This is a good question because they are talking about putting a lot of funds into the market. For one, I tend to believe the imbalance of deposits in the system are such that the NY and Wall Street banks owe the rest of the banks literally billions of dollars. It was last summer that I saw that Citi had a Fed funds liability of some $400 billion, meaning they were basically financing their massive lending through the Fed funds system instead of attracting and keeping deposits. Now, I am not privy to how the funds system works, if one bank lends directly to another or if the money is just piled into a pool and it naturally balances out with one bank being compensated for their surplus by banks that have a liability? I would like to be a little more versed on this idea, but in my day to day life it isn't that important. I do know that the actions of the Fed have to do with buying and selling securities and not merely printing money and giving it away, as some on market boards would have us believe. I also know this is for between banks and little else.
One thing I glean out of Fed statistics and many others have made light of before I was aware of this is that the amount of unloaned reserves in the banking system are now negative. What this means is the new auction is going to actually take this number even more negative. What else is going on?
Well, I think these banks need this money to maintain their balance sheets in reality and to keep their liabilities with their customers solvent. Being that Citi is so much in debt on the Fed funds market, they might even have a worsening position there. But, what about the banks that Citi owes? Do they now sit around with all this money on their books or do they go out and buy t-bills? If they buy t-bills, then the real adjustment is only to who hold the securities and draws interest. Something is keeping securities out to 2 years at rates well below the fed funds rate which makes me think that is where all this Fed money is going, cycling back to where it came from.
There is also the drain of money that must be going on in the US due to trade deficits and low interest rates. Being that the internationals don't want the bad stuff floating around, it has to be liquidated in some fashion for the time being and the Fed is doing that. I doubt anyone would want something that JPM, Citi, Bear Stearns, Goldman Sachs or Merrill Lynch would sell them right now. In this sense, the books have to be balanced or there is an accounting problem.
There is an accounting problem anyhow and it reads long term investments and assets held for resale. Wall Street put out a lot of bags, but they got left holding some of their own. It was not likely that the world was going to continue to trade on the scale it had been with the United States for long. It amazes me that Wall Street was able to pull off what they did, which basically was build China and India, bankrupt the United States and destroy the dollar while impoverishing the next generation of Americans in a Ponzi scheme of finance to line their own pockets. This was only minimal a Fed deal, but it was a deal where the door was opened around the world in order to construct it. I think the system of credit is in danger of breaking down and if it doesn't this time, it will next time. There is nothing to change the fact that credit has been rolled over and over again and the system has expanded or inflated on the idea that what was already accumulated was real and could be liquid while being actual. It is my opinion and to the best of my knowledge true that we are about to see what was believed to be liquid funds seize up and literally disappear from the scene. I believe the China banking system is next if anything I have heard about it is true, as it is supposed to be a house of cards. I sense they are financing Wall Street not only because Wall Street has been a big time profit center in the past, but that Wall Street is the liquidity arranger for the world. At least between they, London, Hong Kong, and Switzerland about all liquidity is created and all schemes are too. The schemes are falling apart and China and Arabia can no more let them fall apart than Washington DC.
So, right now there is money that hasn't been drawn in that financed all this crap just floating around for speculation. The foreigners are engaged in a commodity spending spree since they don't want to touch the last round of debt to finance the American trade deficit. This might work for a little while, but I highly doubt the well to do in the US are going to give up their assets because they are blowing their money. It occurs to me that most Americans that have assets to any extent have them because they held onto their money, not because they were great speculators or fantastic earners. The ones that are speculators are about to lose all of theirs, save the few that are on the side of the big money, which I think is selling out. The difference is that the big money is selling stuff they already possess and will have the cash when it means something.
It appears there is a lot of liquidity out there because the markets are trading like there is a lot of liquidity, but I suspect that most of it is there to support debt already created and the market for such debt and very little is actually free to buy anything. Any kind of rush out of money markets to buy equities I think is prone to meet a liquidity crisis.
In the end, the Fed is the lender of last resort, unless we can expect the IMF to come in. That is the ultimate disgrace of a country to have the IMF come in and dictate terms. How is anyone going to dictate terms to the country that has been the demand for the world? Put the US on an austerity program and the rest collapses inside of a year. As I have read on another site, I think we are in a position where either we find a way to wipe out enough debt that we have some rope back or it will be all they can do to keep this from melting down to maximum deflation.