Chasing Red Liquidity Herrings
In response to the earlier post on Treasury's supply/demand imbalance, a keen reader shares the following insight:
if there are ~16t usd assets in banking per the article and ~1% are in treasuries today that means 9% conversion of assets to treasuries remains....the banks are woefully undercapitalized
if figured on a pre-fasb mark to market basis.... so the only other location of assets / capital is the 1t usd sitting in the fed...(unless the banks sell good performing assets for treasury junk)....
9% of 16t is 1.44t so the banks can't meet the 10% requirement although some will get close....my concern is that the 1t usd sitting in the fed may already be in treasuries and that it is not truly cash - frn....
regardless of the form of the excess reserves it means that ben cannot possibly implement reverse repos or any other trick to sop up liquidity and impose a treasury holdings requirementkeep a watch on excess reserves as qe continues until march...i bet those reserves rise to the 1.3t level as ben buys more mbs and takes them off the books in an elaborate shell game....
clearly these are acts of desperation....the titanic did not sink immediately and there was the orchestra playing tunes until the bitter end...
this shell game is more proof that ben will be reconfirmed...who else could manage this joke?
Certainly, should this line of thinking be correct, the Fed will never permit any transparency into its holdings. The circular approach to extracing liquidity by sopping up Treasuries would be blatant monetization of the most criminal degree: the Fed would not only be purchasing Treasuries at a makeshift price, but also paying interest. In such a way both the Treasury and the Fed would be facilitating funding. And one wonders why all of a sudden Tim Geithner is disposable.
And speaking of liquidity, elsewhere Karl Denninger brings up the interesting point that last week's crash may well have been a function of a rapid and premeditated liquidity extraction by the very same Fed, which would thus be sending a political message, as many have already speculated, as to what may happen should Bernanke not be reconfirmed.
I will remind people that in September of 2008 when Bernanke and
Henry Paulson demanded $700 billion for EESA/TARP, and threatened that
"if this doesn't pass the market will blow up."
Well, The House initially refused to pass the bill, if you remember.
Do you remember what Ben Bernanke was doing behind the scenes at the time?
I'll show you - once again - as I pointed out at the time:
Remember this? $125 billion of "slosh", or excess liquidity, drained from the system in the four days from 9/19 - 9/24/2008.
To put this in perspective that was a drain of sixty-five percent of the total excess liquidity in the system - a "starvation diet" if you will - and that withdrawal was an intentional act!
The above is an irrefutable record of what The Fed actually did.
Remember that Bernanke's argument at the time was that the
credit markets were suffering from a lack of liquidity. That is, there
was no problem with firms actually being bankrupt, but they were
If that's true why did Bernanke intentionally drain $125 billion from the system - two thirds of the market's total excess liquidity - instead of adding to it?
What did the market do after The Fed pulled $125 billion in system liquidity out over the space of four days?
Do you remember?
Does this prove
that The Fed intentionally crashed the stock market? No, but it
sure is a damning argument - statements of "do what we want or the
market will crash" along with claims that "the system is illiquid" coupled with an intentional liquidity drain at the very same time, and leaves open the question as to whether The Fed provided "a damn big nudge" to "emphasize their point."
Remember the events surrounding this withdrawal of liquidity?
On September 7th, Treasury took over Fannie and Freddie.
On September 15th, Lehman failed.
On September 16th, The Fed loaned AIG $85 billion.
And on September 25th, the FDIC stepped in and effectively closed Washington Mutual.
Yet in the middle of this "liquidity crisis", while Ben Bernanke and
Hank Paulson were corralling House and Senate leaders in the Capitol
and demanded $700 billion in bailouts for Hank's unlimited and purely
discretionary use, The Fed inexplicably drained $125 billion from the banking system.
And now they're at it again, with Gibbs issuing thinly-veiled
threats that sound suspiciously like the very threats that were made in
2008 - either give the banksters effectively unlimited access to the
taxpayer's jugular vein or the market will crash.
One has to wonder:
Did our economy fall down the stairs or was it pushed?
Three questions remain:
Is not a threat to destroy financial markets along with acting intentionally and directly opposite what you claim needs to happen an act of financial terrorism?
If it is an act of financial terrorism, why has it been ignored for
more than a year instead of leading to a full investigation and
hearing in front of a Grand Jury?
And finally, is the same thing happening - this time hidden because
we can no longer see Federal Reserve liquidity actions in the clear
light of day - once again, this time as a means of bludgeoning The
Senate into reconfirming a man who is demonstrably unfit for his post?
That is, is the economy and our market being "pushed" once again?
Regardless of whether or not one takes these observations seriously, the liquidity endgame is approaching fast if not here already. Zero Hedge will shortly present a cash flow projection model for the United States which will demonstrate what a positive feedback debt collapse spiral looks like.