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Janet Yellen Says “Liquidity is Strong” [Ignore the Man Behind the Curtain]

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51 comments on Janet Yellen Says “Liquidity is Strong” [Ignore the Man Behind the Curtain]

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Please consider this press release Statement by Secretary of the Treasury Janet L. Yellen and Federal Reserve Board Chair Jerome H. Powell

“We welcome the announcements by the Swiss authorities today to support financial stability. The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation.”

Liquidity Rules

  • If you feel compelled to issue a statement on liquidity, things are not liquid.
  • If you have to provide hundreds of billions of dollars to maintain liquidity, things are not liquid.
  • When multiple banks in the US and Europe have to be bailed out to stop runs on banks, things are not liquid. 
  • When governments resort to forced shotgun marriages of banks, things are not liquid.

That Fed Chair Jerome Powell and Treasury Secretary Janet Yellen felt compelled to come out from behind their curtains to issue a joint statement on liquidity is proof they are both very afraid of a liquidity collapse even after hundreds of billions of dollars in global liquidity efforts by central bankers.

How Much Liquidity Does It Take?

  • The Fed is backstopping about $600 billion in underwater positions of US banks
  • The Fed guaranteed $175 billion in deposits at Silicon Valley Bank
  • The Fed guaranteed $89 billion in deposits at Signature Bank 
  • The Swiss National Bank is providing $100 billion in liquidity in a forced takeover of Credit Suisse by UBS

Hmmm. Things are so liquid that it takes $1 trillion in added liquidity to keep things liquid.  

Liquidity is gushing say the man and woman behind the curtain.

For details of the shotgun wedding of the two largest Swiss banks, please consider UBS Offers $2 Billion to Take Over Credit Suisse, Valued at $8 Billion

It seems like we are drowning in central bank liquidity to keep things barely liquid.

The Perfect Solution to the Banking Crisis Is to Make a Truly Safe Bank

At the root of it all is unsound money as noted in The Perfect Solution to the Banking Crisis Is to Make a Truly Safe Bank

A couple people responded that my take on fractional reserve lending is wrong. It’s not. 

That money is borrowed into existence (or artificially created by QE) is irrelevant.

What else do you call it when 100% of the money that is supposed to be available on demand isn’t? In fact, only a tiny fraction is. That’s how and why bank runs happen.

Perhaps the term fractional reserve banking rather than fractional reserve lending is a better description.

Regardless, if we had a full reserve system, a run on a bank would not matter so it wouldn’t happen.

My bottom line is correct “We don’t need to up the FDIC limit, we need to eliminate the need for FDIC and create a safekeeping bank.”

Of course, I prefer a 100% gold-backed dollar, but we do not even have a 100% dollar-backed dollar!

This post originated at MishTalk.Com.

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Mike Shedlock

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51 Comments
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killben
killben
3 years ago
“Regardless, if we had a full reserve system, a run on a bank would not matter so it wouldn’t happen.”
At this stage after years of full reserve system – will not everything collapse. So is it even possible even should one want to do it?
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StukiMoi
StukiMoi
3 years ago
Reply to  killben
“will not everything collapse”
Why would corn decide to collapse and die, just because of some monetary arrangement? Ditto factories falling down. Houses, and roads, evaporating? And people’s learned skills?
In fact, the only thing which could “collapse” as a result of some arbitrary change in monetary system, is the unearned privileges of those who the current system is arbitrarily propping up.
You’d still have the same number of people, and the same number of houses. So: No increase in homelessness. Ditto carlessness, roadlessness etc. Trump may have to move to a smaller place, so that someone who do, or at least at some point did, someting useful and productive, can live at Mar-a-Lago. But other than that, nothing meaningful will “collapse” at all. In fact, considering how ridiculously distorted things are now: For far and away most people, as well as for US real economic output, hence incomes, going forward: Such a “collapse” is the best of all outcomes. An event to be cheered, not feared.
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ga7pilot
ga7pilot
3 years ago

Again Mish, why would your design be any better than what we have? Full reserve? The whole problem with the banking system is government intervention to prevent failures. And here you are insisting that we remove all risk of failure. Risk makes the world go around. Have you heard of creative destruction?

