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Fed Boosts Cash Auctions to $900 Billion, May Do More

Monday, October 6, 2008, 11:00 AM

Wow.

This is big news.  This means that the Fed is either prepared to destroy the remaining portion of its decimated balance sheet, or (and this is more likely) it is going to be directly printing money out of thin air to pass out in exchange for bad debts.

Quote:
Oct. 6 (Bloomberg) -- The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens.

"The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said in a statement released in Washington today. Fed and Treasury officials are "consulting with market participants on ways to provide additional support for term unsecured funding markets,'' the statement said.

Today's steps follow a hoarding of cash by banks that sent the premium on the three-month London interbank offered rate over the Fed's benchmark interest rate to a record. Industrial companies are also finding it harder to raise cash after the market for commercial paper shrank to a three-year low as investors flee even borrowers with few links to mortgages.

"It is pretty much all out war,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., New York. ``They are pulling out all the stops to try and get borrowers and lenders to meet and do transactions once again.''

Link (Bloomberg)

The speed and depth of this crisis are without parallel.  We are very, very close to an all out-banking holiday and all that means.

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41 Comments

hulksmash's picture
hulksmash
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Posts: 1
Another Einstein quote...

 Seems to fit our current situation: 

"We can't solve problems by using the same kind of thinking we used when we created them."

vegas316's picture
vegas316
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Inflation / Depression

One of the things I find so interesting about this crisis is the speed at which I am learning new things, yet still have so much more to learn!

First of all, I sincerely hope that the Fed manages to get us on the inflationary track instead of the deflationary track. My understanding of deflation isn't that awesome yet, but I know enough to definately not want things to go that way (espically since I have tried to align my limited investments against inflation).

I was assuming that no matter how things turned out however, we were going to be going into a pretty substantial depression over the next couple of years. However, my (flawed?) understanding of how the central banks control currency lead me believe that a depression is caused by a contraction of the money supply.

If the Fed is going all out to inflate the money supply (and assuming they succeed), will that prevent the depression? Meaning, what will be the differences in the economy (day-to-day living) if they succeed, vs. if they fail?

mcknz.ball's picture
mcknz.ball
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What is wrong with these people
I just read an article on CNBC in regards to the huge plunge in the markets that we have seen today. These 'experts' and economists keep hammering in the concept that "if something isnt done soon we could be facing a recession." Huh? So if a recession (in my commoners understanding of the concept) could be defined as a significant decline in economic activity spread across the economy, lasting more than two quarters, normally visible in real GDP, real income, employment, industrial production, and sales, then WHAT HAVE WE SEEN OVER THE LAST YEAR!?!? Maybe they are just out of touch, but regardless of thier fuzzy numbers I have watched what this has meant for people in my own community and around the country and I truly believe that these people are nuts! We MAY see a serious recession? MAY? I think we are a little past that point of blind optimism.
r101958's picture
r101958
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Current deflation caused by deleveraging

IMO the deflation in commodities and equities as well as the strengthening of the dollar that we are now seeing is due to deleveraging by banks, hedge funds and financial institutions both here and overseas. I believe this is temporary...at least where commodities and the dollar are concerned. There are about 400 trillion in these derivitives worldwide and I think it is going to take a long time to unwind that much debt.

DanS's picture
DanS
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Yes, and yes.
The current global financial contagion, which has been building for years, won't be either inflation OR depression.  It will be BOTH hyper-inflation AND depression.  Why?  Think back to all the exponential curves shown in the Crash Course.  When the fiat money supply goes stratro, it is the central banks' hesitancy to 'feed the beast' that triggers the market freeze and deflation.  The western-world's monetary system has reached the point of exhaustion.  A new financial system will arise (phoenix-like) from the ashes.
Doug's picture
Doug
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auctions?
Could someone explain what they mean by "auctions of cash to banks"?  Is this a euphemism for banks bidding to see who's willing to pay the highest interest rates for money loaned from the Fed?
songbird's picture
songbird
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Banking holiday?
Chris says "we are very close to a banking holiday and all that means".  What exactly would that mean?
r101958's picture
r101958
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Banking Holidays....
It means the Fed closing all the banks for all business (or most business) for an extended time. This would probably be announced something like this: 'We need to get a handle on the debt and can not do so with so much volatility in the financial sector occuring on a daily basis. Therefore we are announcing a nationwide banking holiday for the next (time span) so that we can make better progress at saving the national financial system.'
Ray Hewitt's picture
Ray Hewitt
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Bank Seizure Coming

