Friday, July 31, 2009
specialist short sales
in any case, on yesterday's break and reversal specialist short sales spiked to about 220% of its 20-day moving average. this might be an indication of impending reversal -- or not -- as it arguably was on june 29.
The entire 2008 increase in the monetary base was left in excess reserves. There was no "liquidity creation" to go into the stock market.
In a rate targeting-regime, the banking system can borrow unlimited funds overnight at the target -- zero percent. If banks wanted "liquidity" for themselves or their customers to speculate on securities, there was, theoretically, any amount to be had at zero cost. How much did they borrow on these terms? Zero. How much of the excess reserves were lent out or used to buy securities? Again, in aggregate, zero.
There are lots of reasons why we might be in a vicious bear market rally, but I don't think Fed "liquidity" has anything to do with it. Now, PBOC liquidity, well, that's another story...
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bank ABC can through TAF take some questionable former-AAA assets -- which it had been able to use as collateral to fund for years but can now do nothing with in the private market -- and borrow (indefinitely?) from the fed for 30-90-day terms. if the fed had (rather than ballooning the balance sheet to enable TAF, which is what it did) sold off treasury securities from its permanent portfolio to keep its balance sheet at the same size and excess reserves to nil, the capacity to fund these impaired, rerated securitizations would have been an invaluable liquidity provision for the bank.
in other words, TAF is less about credit creation -- which, so far from being helped, has gone into reverse -- than about funding the banks, preventing their forced collapse as private wholesale borrowing markets collapsed. that liquidity, the provision of which is ostensibly a central bank's job in crisis, saved many banks from collapse but also (with private sector loans contracting) left the banking sector very liquid. some of that liquidity is likely now driving equity and securitization asset purchases.
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