Thread: Fed has solved the Y2K bank-withdrawal insolvency scare.
I yapped in a post a while back on Y2K and about how I thought that banks were going to be screwed because of mass withdrawals, that the bond market would crash in 12/99 as rates rose due to the withdrawals, and how if things really were screwed up for a while and cash was king for say, a few weeks then the banks would be insolvent. No longer. Once again the geniuses at the Fed have surprised me with a superb plan. It was announced a couple weeks back but I didnt read anything on it till last nite. They coulnd't have been more quiet with the news, IMO. I was reading a GS bond market outlook weekly report dated 12/4, granted to me by a generous colleague. On the last page they discussed the 12/99 treasury contracts, similar to the afr.com.au article I posted here last week, showing a chart which indicated that specs were betting on rocky money markets in 12/99. Well, the GS review mentioned that the Fed had just that week 'established' a 60-day repo system. Problem solved - simple as that. I can't believe that this was not a major story. It is major to me because it gives the banks two
months of breathing room at Y2K to have all the money back that us panicky citizens will withdraw in 12/99. As I've been persuading everyone, you have nothing to lose by withdrawing a huge chunk of cash in late 12/99 because you can redeposit it on monday, 1/3/00 if everything is ok. If verifones & computers are down for whatever
reason, you'll be happy you withdrew, so its a no brainer right? However, I also yapped about how if things were screwed up for a few weeks trouble would insue because the money would not be back in the banks the following week to satisfy the huge amount of repos that will obviously be transacted in late 12/99. Well, the new 60-day repo gives the nation 2 full months to redeposit their panic-hour withdrawals. The bond market will thus avoid a crash. Congrats to all at the Fed for their simple yet brilliant solution. The only thing detrimental to surely happen will be a mildly weaker dollar due to the cash mill running at full at steam.
Closest article on the web I found even mentioning the 60-day repo:
biz.yahoo.com
My original, pitifully doomsaying Y2K post and excerpt on the bank
withdrawal blurb:
Message 6207623
Excerpt:
'You wrote in the Y2K book that interest rates should approach 3% as the millenium approaches. I have a drastically different view. I believe rates will soar as the millenium approaches. If people are withdrawing such a high vol. of cash, something has to give. Money Market funds will be slaughtered due to the withdrawals. You have thousands of MMFs in the U.S. If 5% - 10% of the money in the MMFs was suddenly called for withdrawal/redemption, the bond market will obviously crash. How can it not? Some commercial paper and T-bills in the MMFs will obviously have to be sold in order to meet the demand for redemptions. Bond prices will plummet and yields will rise. You may suggest that the banks set up repos with the Gov. to meet the demand (every bank will need cash thus one could not borrow from another as usual), whereby the Gov. will supply them cash overnight while holding the MMF comm. paper & t-bills as collateral.
But what if the money is not all re-deposited on monday? Not a single bank will be off the (repo) hook.
Note to thread: I do find it comforting that I wasn't the only freak preaching fear, as it was being priced into the charts just 2 weeks back. Anyone see any way the 60-day repo system could backfire?
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