Chris says:

The speed and depth of this crisis are without parallel.  We are very, very close to an all out-banking holiday and all that means.

They normally announce them on the weekend, but it could happen any day of the week starting today. Load up on cash and food while you can. If the banks totally shut down, stores and gas stations will have to sell their remaining inventory on a cash only basis. Forget debit and credit cards. Cold cash gets you one more trip to the grocery store. If it doesn't come to pass, the cash and food won't be wasted.

affert's picture
affert
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Debit cards
In the event of a bank holiday, would debit cards still work?
Clear Vision Studio's picture
Clear Vision Studio
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a new financial system?

Curious?... a new financial system? Are you implying the 'Amero' perhaps? I'd like to hear more on this.

I spoken with someone recently who has seen what the Amero looks like.

Is this possible? Can someone comment on this please.

thank you.

 

Xflies's picture
Xflies
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USD vs Euro... OK, I understand but USD vs JPY, AUD, CAD??!

I posted a month ago asking for anyone's thoughts on why the USD was so strong... a few days later, Chris posted his update and talked about the impending doom in the USD which was great to hear but the USD continued its rally.  I then posted asking for thoughts on the Euro trying to figure out this move and was unaware of how bad it was in Europe and then this past week I've clearly seen why this has happened.  But now that everyone is on top of the reasoning behind the USD rally vs the Euro, how about the USD vs JPY, CAD, AUD?  OK, I can see the explanation behind the CAD and AUD saying they are commodity based currencies and all the hard commodities and oil have taken a beating but the Canadian banking system is very strong.  Also, Chris has mentioned before about how commodity based currencies should give some protection.  Our banks in Canada are in a much different position, I think I heard a stat that mentioned they are only levered 10-12x which is night and day to US and European institutions. 

 What I'm trying to get at is that in the end, you can have all sorts of theories but with every new data point, you need to treat them independently of your previous hypothesis and re-examine things.  Could it be that what we are seeing is a global 'margin' call and that the flight to the USD is only because the meltdown is affecting all currencies and countries?  If this is a new path of thinking, this would mean that risk might be measured in the overall capability of an economy to withstand volatility before folding.  This could partially explain why companies that are levered ie. emerging countries or small commodity based economies ie. Australia may have greater risk.  The implied vols on the AUD is at 25%!  almost double that of Europe.  We can hypothesize all we want on events coming up in a few years but personally I find making predictions past a few months as being a coin flip since there are just too many factors to take into account.  If you want to make money, focus on the short term... don't buy the long term big picture crap.  Stay liquid, short term focused and treat every new data point as it is ... you will make money in a bear market and a bull market.

Reuben Bailey's picture
Reuben Bailey
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New financial system

I'm no expert, but here is my opinion.

I don't know what the previous poster meant by "new financial system", but from what I have heard, the Amero represents a continuation of the current one with a different name.  My bet is that the current system will have destroyed the confidence required for systems of it's kind, and this will force the powers that be to implement a completely different system.  If they do not, one will be implemented for them by the public, even if it starts out as a direct barter system.  I do not mean to say that we won't see the Amero, just that if we do, I don't see it lasting very long.  All of the current assets and debt would have to be converted to any new currancy, so the new currancy would start out in just as precarious a situation as the USD is now.