How about we just let the market determine the reserves, and let depositors determine the risk they are willing to take? Yes, completely decentralize the banking system, but then just let it be. Creative destruction always determines the best design. I can guarantee it wouldn’t be full reserve.
The banking system wasn’t full reserve before centralized banking, and we did just fine. We managed to finance the industrial revolution without full reserves, and without deposit insurance. It did fine. There were regular bank failures, and deposit haircuts. It wasn’t the end of the world. The good ones picked up and we trudged on, without great systemic contagions, it works. Depositors almost always got most of their money back, it just wasn’t on demand. Even in the systemic crisis of the 30’s, the recovery rate was pretty good.
No, the only thing wrong with the banking system is that government can legally print the money that banks create, and so must intervene to protect it. I highly doubt that Mish intervention will be any better, or anybody else’s intervention for that matter. Just get out of it’s way.
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MarkraD
MarkraD
3 years ago
Reply to  ga7pilot
I definitely agree with your sentiment over Mish’s, that said, true capitalist price discovery requires full disclosure of ALL information relevant to a given asset.
Banks, in particular, are far too evasive with disclosure, citing “proprietary” as rationale.
Dodd-Frank sought to eliminate much of that, and then regional banks were exempted.
.
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ga7pilot
ga7pilot
3 years ago
Reply to  MarkraD
Disclosure is crucial.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  ga7pilot
That is so stupid.
I suppose next you will want people in the marketplace to determine interest rates?
Oh. Wait a minute…
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xbizo
xbizo
3 years ago
Does S&P hit 3700 next week?
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Jack
Jack
3 years ago
Reply to  xbizo
Market went up a little last week with 2-3 bank failures last weekend.
This weekend only 1 bank failure.
Will market to end up even higher this week?
Too much money still sloshing around.
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MPO45v2
MPO45v2
3 years ago
Midsize banks want infinite FDIC for two years…..nothing to see here or worry about unless you are banking at a midsize bank.
A coalition of midsize U.S. banks, Mid-Size Bank Coalition of America (MBCA), has asked regulators to extend FDIC insurance to all deposits for the next two years, Bloomberg News reported on Saturday citing an MBCA letter to regulators.
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Zardoz
Zardoz
3 years ago
“Liquidity is strong” sounds like a euphemism for a desperate need to micturate.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Zardoz
Piss on the banks, all the banks.
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StukiMoi
StukiMoi
3 years ago
Reply to  Zardoz
The Pavlovian dimbulbs have learned that if they say “liquidity”, then the idiot choir can be relied upon to cheer for them. Since membership in idiot choirs, requires sufficient economic illiteracy to fall for such nonsense as “liquidity” somehow differing from “solvency.”
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Christoball
Christoball
3 years ago
Brenton Woods began right after after World War Two. Brenton Woods II began in the early 1970’s.
This is an honest question…… Are we now in Brenton Woods III, IV, or V and what is a short summary of the current version?????
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shamrock
shamrock
3 years ago
Liquidity IS strong… as long as people don’t run the bank.
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Casual_Observer2020
Casual_Observer2020
3 years ago
Maybe this whole banking crisis is crypto induced ?
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MPO45v2
MPO45v2
3 years ago
Reply to  Casual_Observer2020
So buy PUTS on NYCB on Monday?
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Zardoz
Zardoz
3 years ago
Reply to  Casual_Observer2020
It’s where the most stupid things were happening, so it’s likely.
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MPO45v2
MPO45v2
3 years ago
Good news everyone, academic paper says only ~200 banks may fail or more if there is a panic. Time to play bank roulette!
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Zardoz
Zardoz
3 years ago
Reply to  MPO45v2
The Bank of Graham Crackers and Ammunition beckons.
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Jack
Jack
3 years ago
Reply to  MPO45v2

Now we can confirm why reverse repos exist. Pad the banks with free money without people noticing to avert disaster.Cat is out of the bag.

