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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Kirk © who wrote (8792)	11/29/1998 9:28:00 PM
From: MrGreenJeans	Read Replies (1) \| Respond to of 42834

Financial Times, November 30th US: Money market liquidity When the US Federal Reserve cut rates last week, it said unusual strains remained in financial markets. But what exactly was this Delphic utterance referring to? Clearly not the stock markets, which are storming ahead. Nor, presumably, the bond markets, which have reopened even to junk. The best candidate for the Fed's jitters is probably money market liquidity, which has recovered in recent weeks but not to normal levels. If this is Alan Greenspan's concern, what is his game plan? Perhaps he is creating a breathing space for the financial system, which is sitting on a mountain of short-term liabilities, to switch to longer-term borrowing. There is, indeed, anecdotal evidence that this is happening. For example, one US investment bank has recently cut its commercial paper (typically one-to-three month debt) from about $40bn to $20bn. So at least some institutions are learning the big lesson from the financial crises of the past year and a half: do not rely excessively on short-term borrowing because it might not be rolled over. There is, though, a niggling worry: the pain in the western banking system may not have been severe enough for everybody to learn this lesson. In fact, by cutting interest rates, Mr Greenspan has enhanced the attraction of short-term funding - while at the same time pumping up already inflated equity prices. All this puts the Fed in an awkward position: if it raises rates, the bubble will burst; but when it cuts, the bubble gets bigger. Markets seem to know no middle ground between exuberance and despair.