NLP's picture
NLP
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Definiton of TAF

Hi Doug if you haven't already check out the following link for the FED definition

http://www.federalreserve.gov/monetarypolicy/taffaq.htm
jrf29's picture
jrf29
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This is a post from Chuck

This is a post from Chuck Butler, Vice President of EverBank, Inc, who writes a daily newsletter.  He, like Chris, had concluded that the rise in the US dollar, relative to other currencies, must be entirely the result of shadow manipulation of some kind, since it seemed to have no other logical explanation.  However, on Friday, he came up with a new theory, for what its worth.  This theory is not exlcusive of the idea that markets might be manipulated to some extent, and also explains the rise of the dollar against currencies other an just the Euro.  I don't understand the idea enough to endorse it, but I point it out:

"Good day... And a Happy Friday to one and all! A Fantastic Friday, I hope! As the blind man said, as he spit into the wind... It's all coming back to me now... And so it was yesterday morning after I had hit the send button for the Pfennig, a trader friend called to give me some insight, and... After talking to him, it all came back to me now...

What the heck is he talking about now? I hear you asking... Well, recall how I have been scratching my head and wondering just how in the world the dollar could be rallying in the face of all that's going on, and the bad data to boot. Well, here it is folks, sit back and take a sip of coffee...

One of the things we've learned this week is that the European banks are not getting to go Ollie, Ollie Oxen Free, on the holding of toxic waste debt... And since they are U.S. issued mortgage bonds, the trader that called tells me that they need to have capital reserved in U.S. dollars. Well, usually, these banks use LIBOR for this funding... But with the credit crunch going on all over, LIBOR rates have gone through the roof. So... Looking for alternative means of raising capital, the European banks have turned to the euro / dollar swap market... Selling their euro reserves and buying dollars.

SLAP! I could have had a V-8! Now why didn't I think of that? Anyway... This is what's going on... One would logically think that when LIBOR gets back to normal, these euro / dollar swaps would be reversed. Now... The next question is... What will it take to get the LIBOR rates to normalize? Well, that would be an unlocking of the credit crunch. And according to our Fed Chairman, U.S. Treasury Sec. and President, the way to unlock the credit crunch is to pass the Bailout Package! Dang it! I knew it would all get back to that darn Bailout Package!"

jrf29's picture
jrf29
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Re: Debit cards

It would depend.  Perhaps yes.  Perhaps no.  See http://en.wikipedia.org/wiki/Corralito for a wiki overview of the extended baking holiday during the Argentine economic crisis.

jrf29's picture
jrf29
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jrf29's picture
jrf29
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Yes, and the more they
Yes, it is a short term loan (28 day or 84 day) of federal reserve cash, and the more they auction, the lower the interest rates are.  That is partly how interest rates are controlled, and is also used to increase the amount of money in the system (since the loans are constantly being renewed).
miranda's picture
miranda
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I wonder who started buying stocks again at 2:45 pm

I never used to think to wonder about that kind of thing. But now I do...

I'm no stock trader, but obviously it takes a large number of 'buys' to make the market move up by 400 points. Did a huge herd of traders simply turn around en masse after lunch, believing they could buy stocks cheap? Some hedge fund thing going on? Foreign buyers? Some other reason... Any guesses? Is it totally naive or totally paranoid to wonder about this?

 

Doug's picture
Doug
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thanks jrf29 and npeykani
As I understood the info at the link. all the institutions bidding submit whatever interest rate they are willing to pay, and when bids are tallied, the highest interest rate bid gets the first allocation and on down the line until all the money put up for bid is gone.  So, different institutions will be paying different rates on the same auction.  Is that about right?
Judithkitty's picture
Judithkitty
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Hello dan

Dan what you say is very interesting, but why are central banks hesitant to "feed the beast" ?

Does it have something to do with how other countries are owed in USD?

 

jdownie's picture
jdownie
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Fed is bankrupt

If you have the time go to www.silveraxis.com/todayinsilver/ and read Fed is bankrupt: update on the helicopter.

