Fed pumps 47.25 bln dlrs into US banking system, page 3

Sorry I took so long to respond in this thread but I was knocked offline yesterday and had some ensuing computer issues.

Some people have asked for some background. I'm not a financial expert and usually try to understand the big picture without getting too bogged down by the technical jargon but here goes. (please do your own research as it's infinitely better for your understanding and long term memory to work things out for yourself)

I'm betting that most people have heard the expression "the lender of last resort" when referring to the FED.

What we are witnessing is this exact principle in action. This is applied every day of every month of every year because there are always small banks in trouble or with poor credit ratings etc. What one has to keep in mind with a story like this is the scale of the operation and the banks involved.

What happened in August is that some big lenders got caught with increasing amounts of bad loans on their books. Other banks did not want to lend them money to refinance those loans because they were having trouble with high levels of toxic loans of their own to deal with and try to refinance.

The result was the blow-up of several large mutual funds held by the likes of Bear Stearns and some European banks (finance is truly international) who could not fund their obligations and had people trying to pull their money out of those funds as they tanked in value. This situation has continued to worsen with bank runs in Europe, increasing numbers of funds in trouble and all kinds of trouble for many types of financial instruments know as derivatives. These are basically different types of loans and "financial products" bundled together and sold (works like an index fund or mutual fund which contain several companies' stock but have a per unit value of their own that you pay to buy in).

The problem is that most derivatives have mortgage funds in them and there are some derivatives of derivatives. They are not regulated, are non-transparent and their value is difficult to ascertain. Most banks rely on the "reputation" of the institution selling them or the credit ratings agencies which ignore the toxic debt (or the "sub-prime" debt) and focus of the highest rated product in the bundle to give their overall rating.

So we have a situation where the banks are unsure of the value of their holdings, not sure to what extent they hold toxic debt, face other banks with the same problem and their unwillingness to lend without knowing the risks or want to charge a premium (via higher interest rates) for any loans made to refinance such debts.

You can see that in an economy built on debt financing this a major problem. Enter the "lender of last resort". The only way for the banks to get their hands on money to refinance their debt obligations at a reasonable rate is from the FED who simply "print" that money into existence (enter INFLATION). They lend to the big banks (Citigroup etc) and hope or encourage them to lend to the smaller banks. (you see here how the FED is "encouraging" even more debt into the system)

So the FED has been making tons of new money available at low rates (they've lowered the prime rate twice now - while some other countries have raise them to fight price inflation) in the hopes of keeping the whole debt financing economy afloat. The problem is that everybody is already in debt up to their eyeballs and not really in a position to absorb more debt.

The other problem is the supply of money. The laws of supply and demand generally dictate that the more there is of something the cheaper the price. Thus with all of this new money, each unit falls in value (hence the falling dollar). A vicious cycle is then set in motion where holders of the currency see it loosing value and want to trade it in for something not falling in value. It becomes a game of hot potato or musical chairs and nobody wants the music to stop.

So I hope that people can see that in a time where the price of oil is at all time highs, the the money supply is being inflated (two things that lead to price inflation eventually) the decision by the FED to lower rates (which is usually done to "stimulate" more economic growth i.e. inflation) and open the money spigot is a desperate attempt to keep the party going as long as they can while hoping that a new balance will eventually be reached. Also note they are doing it for the banks and existing economic paradigm, not for you.

That's the way I understand a story like this and why it's important to note the scale of it and the fact they are still refinancing the previous injections of money.

At some point, the music will stop.

I still see lots of people talking about a future crash in the dollar or the "markets" (meaning the index of 30 companies on the DJIA) but if you look at the over 30% devaluation of the dollar over the last couple of years it's already crashed/ing. If it fell 30% in one day everybody would be running around in a panic having clearly seen/recognized the event for what it is, but having an "orderly" decline some people are still waiting for it to happen. Like the frog in the pot with the heat being turned up slowly, they are busy enjoying the warm bath (and even encouraging others to join them) without realising the fate that awaits them.
.