Will Fed Try Something New to Aid Markets?

Wall Street Journal ^ | 10 March 2008 | DAVID WESSEL

[dollarbull]

I've never denied that the banking system creates money out of thin air. Now all you need to do is show how DBEI does it. Start from scratch, with the $200 billion in borrowed T Bills used as reserves.

Todd sees 2 gunmen rob a bank, but until someone explains to him the role that the 1st of the 2 gunmen played in the robbery, he doesn't think a crime was committed.

Classic...or should I say "LOL!"

[AndyJackson]

It is like you catch the criminals with the bag of loot, a fired pistol still wearing their masks, hot footing it down the street, and you find the dead teller on the floor, but he denies that the money was "stolen" from the bank.

I guess the bank just makes a ledger entry and it is all ok.

[Toddsterpatriot]

More like - "let's take our $1million of reserves, use it to create $10 million of out thin air and loan the $10MM @ 6% interest. Then we take the interest we earned (on nothing) and buy a Ferrari with it".

I'd ask you to walk us thru the steps, but you've already run away every time I ask. It's like you're making it up as you go.

[palmer]

The banking system as a whole picked up the multiplier. It is an error to state that any one bank multiplies the money. I know what a margin call is and as you explain below, the T-Bills that the investment bank borrowed can meet the margin calls. Now the Fed has gone further, Bear Stearns has an undisclosed credit line of T-Bills from the Fed through JPM for more than just margin calls. Will they pay those all back? Sure. Maybe. Maybe not. It is certainly possible they will default on some of it.

[palmer]

$200 billion in T-Bills added to reserves somehow creates $1 trillion in deposits.

It does (2T or more), but in the banking system as a whole, not in one bank. The 10% reserve requirement is lowered in special cases (which I would think there are more of at the moment).

[Toddsterpatriot]

The banking system as a whole picked up the multiplier. It is an error to state that any one bank multiplies the money.

Excellent! You might want to explain that to a couple of the other people on this thread.

I know what a margin call is

Then why are you talking about banks meeting margin calls?

and as you explain below, the T-Bills that the investment bank borrowed can meet the margin calls.

Bear Stearns is getting a margin call from (for instance) JPM. JPM (or any other bank) is not getting a margin call from the Fed.

Now the Fed has gone further, Bear Stearns has an undisclosed credit line of T-Bills from the Fed through JPM for more than just margin calls. Will they pay those all back?

You mean will they return them. If they don't, the Fed has their collateral. The proper question is, should they fail to return the Treasury securities, will the collateral they deposited have enough value to cover the value of the Treasury securities.

It is certainly possible they will default on some of it.

You bet.

[Toddsterpatriot]

$200 billion in T-Bills added to reserves somehow creates $1 trillion in deposits.

It does (2T or more), but in the banking system as a whole, not in one bank.

No, it doesn't. If the Fed bought $200 billion in T-Bills, the new cash added to the system would end up adding $2 trillion (use a different multiplier if you want to) to the money supply.

The debt swap doesn't have the same impact as new cash.

[dollarbull]

Why would I be sweating my ING position? It tripled since I bought it. And paid some nice dividends.

Do you own any stocks that have outperformed gold over the last 5, 10, 15 years? LOL.

BAC....LOL. $5 and no dividend