Not a liquidity crisis in the economy but a potential liquidity squeeze in the financial markets. Much of the futures trading markets are based on margin accounts. It looks like the CME is going to ask for either a lower level of borrowing behind the positions OR put up more collateral in the existing positions. Let’s see how that plays out Monday before we know the answer to the new policy.
I don’t think this Fed Board led by Bernanke will let a deflationary spiral occur if they can help it. For his faults on policy, one thing Bernanke certainly has is a full historical understanding of the Depression and the role monetary policy played in it. He will try to offset the reduction in velocity with increases in the money supply itself.
It’s a heck of a balancing act and mistakes can occur. We’ll know better at the close of Monday how big a deal this policy change is.
Thank you.
“...increases in the money supply itself.”
(shakes head in confusion...)