Friday, October 25, 2013


A shocker, it really is.  The Boys in D.C. are finally talking about something that's important, namely the liquidity index of banks in regard to survivability of in a 2008-type event.  It's an important discussion as regular readers will recognize but as usual they are about to get it wrong.

The reasons are simple.  In Washington the answers to nearly problem we face are to either

1.  Throw money at it
2.  Over-regulate, or
3.  Over-legislate

There is never a recognition that sometimes you can't do any of the three.  This is one of those cases.

As we have said over and over; banks get sick on the asset side of their balance sheets by die on the liability side.  The lack of liquidity or to put it another way, the loss of liquidity is leading cause of bank death throughout history.  The gang has figured that out; so far so good.  They also recognize the a Central Bank's primary and most important function in life is to provide liquidity to the system when needed.  The rest of that stuff like promoting full employment is a side show.  But you see, regulators must regulate and legislators must legislate.  This is the rhythm of life.  So, now cometh this mob trying to figure out what is the proper level of liquid assets (U.S. Treasury obligations) a bank should hold as a buffer against the dreaded day when deposits begin to fly out the door.  Of course that is the description of what is going on which is a total nonsense.

This is another in the long list of show trials being conducted to prove to the American people that the regulators, the legislators and all jerks involved are really on top of the issue of risk within the system.  The fact is that in a redoux of 2008, any percentage of risk assets readily convertable into cash that is less that 100% is inadequate.  To force financial institutions to add to their holdings of short term govvies simply for liquidity purposes, (and they must be short term otherwise liquidity suffers the further out the maturity in the inverse proportion to  losses suffered in the event of liquidation) merely insures the reduction in profitability of the institutions involved.  Of course in this era of kill all banks and bankers being a national goal, that may be the reason.  To say that such actions relieve the possible burden upon the Fed is close to a flat-out lie.  The willingness of the Fed to create nearly $2 Trillion in new footings over the past few years in exercises that have accomplished very little gives proof to my contention.  If the Fed, whose job it is to provide liquidity to the system is prepared to create  liquidity out of thin air as we have seen in the QE exercises,  why the hell bother with the nonsense of loading up on low yielding assets when what really works is simply for the Fed to say, "got your back" and for people to believe it.  Aye, there's the rub.  In the brave new world when the Fed is now a subsidiary of 1600 Pa. Ave. we may have a problem...especially with a Chief Executive whose credibility is sorely tested.  But doing something this useless does little more than a soft tummy-rub.  Feels good but accomplishes nothing in the long run.  Better we insure we have the BEST people running our financial institution.  How?  That's for next week.  As for the rest, please stop.

No comments:

Post a Comment