 

Ray Hewitt's picture
Ray Hewitt
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The Phantom Bull
Last hour buying after the market is tanking occurs with regularity. It's got Paulson's Plunge Protection Team footprints all over it. A drop of 800 points on the Dow would have set off a worldwide panic. If they do this long enough, the Treasury is going to find itself the majority owner of 30 blue chip companies.
rvwainscott's picture
rvwainscott
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Inflation is out of the question

The Fed has a long history of wanting to avoid inflation even if it means higher unemployment or unbearable interest rates. Though it is possible to inflate our way out of this mess, there is no guarantee that the inflation would not lead to Hyperinflation.

Now, for people in debt up to their ears, hyperinflation would be a get out of jail free card. Imagine hyperinflation like they had in Weimar Germany with workers being paid twice a day (those of us that could find work). Now imagine being able to pay off all of your debts - home, credit cards, car loans, student loans, etc, with what you earned in one day. Do you, in a thousand years, think anyone will allow that to happen? They'll declare martial law before they allow something like that to happen.

I'm guessing that we'll see a repeat of the Great Depression and it will be a deflationary one and those that have some cash will be able to use it to buy the factories and farms for pennies.

Finally, I'm not an economist nor am I even an investor other than investing in my own supply of food, water and ammunition, but I can see the writing on the wall and it spells out hardship for us all.

Gado's picture
Gado
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Stop Paying Mortgage Payments

I thought  this was cute from Stefan Karlsson an economist.

http://stefanmikarlsson.blogspot.com/

Stop Paying Mortgage Payments!

If you haven't already listened to it, do listen to the LRC podcast where Lew Rockwell interviews Peter Schiff. As usual with Peter Schiff, he provides a lot of valuable insight, but what I actually found most interesting is how he reveals that with the bailout package, it is economically rational to stop paying off your mortgage. Because if you do, your lender will sell the mortgage to the government who under the package must do everything they can to prevent foreclosure, which will mean that they will have to offer you a sweeter deal. So when Rockwell asked Schiff what an ordinary person can do to save themselves in the ongoing economic meltdown Schiff replied that the most obvious and best thing to do is stop paying your mortgage. I spontaneously laughed when I heard that as I figured he was only ridiculing the irrationality of the bailout plan. But maybe Schiff is right, maybe it would be rational (at least for some people) to stop paying your mortgage with this bailout plan. Can anyone find any reason why Schiff is wrong on that?

posted by stefankarlsson at 11:13 AM

 

Lemonyellowschwin's picture
Lemonyellowschwin
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"Inflation is out of the question" -- LOL

Have you read what the Federal Reserve Chairman has to say on the subject?

 "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm 
srbarbour's picture
srbarbour
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There's a reason he's called Helicopter Ben

Indeed Tongue out

There is ample evidence that Helicopter Ben has indeed unleashed his disturbing joke of 'hypothetical black helicopters' raining down freshly printed cash upon the people (to 'inflate' our way out of the problem).

Alas, we'll soon discover if the Economists who theorize (much like they theorized that there was/still is no problem with our high debt! or that house prices can not fall...) that a recession can be 'infalted out of'  (because recessions are "always" deflationary...).   Or, if common sense and rational thought hold and we end up screwing ourselves twice in one go.

Look on the bright side.  We are now about to discover if economics is wrong about yet another one of their theories.  One that was shot to pieces by the 70s stagflation but was then "rescued" with the careful application of sophistry and self delusion.  

To think, some people accuse physists of being money grubbers when all they want is comparatively dirt cheap super collider to experiment with.  Comm on! economists get to carry out their experiements with $14 trillion dollar a year economies!

--

Steve 

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vegas316
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Can't have it both ways...

According to "Money Masters" a depression occurs when central banks contract (ie shrink) the money supply. Inflation, by contrast, is defined as: "overissue of currency, resulting in a reduced value of that currency".

So it seems to me:

Depression = contracting money supply = deflation

XXX = rapidly increasing money supply =  Hyperinflation

The question is: what is XXX?

It seems that we can not have hyperinflation in our currency at the same time we are going through a depression. They are mutually exclusive.

 

Does this make sense?

