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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Enigma who wrote (2239)	11/12/1999 10:10:00 AM
From: Henry Volquardsen	of 3536

D, The physical method of injecting reserves would be the same as we see in normal circumstances, the Fed would buy bonds, notes and/or bills either outright or through repurchase agreements. The mechanics for managing liquidity is well established and the Fed would not need to use anything different. The commercial banks would then provide the liquidity via the broker loan mechanism. It is important to remember what the Fed would be trying to accomplish. They would not be trying to stop a decline or effect price levels. Remember in '87 the market had already declined a long way long before the Fed acted. What they were trying to do is keep the market orderly. The fear was that the banks would respond to a stock market decline by canceling credit lines to the funds. It was feared that this would prompt even greater advance selling as the funds tried to get ahead of liquidity. By providing liquidity, and more importantly by the use of moral suasion (sp?), the Fed was trying to make sure the banks did not withdraw liquidity from the funds and thereby exacerbate the collapse. The point was to allow the funds to continue to operate, including selling, and not force them to also deal with a loss of bank liquidity. At no time was the liquidity to be used to 'buy the hell out of stocks'. The Fed monitored things closely to insure that did not happen. The 4.8% cash position, if that is the average, is probably more the result of the long term bull market than any conscious reliance on the Fed's backing. Afterall the Fed would not act unless the market was already melting down and even then only in a manner to keep the market orderly. Henry

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