Thursday, February 11, 2010
Fed in Talks With Money Market Funds to Help Drain $1 Trillion
Here he goes again! Time Mag's "Man of the Year" who seems more confused on a daily basis. His new "big idea" is to consider allowing money market mutual funds to enter into some kind of direct relationship with the Fed, like primary dealers, in order to help "drain all the liquidity pumped in during the financial crisis." The idea being, that primary dealers' capacity to buy securities is limited and more buying power is needed?
So far this fiscal year (that's four months) the Treasury has sold $2.7T worth of securities (see data here). That's nearly THREE TIMES AS MANY RESERVES AS ARE CURRENTLY IN THE SYSTEM!
In other words, the Treasury debt sales would have drained Bernanke's worrisome reserves three times over in a mere four-month period had the Fed not been there to BUY an equal or greater amount of those securities to keep interest rates at zero.
What I'm saying is, by simply doing nothing all the reserves go away automatically. You don't have to call in the money market mutual fund cavalry!!
How can we ever hope to get out of this mess when the highest policy makers in the land don't understand basic concepts and principles? We are surely doomed!