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srbarbour
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You can have it both ways

[quote]According to "Money Masters" a depression occurs when central banks contract (ie shrink) the money supply. Inflation, by contrast, is defined as: "overissue of currency, resulting in a reduced value of that currency".[/quote]

Both of these are deeply flawed definitions of Inflation and Deflation.  They are artificially created and reflexive upon an unproven Hypothesis (strictly economics calls it a theory, but most economic theories lack the evidence required to be called such).   As such, these definitions result in circular logic, or the fallacy of begging the question.   That is, in order accept the conclusions derived from them we must:

1) Agree that deflation can only occur by means of a central bank actively destroying the money supply.   That is, the falling prices of houses right now due to a glut of supply is not deflation.   Nor is any effect of this current deleveraging and debt destruction.

2)  Agree that inflation can only occur by means of a central bank actively increasing the money supply.   That is, all those rising prices caused by the oil spike this summer were not inflation under this definition.

Again, as I said, these definitions are clearly and deeply flawed.  They do not meet the definition of inflation and deflation used by common individuals, or even a wide number of  economists.   As always, any redefinition of a common term to suit ones convince is at best misleading and in general stinks of sophistry.   Given the vast amounts of psuedo-science polluting economics, this should make you deeply skeptical of any further claims. 

 

More widely accepted definitions would be:

Depression:  A severe and prolonged recession marked by any of, but no necessarily all of: high unemployment, rising poverty, destruction of wealth, decreasing economic productivity, etc... 

Recession: An cyclic economic event where the economy experiences a brief and generally mild bouts of any set of: high unemployment, rising poverty, destruction of wealth, decreasing economic productivity, etc...

Inflation: Any broad decrease in the value of a unit of currency marked by a rise of prices.

Deflation: Any broad increase in the value of a unit of currency marked by a fall of prices.

 

As a good rule of thumb, any economic theory that starts by distorting these definitions is at best talking about a magical alternate universe which probably has little to do with this one.

--

Steve 

 

bluebird's picture
bluebird
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recession or depression

 

I'm thinking we are already in the recession based on all the indcators out there. So when these indcators show depression, the media will say that we are in a recession.

 

 

Rustyrayl's picture
Rustyrayl
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What about a digital banking system

Question 1---If the Currency were to collapse and a new system were to arise, wouldnt it be wiser to implement a digital type of bank account system, where money was stored in the form of Digits instead of paper money, most of the people I work with all do their banking and pay their bills electronically anyway?

 Question 2----I wonder sometimes if  we aren't headed to a place where we will no longer see all the mega banks with their multi million dollar monster headquarters buildings, and hundreds of remote branch offices, because as I have heard lots of smart people say " this is a systemic crisis". As the system feeds on itself, it only gets worse and it seems to make sense to me that banks will not be able to sustain all the services they provide, they will have to come up with new innovative ways to cutback, layoffs will happen, and remote banking sites will have to be shut down. In that type of environment where your local bank may be 70 to 80 miles away, it only makes sense that we get rid of cash entirely, is this deep a crisis too farfetched or unrealistic?  

jc281272's picture
jc281272
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From Australia
Considering our banking system is different to the US's, does anybody have any thoughts on how we may be affected by the US dollar crashing?
Tesseractal's picture
Tesseractal
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Monananda's Amero query

 

Search the web enough and you'll discover that a mock up Amero was mad by a commerative medal maker.  From there the concept developed a life of its own - not necessarily basd on fact.  E.g. as I understand it the congressman who made mention of it did so on the back of a joke being played on him, but his mention of it gave it 'credibilty' - think twice about believing what a politician says.

Explore the concept of a single continental currency by all means - the problem with the Amero is that is suggests some existing structures and form are in place that there is no evidence to support. 

One of the Amero related sites quotes as part of its substantiation the development of a central superhighway from Mexico to the north - ostensibly as a conduit for trade between Asia and central America - if this foundation is tested using some simple transport economics and a tiny bit of measurement you will find its about as realistic as the tooth fairy.

Tesseractal's picture
Tesseractal
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To From Australia

 

I suggest making this a forum topic and transferring the discussion - epeciall given that some 40% of subscribers are from outside the US there should be an active dicussion.

