They will be wrong.

The end-game of the collapse just got that much more spectacular.”

I’ll assume that Fed and Treasury officials know full well how risky the path taken can be.

Which begs the question: Why do it regardless?

I mean, I can understand that a financial crash would have disastrous consequences for the world economy but this push-n’-pray approach is like going all in in a Texas Hold’em tournament with a 4-7 unsuited hand.

Is the financial sector THAT short stacked?

Cash wants to set the record straight on one thing: if the financials were on a rafting trip (you know, one of those team-building corporate field-trips), it would be in Class V (Eastern Scale) water at floodstage. Y’all might have seen Deliverance? Ol’ Cash happens to have run the Chattooga a time or two, and in this case, last night the Guide fell out of the raft at Entrance to the Five Falls, today the raft went into Corkscrew and flipped, and now everyone is in the water swimming towards such famous drownin’ machines as Crack In The Rock and Sock’em Dog. Hank, Ben and Tim are on river left with throw-bags, except that in their excitement they forgot you are supposed to hold onto the rope and throw the bag, and they are just hurling everything including their PFDs and Tevas into the river, possibly in a not entirely senseless attempt to partially slake the gluttonous lust of Earl the River God and his Dread Double-Recirculators so that maybe at least one of the swimmers makes it. Just so you know.

But the 7-dimensional chimera who’s 3+1-space world-line signature is referred to as “Cash” feels that y’all should know that what has actually happened is that when LEH imploded, so much liquidity concentrating in one place and then disappearing could only indicate one thing… Yes, you guessed it: those whackjobs protesting the LHC had the right idea, but they were lysdexic; it was actually LEH that would start the Mother of All Black Holes. Already you can barely see AIG and WM, they are so close to the event-horizon, and while BAC heroically tried to pull MER out, it just pulled itself further into the accretion disc, where it is spinning along with GS, MS and the rest. Remember Cash’s pardner H. Ross Perot and his Giant Suckin’ Sound? Now there’s a light-show to go with it, mostly in the X-ray spectrum.

The long and short of it is, we’re all Doomed; in fact, in the long run, we’re all Dead. But in the meantime, Cash is taking care of some business and would like to buy a suitable cult, ideology unimportant, serious inquiries only. He stashed some money in an International Bond Fund today, and also has a good supply of shiny glass beads in reserve.

Thanks for your confirmation and further insights, but man, this is making me ill.

It would be hard, in general term,s to devise a worse course of action: increasing leverage and by reducing the segregation of depositary subs, increasing the internal links in a system that is already too tightly coupled. These measures only increase the risk and cost of disaster (if were weren’t already in one).

Oh it is even better — we are now in a situation where in effect:

* Large banks are regulating Fed activities.

* The Fed has increasing requirements to deposit significant reserves with large banks.

* This is to done to prevent an excessive contraction of credit, if the Fed were free not to deposit new funds with the large banks.

* Large deposit taking institutions are *required* to buy investment banks (the G-S reverse).

* The SEC mandates relaxed accounting standards in the stockmarket.

«a continuation of “muddle through” as a strategy»

You forget there is an important election pending. Any substantive action might be interpreted as helping one or the other campaign, so everything has to be frozen until November or January.

Actually even the lack of intervention is helping one of the campaigns — a cleanup now would destroy the republican claims to good economic management.

The strategy seems to be that the race is close enough that the RNC and the business interests that fund them want to see who wins in November. If it is Obama, probably depression and catastrophe before January, if it is McCain, bailouts and inflation.

This is an extension of the Fed’s one-off 23A exemption policy, begun last August. They seem to have turned it into a blanket decree.

Rather than overtly suspending reserve requirements, they simply stated that “collateral” must be provided to the commercial banking arm — but we all know what /that/ means.

The upshot is they are indeed allowing the system to become even more highly leveraged, as if that will solve the problem. The assumption here is still that the problem is a short-term matter of liquidity, and that increasing leverage will not simply exacerbate the problems.

They will be wrong.

The end-game of the collapse just got that much more spectacular.

Kind of a reverse Glass-Steagall. We’re on the march to two megabanks, or three if you count Citigroup on life support.

There is no stability until the structure is the Glass-Steagall structure with commercial banks totally outside the sway of investment houses.

Does anybody know what happens with the Lehman toxic paper on the Fed’s balance sheet? At what point is the Fed stuck?

Fed is going to suffer for its crimes. I expect CITI is going to be high profile banking collapse that could happen and would signal the bottom of US markets. Just note the date of my writing. You’d remember it once CITI got collapsed.Bcoz CITI would obviously make more use of this deal. U know what Citi would do. It would never sleep to swallow the money.
If Bank deposits are allowed to run investment banks, I’d ask US people to deposit their money in Public Sector banks of India, where your investments are safe and secure (It’s not an advertisement. Its truth). Or as an alternative US depositors should find some other country (Country which they trust and sound in economy)and deposit their money in those banks which are by far safest bet.

The irony is that currently in effect it is “too big to fail” corporations that regulate the Fed*mart, and it is the Fed*mart that has to deposit reserves with them .

An article mentioned in another blog:

http://market-ticker.denninger.net/

makes the point that currently the Fed and therefore the Treasury are providing margin lending on stocks (and try to imagine banks presenting Lehman stock at the Fed window…).

But margin lending is likely what has fed the stupendous bubbles that have happened in the past dozen years:

http://bigpicture.typepad.com/comments/2007/10/margin-debt-gro.html

and as I mentioned previously (probably) this seems to have been caused by the effective nullification of reserve requirements in 1995:

http://www.signallake.com/innovation/FedReserve1995.pdf
«The key event that happened around 1995 is that the fractional reserve ratio was not only lowered, it was
effectively eliminated entirely. You read that right. The net result of changes during that period is that banks are not required to back assets which largely correspond to M3 or “broad
money” with cash reserves. As a consequence, banks can effectively create money without limitation. I know that sounds hard to believe, but let’s look at the facts.»

I guess some people will remember that M3 is no longer reported by the Fed. Coincidentally of course.