Liquidity pump

[sassa]

As a member of a managed fund,am I led to believe-
1.If the central banks and/or reserves pump liquidity into the markets,then my investment will be secure.
2.The central banks/reserve will continue to pump liquidity into the market to ensure investor confidence.
3.The central banks/reserve are concerned about the "average joe" and not bailing out the hedge funds.

 

[Captain G]

This is only going to get even more ugly. So all the Central Banks pump and pump and then watch the market balloon go off with a bigger bang when more bad news cames out of the US Sub Primes. It like there extending the life of the Titanic by a few more hours, so that all very wealthy and protected passengers have more of an opportunity to off !!

 

[numbercruncher]

Makes you question the whole system actually, maybe they (the controllers of the financial world) will never allow things to Implode or contract to much, maybe they will always pump and pump, Inflating away all there troubles, until dollars are worth cents then one day when it finally all collapses theyll usher in some true world wide currency ...... the 'worlddollar" or something

 

[Miner]

With liquidity pump I wonder how US government could pump $45 billion into market? Did they buy some shares or bonds or what?
Can some one please give some light?

Also with today's news that Karl Rove, Adviser to President Bush, the architect of President Bush's two national campaigns and his most prominent adviser through 6-1/2 tumultuous years in the White House, will resign at month's end and leave politics, a White House spokeswoman said this morning.
Will it implicate another fall in the US Stock Mkt?

Regards

 

[bvbfan]

So you invest $1000 but the market takes a dive and they are then only worth $100 a few days later.

The financial wizzs pump in liquidity so that the after some years your investment becomes worth $1100. You decide to take your profit of $100.

In the mean time the amount of money has just increased 10 times so that in effect the $1000 only still buys $100 worth of stuff as before.

You get taxed on the $100 again too, so you lost $900 in purchasing power and they also get to tax you on the 'gain' of $100.
(assuming there is no indexation of the cost price)

Noice!!!

What a winner for the government and a loser for John Citizen

 

[bvbfan]

With liquidity pump I wonder how US government could pump $45 billion into market? Did they buy some shares or bonds or what?
Can some one please give some light?

That's the basis of a fiat money system, they can create the money at the drop of a hat or in this case the running of a printing press.

The liquidity injections put money into the system for the period (so 3 days for the Friday injection)
Then today they will draw those injections out.

 

[sassa]

That's the basis of a fiat money system, they can create the money at the drop of a hat or in this case the running of a printing press.

The liquidity injections put money into the system for the period (so 3 days for the Friday injection)
Then today they will draw those injections out.

Are they charging overnight market rates for these injections?

 

[bvbfan]

As far as I know they are trying to bring the Federal Funds rate (the rate the banks lend to each other) in line with the discount rate that is set by the Fed.

They offer them at the discount rate
Maybe this will help
http://www.federalreserve.gov/monetarypolicy/discountrate.htm

 

[dhukka]

As a member of a managed fund,am I led to believe-
1.If the central banks and/or reserves pump liquidity into the markets,then my investment will be secure.
2.The central banks/reserve will continue to pump liquidity into the market to ensure investor confidence.
3.The central banks/reserve are concerned about the "average joe" and not bailing out the hedge funds.

1. Absolutely not
2. No they won't, that's not why they did it in the first place
3. They are not concerned about bailing out either and neither should they be.

 

[dhukka]

With liquidity pump I wonder how US government could pump $45 billion into market? Did they buy some shares or bonds or what?
Can some one please give some light?

Also with today's news that Karl Rove, Adviser to President Bush, the architect of President Bush's two national campaigns and his most prominent adviser through 6-1/2 tumultuous years in the White House, will resign at month's end and leave politics, a White House spokeswoman said this morning.
Will it implicate another fall in the US Stock Mkt?

Regards

The Fed has been pumping money into the market via repos. Most of them have been of 3 day duration. Banks and other institutions submit Treasurys and Mortgage backed securities. The Fed accepts a portion of these as collateral in return for funds. The companies then have to turn around in 3 days and buy the securities they submitted off the Fed.

There is no bailout here. The Fed is not taking impaired securities off the books of banks. The banks and hedge funds still have them. Read here for more info.

 

[ducati916]

Just to provide the context as to the *why*

When the Private Equity guys failed to sell their junk bonds to investors, due to a new pervasive fear that they had mis-priced risk, viz. sub-prime, suddenly a lot of Banks were on the hook.

How so?

The Private Equity boys had contractual agreements that if the paper could not be placed by the banks, then the banks would provide the funding via bridging loans.

Now some $400 billion of bridging loans have hit the banks Balance Sheets, and their reserve requirements due to their very high leverage has been exceeded, thus, they are either

*unable to lend to anyone
*unable to provide reserves to depositors deposits [commercials]
*unable to fund their contractual commitments
*run the risk of a 1930's style bank run

Thus it was vital that the Central Banks step up quickly to provide
*short-term liquidity
*confidence to the man-in-the-street
*confidence to liquidity providers [Corporations that purchase CP]

Developments in the CP area actually are causing problems currently.

jog on
d998

 

[saichuen]

I just found another good link about the money market and the role of a central-bank with easy to understand explanations and examples. For those who is interested, this is definitely a good read.

http://www.jdawiseman.com/books/pricing-money/pricing-money-chapter-1.html