I have thoughts and would certainly be interested to see others

 

srbarbour's picture
srbarbour
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Re: Digital banking

[quote]Question 1---If the Currency were to collapse and a new system were to arise, wouldnt it be wiser to implement a digital type of bank account system, where money was stored in the form of Digits instead of paper money, most of the people I work with all do their banking and pay their bills electronically anyway?[/quote]

In many ways, such a system already exists.   Paper money however is likely to persist for many reasons.  Not the least of which is a lack of traceability and better contained losses via thievery.    It'll take several generations for paper money to vanish completely, if it ever does.

[quote]As the system feeds on itself, it only gets worse and it seems to make sense to me that banks will not be able to sustain all the services they provide, they will have to come up with new innovative ways to cutback, layoffs will happen, and remote banking sites will have to be shut down. In that type of environment where your local bank may be 70 to 80 miles away, it only makes sense that we get rid of cash entirely, is this deep a crisis too farfetched or unrealistic?  [/quote]

It seems to me that you misunderstand.  Basic commercial banking is still a highly profitable business.  The major commercial banks  BoA, J.P. Morgan, etc... are the guys buying up many of these investment banks.  So, no, it is quite unlikely that banks will stop offering services for customers.   Overall these costs are rather fractional as compared to the scale of losses and earnings in their overall business model.

If anything, the fallout of this crisis will make staple banking stronger and more profitable.   Americans, once this is through, will almost certainly make the step to returning to a proper and fiscally responsible savings regime.   Thus bank deposits will increase increasing overall yields.   That's still a few years in the future though. 

--

Steve 

Set's picture
Set
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The PPT or "Plunge Protection Team" steps in arounf noon on real
The PPT or "Plunge Protection Team" steps in around noon on down days and pumps the market uo.  This is just one of the manipulation tools used to destroy the credibility of the Free Market System."
srbarbour's picture
srbarbour
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Never ascribe to conspiracy...

[quote] Is it totally naive or totally paranoid to wonder about this?[/quote] 

Never ascribe to conspiracy that which can be easily explained by stupidity.   Recall that many economists are still predicting a mild recession with maybe -1% GDP loss. 

To put it simply, there are a lot of Americans that believe that things will turn up sooner rather than later.  Its almost as though most of them don't realize that all throughout 1929 and 1930 everyone kept thinking its just about to get better!   Hell, for a while stocks even resumed their climb.

Then they plummeted for ~2 years straight.

I've said it before and I'll say it again.  Deep down in their hearts, Americans just don't believe in long recessions. These last few weeks have been a nasty shock, but don't doubt for a minute that over the next months as soon as things calm for a bit that everyone -- the media, economists, the market, etc... -- will start perking up as though its all over. 

Then the crisis will steam roll them once again, and eventually the horrible truth will be beaten into their souls.

--

Steve 

vegas316's picture
vegas316
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Thanks!

Hey Steve,

That does make sense. Bad assumptions and definations lead to faulty logic. Thanks for your response!

 Dave

 

gauntlett's picture
gauntlett
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interesting point

I've been mulling this one over for a while, and admit that I still have a ton to learn, but this makes a ton of sense.  Thanks for posting that!  

 And here is where I get a little confused...  How does the Euro / dollar swap market differ from the Forex markets or are they the same thing? 

 

-T 

machinehead's picture
machinehead
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Newton's Corollary of Monetary Action/Reaction

"The Federal Reserve will double its auctions of cash to banks to as much as $900 billion."

And gold be up 2% this morning.

Coincidence? I reckon not!

Money mouth Death to Bretton Woods II! Money mouth

Welcome to Bubble III, my fellow Weimericans. 

Tesseractal's picture
Tesseractal
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Posts: 25
What about it - the digital banking system
For a system to work it has to have broad application - I suggest that within the US there are a signficant number of people who wouldn't be in a position to use an electronic system and internationally there are more that couldn't than those that could - remember passbook banking - it still exists!!

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