Feb

11

PhilDespite the much publicized efforts of the Fed to make the world safe for banking again there are still signs of a lack of liquidity in the system. In particular the net free reserves in the banking system are about $1 trillion. This sounds like a lot of money but it is not. Despite all the efforts of the Fed the net free reserves have fallen at a rate of -113% over the last 13 weeks. How a positive number can fall 113% and still remain positive is beyond my ken, but perhaps it is some sort of annualized rate.

The other notable thing is that M1 has been fidgeting around the zero growth rate line for something like 18 to 24 months. It is now joined by M2. Ultimately the cause of the current debacle lies with the Fed which has been snugging the money supply for too long. Details are at Wsj.com .

We are all bottom fishers. We are all waiting for the markets to put in a bottom. If we are investors in real estate funded by a 30 year mortgage we are looking for the bottom in the interest rate cycle before we lock in our 30 year commitment. We all play that game. As the Fed continues to ease and lower rates we are all on the sidelines waiting for that bottom. But few are borrowing and it is the act of borrowing that creates money.

The Fed needs to make its moves quickly and boldly and then make it clear that they are done. Only then will people believe that the bottom is in and it is safe to get off the pot and lock in a 30 year loan.


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3 Comments so far

  1. Curmudgeon 3417 on February 11, 2008 9:23 am

    It is possible for Free Reserves to be negative (it is the difference between two positive numbers: Excess Reserves and Discount Window Borrowing), a situation described as Net Borrowed Reserves. When it is positive, as now, it is called Net Free Reserves.

  2. Craig Bowles on February 11, 2008 11:25 am

    http://www.shadowstats.com/ computes M3 and it’s hanging strong around +15%. M3 is the probably the best inflation indicator. Leading inflation indexes use M2+ but it’s delayed.

  3. Lon Evans on February 11, 2008 12:25 pm

    A thought on your final paragraph, “. . . and lock in a 30 year loan.”

    As I understand it, bank’s aren’t handing out mortgages with the same zeal that landed us into this mess. Is it because they finally realized something akin to moral decency, or is it that there are just too few left to fleece?

    My take is that the financiers are well aware of the debt on their books, and are running scared. The game seems to be one of devil take the hind most. A sort of musical chairs that will cull the weaker until the various Feds are “forced” to step in and save the day (with your and my money, undoubted).

    Capitalism, among the plutocrats, seems to have devolved into a state of a specific socialism, a state where the Fed is expected to act as a piggy bank for the privileged. A cursory look at the S&L Scandal grants such an opinion credence. Possibly, we should look more carefully at what occurred during the senior Bush’s watch and how it finally unwound. In historical terms (spiced with a little Freud), we, possibly, might be witnessing one of Victor’s Lobagolas, one acting as the final comeuppance due to an incompetent leadership.

    Lon

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