Fed makes biggest temporary injection since ’01

Chest freezer, a little ammo. If you have the means, pull out $500 or so and stick it in your closet. If confidence drops and there are runs on any banks remember that your debit and possibly credit cards may be frozen. This would be temporary, but is still possible.

‘Course it is a $500 run on the bank…

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Complicated subject, I’m barely knowledgeable, but something like this:

The banks have to keep a minimum on hand as reserves, every day. This is the money you do business with. The minimum is required because high level banks don’t give a rat’s ass about you. (sorry, my conspiratorial injection)

Anyway, at the end of the day they have to reach this number and they borrow from each other, if one has a surplus. This can put the bank with a surplus in the position of getting a great deal of money for it’s money and upsetting the delicate balance among the world’s largest financial institutions. So the Fed steps in…something they have done probably every week since 1913. Short term loans, not more than a month or so. If they buy a record amount of bank assests, there is some money that comes back in from previous lendings, so it is the difference you gotta watch out for.

Normally, mortgage-backed securities are one of the safest things in the world – American homeowners scrutinized through a credit process with loan obligations set in stone for decades of compounding profit, all with a failure rate of less than 1%.

Is that really what you hear about the mortgage market these days? Me neither. Fact is, we don’t know what the hell is going on. That makes for a classic lack of confidence.

Why can’t banks meet their reserves? Don’t know that either, but it doesn’t keep one from having an opinion:

1) People are pulling their assets. Not an actual street “run” but a higher level (think Chinese government, large bond investors, etc) run that we can’t see. You’d better believe that the real players will have their money out and gone well before we hear about it.

2) People are tapping their money or the banks reserve through credit cards because they don’t personally have enough cash to make it.

3) Lots of the banks’ “reserve” isn’t quite so solid anymore. The definition of “pieces of paper that have value” is changing before our eyes.

4) 9/11 was an outright emergency and test of confidence. When you have a record amount of Fed dollars required, but no obvious emergency, then there is likely one that you can’t see or one that is hammered on every day but we are too ignorant to understand.

It’s been a long time since we have had a financial emergency, one that the common person is impacted by directly, one that makes the average person begin to learn the terms stagflation, depression, devalued, inflation, gold-backed, two-tier, run, ration, bury-in-the-backyard-in-a-mason-jar, etc.

Oh, the banks that are involved are always the largest financial institutions, there’s no real problem there with branding, just realize that they are all tiered. If you are a member of a credit union that has high in-house asset retention, you are a lucky person. The FDIC will get your money flowing in an event but there may be temporary bank closings.

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As the frequency and dollar amount of write-offs increase, the credit markets will continue to tighten up. Leveraged investors such as banks, brokers, and hedge funds have underwritten the bulk of the mortgage based securities out there and in order to maintain a ‘well-capitalized’ status under federal bank regulatory agency definitions, leveraged investors may need to scale back lending by up to $2 trillion (according to Goldman Sachs) in order to maintain a minimum Capital Ratio of 10%.

To maintain a constant capital ratio of 10 percent, a bank would need to shrink its balance by $10 for every $1 in losses.

In response, the Fed keeps injecting liquidity into the system which helps defuse the credit crunch but it also helps to create inflation and further devalues the dollar.

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Stocking up on supplies is one thing, but if things get much worse it seems that a complete set of the Foxfire books might be a worthwhile investment…

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