Wednesday, October 29, 2008

Reserve Fund shut out, cutting rates, and liquidity traps

Start burying your gold in the backyard....

The national “bank holiday” that ushered in the New Deal in 1933 locked up the public’s cash for four days. The crisis that hit last month at the Reserve Fund, the nation’s oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.

At least 400,000 people, and perhaps as many as a million, can’t get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.

Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate.
And on the subject of money.... The feds just cut rates again:
NEW YORK ( -- The Federal Reserve cut a key short-term interest rate by a half-percentage point Wednesday and expressed continued worries about the damage being done to the economy by the ongoing crisis in the financial and credit markets.

The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.

Investors had been expecting a half-point cut and some were betting that the Fed would even cut rates by three-quarters of a point to 0.75%.

The Dow Jones industrial average, which had been higher ahead of the Fed's decision, turned lower shortly after the announcement.
Is anyone in charge thinking about a liquidity trap?:

Here’s why these events are distressing: When the Fed douses the monetary system with cash but banks hoard it, monetary policy no longer works and the economy starts to crash. This is called a “liquidity trap” and it occurs when interest rates are at or close to 0 percent and monetary policy is no longer effective. Newly minted money is injected into the banking system but trapped by financial institutions that are paralyzed by fear. When banks don’t recycle their money through normal lending activity, it doesn’t matter how much the Fed increases the money supply. Monetary policy just won’t work. Failing monetary policy usually means that we are going to have a recession, or worse.

This is what happened at the beginning of the Great Depression and during the Japanese banking crisis of the late 1990s. In both cases, economic activity slowed dramatically and deflation occurred. No matter how hard the central bankers tried to pump money into the economy, it wouldn’t work.
Use plastic mayonnaise lids on the jars, the metal ones rust.

Or better yet, let's all go to Zimbabwe!



Ali said...


ellroon said...

Wet pissed off kitteh! They better check their shoes for the next few weeks...