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Casual_Observer2020
Casual_Observer2020
3 years ago
NYCB subsidiary acquires Signature bank assets but FDIC still holds about $65B in receivership.
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Maximus_Minimus
Maximus_Minimus
3 years ago
Is there a reverse-Yellen fund I can invest in?
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dtj
dtj
3 years ago
Yellen issued a revised statement: “The capital and liquidity positions of the U.S. banking system are
not strong, and the U.S. financial system is about to collapse. We have been in
close contact with space aliens in the hope they will beam us elites out of here ASAP.”
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Six000mileyear
Six000mileyear
3 years ago
At least 5 year bonds held to maturity are getting really close to face value. that will make more capital available without having to sell 10 year bonds and take unrealized losses.
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blackswan
blackswan
3 years ago
Mish, I think there are 2 distinct issues here:
  • the backing of a currency (dollar),
  • fractional reserve lending that essentially produces leverage in the economic activity?
I am mentioning this because in the past (like 17th century) : gold was also used in conjunction with fractional reserve lending and there were bank runs.
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blackswan
blackswan
3 years ago
Reply to  blackswan
Just to be clear, I completely agree with you Mish: I don’t think Fractional Reserve Lending is a good idea for so many reasons. Effectively, we have a terrible combo here: when fractional reserve lending => Government+FED prints the paper currency…
My understanding is Fractional Reserve Lending does multiply economic growth (leverage). Perhaps the issue is the ratio of roughly ~10% for capital reserves. This is too low?
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  blackswan
Dear blackswan –
The Federal Reserve reserve requirement is currently zero.
Zip.
Nada.
That is all.
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Maximus_Minimus
Maximus_Minimus
3 years ago
Reply to  Lisa_Hooker
Eliminated because there wasn’t enough gambling in the system.
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Jack
Jack
3 years ago
Reply to  blackswan
This “leverage” creates fictional money.
When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of dollars worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.
Remember, all money is fictional. It is a man made construct that was made up.
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8dots
8dots
3 years ago
ES, NQ gap up
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8dots
8dots
3 years ago
US treasury provided 600B to support unrealized losses, out of 23T total assets, a blip, so the bank can liquidate and fill the gaps, if they wish.
They provided money for SVB depositors and liquidity for CS takeover, asap, to stop the panic this week. Yelen, a midget, is the inverse of Hank Paulson.
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MPO45v2
MPO45v2
3 years ago
So if a person has been prudent with FDIC insurance limits and has:
250k at First Republic
250k at Key Bank
250k at Comerica
and now those banks are theoretically insolvent and shotgun married to JP Morgan, you magically only have 250k insurance now at JPM. Guess what happens to that 500k at JP Morgan? Where will it go? Treasuries or other banks or poof?
Expect more bank runs folks until the game of musical chairs comes to an end and millions land on their a$$ without a chair.
As a side note, I was unable to access the etrade bond desk on Thursday. Turns out I wasn’t the only one having problems with Treasury T-bills.
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jiminy
jiminy
3 years ago
Reply to  MPO45v2
FDIC insurance is per account, per owner. In your example there is no change in insurance coverage, providing accounts are kept separate. Really, the USA will default before Morgan.
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MarkraD
MarkraD
3 years ago
Loans come with the presumption that debt will be paid, income is a requisite of that payment.
Since 1980, The Fed continually resorts to increasingly convoluted means to accommodate a lack of both household and government income and growing debt.
May be time to rethink Reaganomics’ “trickle down”, and have a look at supply side policies that induce actual supply vs line the pockets of the already wealthy.
As long as Citizens United allows limitless hidden money in Superpacs, it won’t stop, bribery is free speech and the wealthy have a lot more free speech than the rest.
.
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Doug78
Doug78
3 years ago
Reply to  MarkraD
Citizens United is a travesty and should be removed immediately.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  MarkraD
“All animals are equal, but some animals are more equal than others.”
It must be nice to be more equal.
I wouldn’t know.
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8dots
8dots
3 years ago
The elite got hurt. Their uber ego deflated since Nov 22 2021. The best of the best have been humiliated for a year
and a half. The cannot take it anymore. Their pyramid of fakes crumbled in front of the whole world. Behind their monitors they could
destroyed men & women, political opponents, open a Kafka file on innocent people, muzzle, do a regime change with the click of the mouzer, but the regime change boomeranged on them. Who gave the order to destroy them…
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Casual_Observer2020
Casual_Observer2020
3 years ago
The only reason so much liquidity is needed is to cover up the bad investments. This is a bad thing and implies that no investment is allowed to fail or must be acquired by the counterparties Our regulators and experts have learned nothing from previous crises and continue to institutionalize behavior that will only lead go worse behaviors and outcomes. This is no longer capitalism.
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MBA SOFA
MBA SOFA
3 years ago

Quantity Tightening means less money. Someona has to suffer. It appears QT is impossible, the fed lacks the strong will it requieres. Mkre inflation is near…

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JackWebb
JackWebb
3 years ago
The Panic of 2008 was rooted in the lack of credit quality, which was rooted in the lack of basic lending controls in residential real estate. This time, credit quality appears to be intact, at least for now. To me, this makes the current crisis much worse. It tells me that the basic structure of finance is rotten, whereas the ’08 panic might have been larger (we shall see) but was limited to regulatory failure. This time, we see a financial system that in itself doesn’t work, as opposed to one that was operable if operated correctly.

