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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Augustus Gloop who wrote (9109)	5/16/2008 10:35:45 PM
From: John Pitera	Read Replies (2) \| Respond to of 33421

(The FED can not give money away fast enough!!!!!!!!!!!!!!!! this is a truly extrordinary development; read story in WSJ below. So we need to make banking even more profitable? and the reason that the FED wants to inject this additional liquidity and fatten bank profits, is to keep the overnight FED funds rate from going to low on interbank overnight loans that go below the FED Funds rate. This is an obvious indication of how weak the banks are on a capital reserve basis and must portend more storm clounds on the horizon. I disagree with banks which benefit greatly from the fractional reserve money multiplier effect of their lending, having the their pot sweetened even more, with the FED paying interest on their Reserves. And I think that this absolutely reinforces my Argument that the FED's overall balance sheet can not be only 800 Billion dollars. The consensus 4 to 6 weeks ago was that the FED had already used half of their balance sheet ie 400 Billion and the Vanguard Fund Founder John Bogle was commenting that the FED stood some risk of running out of bullets, as they had already utilized half of their balance sheet in assisting the banks through this credit meltdown. If the FED was anywhere NEAR running out of powder, bullets, reserves, money, electronic units of value on a computer double entry accouting ledger, how in the name of Mayer Amschel Rothschild could the FED have the extra money, during this crisis to start paying interest payments on how many Hundreds of Billion, or is it indeed a few Trillion dollars of the Reserve Requirements for all banks under the FED's domain? Would some one please explain that logical inconsistancy to me ...... or is this the old story of the FED having an neverending supply of liquidity, that old could be called into question by a liquidation run on the currency itself.) I also have to point out this is also got to be part of the BASEL II global capital reserve upgrades that are scheduled to be going into effect globally this year. Btw.. Greg Ip who is one of the top 3 WSJ reporters and authored this piece comments about this proposal solving TWO technical problems for the FED... I only seem to see one of them discussed in the article.... anyone got any insights into that? ----------------------------------------------------- Fed Asks to Now Pay Interest on Reserves By GREG IP May 17, 2008 Federal Reserve Chairman Ben Bernanke asked Congress to accelerate the date when the Fed can pay interest on commercial-bank reserves, a power that would give it better control over interest rates and more leverage to battle the credit crunch. In a May 13 letter to House Speaker Nancy Pelosi, Mr. Bernanke noted that Congress gave the Fed the authority to pay interest starting in 2011, because "the payment of interest on reserves would contribute to the efficiency of the financial system." He went on to say: "In order to prevent further delay in realizing the benefits of this legislation, we recommend that the date be changed to make the legislation effective immediately." Similar letters were sent to Senate Banking Committee Chairman Christopher Dodd (D., Conn.), and the committee's senior Republican, Richard Shelby of Alabama. The letter was expected. The Wall Street Journal reported earlier this month that the Fed was seeking the authority. Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed but receive no interest on these deposits. Having the authority to pay interest would solve two technical headaches for the Fed. If banks earned interest from the Fed, they would have no incentive to lend out excess reserves for less. That would make the Fed's benchmark federal-funds rate, which banks charge on overnight loans to each other, less likely to plunge below the Fed's official target -- now 2% -- on days when the system was awash in cash. Officials from both parties have suggested they are favorably disposed to the proposal. Passage isn't guaranteed. The controversy surrounding the Fed's loan of $29 billion to assist in J.P. Morgan Chase & Co.'s takeover of Bear Stearns Cos. means some lawmakers may balk at any move that would benefit banks. The proposal would likely be attached to a larger and probably unrelated bill. Write to Greg Ip at greg.ip@wsj.com