Fed Speaking Out Both Sides Of it's mouth

[LabMonkey]

Here is a 9 minute video clip from a man named Karl Denninger who runs a website called tickerforum.org and fedupusa.org. In this youtube video, he says that the slosh ("tells you how much free liquidity is out in the banking system at any one given time") has been decreased by 125 billion over the past few days.

http://market-ticker.denninger.net/archives/590-FLASH-Fed-Speaking-Out-Both-Sides-Of-Mouth.html

http://www.youtube.com/watch?v=daOfYmSLW_U

-80 billion decrease on 9/19/08
-20 billion decrease on 9/23/08
-25 billion decrease on 9/24/08

The "total sloshing" is 65 billion at present day - a decrease from the average, which he suggests should have prompted a rate cut. He says that if the fed were truly been concerned with liquidity, they would have resolved this already, suggesting perhaps they want to scare people/congress so the bailout will pass. I was hoping to see what you experts might say. Any veterans on the subject able to comment?

[rzero]

Re: Fed Speaking Out Both Sides Of it's mouth

There is a lot of misunderstanding of the relationship between open market operations and interest rate targeting. Focusing solely on traditional temporary open market operations misses the bigger picture. Since the effective federal funds rate has been around 1.50 since 9/19, this means US interbank lending has been significantly more "liquified" than before 9/19. It's that simple. This would be from either a decreased demand for cash, or from more reserves being added to the system. The former isn't true with the markets acting like they have lately, so the only possibility left is the latter.

So if traditional TOMOs are contracting, then the fed is expanding its other facilities to offset this contraction, plus some. These other facilities also provide liquidity that doesn't show up in the effective FFR, because they effectively temporarily take illiquid assets out of the system and add liquid treasuries. The easiest way to see what is going on is by checking this page, which is updated weekly.

So the bottom line, a lower effective FFR combined with an expansion of these special facilities means more liquidity, not less.

[Rantly McTirade]

Re: Fed Speaking Out Both Sides Of it's mouth

Fed Funds @ 1.5%, v target of 2%, may also indicate further credit
rationing between banks; those who NEED to borrow FF can't(aren't
trusted by banks w/funds to lend), while banks viewed as strong
credits DON"T NEED to borrow FF-their strength has attracted
plenty of other deposits, at least relative to (minimal) good lending
opportunities they see. Doesn't preclude Fed adding reserves by
new facilities, in fact if they're draining via traditional OMO, they
probably are.