Now, I freely admit to vast ignorance. Maybe I am wrong, but this seems much more worrisome than a boatload of liar loans.

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Casual_Observer2020
Casual_Observer2020
3 years ago
Reply to  JackWebb
I agree. The reason it is worse is 0% loans that were stated as cash but were actually loans that eventually have to be paid back. I think these bank balance sheet are all fraudulent and the reason we are seeing medium sized banks fail is no one was looking at what percentage of cash is actually in the form of loans.
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Salmo Trutta
Salmo Trutta
3 years ago
Reply to  JackWebb
Bernanke bankrupt half the home builders. It’s just math. Rates-of-change in monetary flows, the volume and velocity of money, equal roc’s in P*T in American Yale Professor Irving Fisher’s truistic “equation of exchange”. N-gDp is a subset and proxy.
You can look at Scott Sumner’s idea of N-gDp targeting to see that Bernanke persistently lowered N-gDp. Or you can see it from the right way, my way, that Bernanke drained legal reserves for 29 contiguous months, turning otherwise safe assets into impaired assets.
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radar
radar
3 years ago
Reply to  JackWebb
I agree with you. I don’t really know enough to explain it, but it seems as though the basics of fundamental finance are not being followed. It’s like redefining math such that 2+2 is now 5. You can pretend for a while but at some point it all falls apart.
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HippyDippy
HippyDippy
3 years ago
Fractional reserve banking is a con as old as banking itself. Yet, the financially illiterate will argue it’s great. Of course, the printing of money, with its issuance at a loss, is great for the banksters and the politicians as well. Fiat can work, but not under the stewardship of those who control the money now. And the slaves do love their misery.
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JackWebb
JackWebb
3 years ago
Reply to  HippyDippy
It’s a confidence game. Lose confidence, and the game is over. Loss of confidence can come from many different sources. Once gone, hard to restore. Do you set up a system, be it banking or myriad other systems large and small, based on a lack of confidence? I don’t think that works. Thus, I don’t attack confidence, but rather whatever destroys it.
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Salmo Trutta
Salmo Trutta
3 years ago
re: “We don’t need to up the FDIC limit, we need to eliminate the need for FDIC and create a safekeeping bank.”
It’s stupid to bottle up savings by offering deposit insurance. That’s what the Japanese do. They have unlimited transaction deposit insurance.
Danielle Dimartino Booth’s book: “Fed Up”, pg. 218
“Before the financial crisis, accounts were
insured up to the first $100,000 by the FDIC. That limit kept enormous sums in
the shadow banking system. After the crisis, the FDIC raised the insured
account limit to $250,000. That causes secular stagnation, a deceleration in Vt.
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JackWebb
JackWebb
3 years ago
My mantra remains intact: Janet Yellen is qualified — maybe — to wait tables at the TGI Friday’s at Dulles airport, but no more. She needs to be replaced immediately.
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Maximus_Minimus
Maximus_Minimus
3 years ago
Reply to  JackWebb
But, but…she has the right pedigree.
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Karlmarx
Karlmarx
3 years ago
I just saw a Youtube video about reverse speaking (like the Beatles did with their songs) Seems that there is a theory that every time a politician speaks you can listen to it in reverse and they will subconsciously admit the lie that they are trying to coverup.
I guess things have gotten so bad that even the normal speaking is a lie. God only knows what playing this backwards will reveal….
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ColoradoAccountant
ColoradoAccountant
3 years ago
As long as I can get a nice bottle of wine on the weekend using pieces of paper with pictures of old, dead, white guys on them then everything is fine. When I have to go into the utility room and get those silver Maple Leafs to buy a box wine, then things have seriously gone downhill.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  ColoradoAccountant
I feel the same way about good chocolate.
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