Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: John Pitera who wrote (10902)	12/13/2008 11:20:18 PM
From: rich evans	1 Recommendation Read Replies (2) \| Respond to of 33421

Everything you say is true. But in this case, the Fed is not purchasing but is selling thus withdrawing money from the banks/ economy with a reverse multiplier effect which you described. The NYFED website also shows on the permanent desk a few months ago a sale of treasuries to withdraw 68 bill dollars which could have a multiplier to 680bill. My thinking is that this is being done to counteract the large increase in the money supply from all the buying and loaning at the temporary Fed desk and all the new facility arrangements which because of the large increases, and length of times now used for the facilities and loans and repos has become quasi permanent transactions especially considering the rollover rates. So by selling now their own bonds they are counteracting these expansionary forces they have put in effect. They are using their own bonds since they are out of treasuries. For the first time in a long time a few weeks ago they bought treasuries direct from the treasury thus again increasing money supply to get some treasuries I guess to trade for the mortgage backed securities and agencies in the facilities they have created. But now by selling instead of buying both their own bonds and treasuries, they are trying to cap this large increase in the money supply. What has saved them/us to some extent IMO is that the banks have not lent out their increased reserves etc from Fed buying so we are not getting the multiplier effect you describe and what the Fed wants. This also seems to be the case with the TARP funds . Why this is, I do not know. A banker I talked to said it was because of pushing on a sring. The banks will loan under the right conditions but won't take undue risks which means in today's time no loans. The spreads also seem to be a stopper. Junk bonds at 15% and AA corporate bonds at 9% seem high with Fed funds rate so low. Libor plus 6% is about the average for small business loans of good quality. So despite all the money, it is not business as usual and the Fed and the treasury with its TARP investments is not getting the response it expected with the economy therefore languishing. Thank God for the Chinese and other foreigners who must continue to put their capital flows into the US from their trade balances. JMHO Rich