of an eye?

http://finance.yahoo.com/echarts?s=^VIX+Interactive#symbol=%5EVIX;range=1d    

 

Maybe it was to create a nice-looking doji?    http://stockcharts.com/freecharts/gallery.html?s=vix       

 

 

Mon, 01/31/2011 - 16:42 | Link to Comment LexLuger
LexLuger's picture

Don't blame me.

I voted for Ron Paul, and I'm damn proud of it.

-----------------------------

New live futures trading room using ThinkorSwim opening soon.

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Mon, 01/31/2011 - 16:45 | Link to Comment cocoablini
cocoablini's picture

Isn't this Bernankes' dream. Soooooooo much money sloshing around that it can't be sterilized by the Fed or the Treasury.
Qe3 is for the government to be able to run by borrowing at cheap rates. Pomo is for banks to collect free cash for debt. The liquidity drain isn't important to Ben- he wants inflation as it proves his flatearth theory correct. Now that liquidity draining is near impossible, no matter what Congress does, that means the banks get a lion share of the new money. Right in front of our noses too.

Tue, 02/01/2011 - 02:42 | Link to Comment Milestones
Milestones's picture

Que Pasa   ???    Por Que       ???      Banca      ??        Willy Sutton  here I come. Ya got to go where the $$$ is.

Milestones

Mon, 01/31/2011 - 17:17 | Link to Comment davepowers
davepowers's picture

I've been trying to reconcile the commodity/stock speculation and resultant price of stuff inflation we're seeing with the arguably sterilized, passive, in place excess reserves.

One possibilty is that the overall level of excess bank reserves is not impacted by an increase of lending. The FED argued this in a 2009 position paper, using the example of a bank A that lent to Company B who deposited the loan in Bank C. Bank A draws down its excess reserves to make the loan, then Bank C deposits the loan money into its reserve account at the FED. Individual banks reserve accounts change but the overall level of reserves at the FED does not.

This does not account for the discrepancy between the declining bank lending and commodity speculation. Perhaps the answer is that the overall lending numbers, like the overall reserve numbers mask what is happening inside the lending industry. To take an example, bank A has no interest is lending for so called constructive purposes (whatever that is these days) and calls loans all across the board. But they replace those with loans to hedge funds and the like to engage in commodity speculation. The overall level of bank lending could decline, but the internal composition of lending could go from 'constructive' purposes' to 'unconstructive ones' (again, whatever that means).

In that manner, surging hedge fund/commodity speculation loans could be soaring, but masked in overall bank lending numbers decline.

It's a theory. I don't know and wish the learned would address this. 

Somehow, one needs to render consistent the existence of surging price inflation (esp for necessities) with the apparent fact that allegations of direct Fed printing via QE are overstated.

I remain of the tentative view that the power of Fed QE is largely psychological - people think of it as printing, therefore it is.

The psychological view that the FED is printing would and probably is encouraging stock and commodity speculation.

Again, it's Wizard of Oz stuff. What is happening is different depending on what side of the curtain one is on. But as long as belief in the all powerful Wizard remains, then the Wizard is all powerful. 

Mon, 01/31/2011 - 19:00 | Link to Comment bingaling
bingaling's picture

Jeez if your theory is right we are in worse trouble then when we started . The rally is on loans and margin and FED QE hasn't really caused any inflation? All of the up is pure speculation that inflation will occur? I would hate to be the last hedge fund out of that door .

The more I think about your theory the scarier it is . It is truly paper, on top of paper , on top of paper with nothing tangible behind it .When the profit taking starts it all collapses .A true ponzi but of unimaginable size .

Tue, 02/01/2011 - 01:05 | Link to Comment ConfusedIdiot
ConfusedIdiot's picture

From your own hypothesis I see a Learned person, Dave Powers. The rabbit is visibly pulled from the hat - see the uptick in commodities. The source of funds is the $US. How does the rabbit get in the hat? If all the reserves are contained at Fed then where do the lenders find the "cheap" dollars to lend to the carry traders? Banks seem to produce their balance sheet positions on a very fixed quarterly time table which on the last day of the quarter shows the funds in reserve. The same goes for the Fed balances. This is a good thing no doubt. CI

Tue, 02/01/2011 - 01:10 | Link to Comment ConfusedIdiot
ConfusedIdiot's picture

Dave Powers: "I remain of the tentative view that the power of Fed QE is largely psychological - people think of it as printing, therefore it is."

Agreed Dave Powers. In QEII the FED is via a commission payment encouraging PD's to sell back to the Fed the Treasuruy securities that could as easily be sold on the open market. No real money has been created - the longer term dated security on the Fed's Liability was just changed to an immediate term security called an FRN. But as you mentioned if people think it is printing then the psychological effect may be all that is needed to spur the "animal spirits". CI

Mon, 01/31/2011 - 18:01 | Link to Comment prophet_banker
prophet_banker's picture

excess reserves by definition= banks are lending much less than they are able  to.  This debt/money creation is the source of our  local money supply, so it shrinks.  In the future though, the big banks will be set for the next leverage boom cycle.

 

but check it against dow vs gold, growth rates lower than inflation rates

Mon, 01/31/2011 - 19:19 | Link to Comment bigargon
bigargon's picture

Ben is giving the world  the biggest dollar Enema in history. he just keeps squeezing the bag.

Mon, 01/31/2011 - 23:50 | Link to Comment flow5
flow5's picture


 

The primary problem is the Keynesian training of the FED’s technical staff that advises them that interest is the price of money, not the price of loan-funds (leading the FED’s technical staff to use interest rates as the monetary transmission mechanism since 1965). 

I.e., the liquidity preference curve & the demand for money are false doctrines.  They are failed theories.

But now the FED is going to put all their eggs in one basket (IORs).  IORs are the functional equivalent of required reserves (i.e., they are contractionary; & as such, were used to offset Bernanke’s liquidity funding programs (expansions), on the asset side of the FED’s balance sheet).

If IORs weren't the functional equivalent of required reserves, and didn't absorb other commercial banking system deposits, IORs could not then be used as a monetary policy tool to regulate the money supply (via the FED's preferred monetary transmission mechanism - interest rates).

Apparently the FED's Ph.D.'s think that they can fine tune interest rate pegs to match what was previously absorbed via changes in reserve requirements.   More bad theory.

 

 

 

 

 

Tue, 02/01/2011 - 01:16 | Link to Comment calltoaccount
calltoaccount's picture

" she will finally get around to putting out a real report" -- 

and indict herself and co conspirators?  never.  

she's a career coverup, always look-the-other-way crime-enabler.  

just what egyptians hate about their own corrupt administrators.

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