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>   On Wed, Sep 17, 2008 at 8:54 AM, Pat wrote:
>   Summary of Michael Cloherty (BoA) assessment this morning:
>   Following Reserve’s Primary Money Mkt Fund breaking the buck, we are looking
>   at possible structural changes to the funding markets depending on how the
>   money investor’s perception of Money Mkts funds safety is. Massive
>   withdrawals from this $4.6 trillion market could be devastating most of the
>   money would go to T-bills and bank deposits.

all the t bills are already sold so what it does is bid up t bills to new indifference levels. quantity stays the same

yes, bank deposits would go up, and banks would invest in what the money funds were investing in, though perhaps at different spreads

the move to money markets was a disintermediating event.

instead of putting funds in banks, they put them in money funds

since ‘loans create deposits’ this changed the entire financial landscape

repo, commercial paper and other funding instruments replaced bank lending to create the newly desired money fund balances.

>   This is rattling the repo markets which were already under enormous pressure.
>   The repo market relies on the MMKT funds cash to back it. “If withdrawals are
>   large enough we will head towards a bank financed system (as if balance sheets
>   weren’t crowded enough already). Liquidity could get worse”.

with the falling desire for money fund balances vs bank deposits funding returns to the banking system.

>   At the very least money market funds will be defensive and cash will be
>   expensive in the mornings as they switch to O/N repos and CP.

yes, it’s all returning to bank funding at the moment, which means wider spreads for borrowers

we are now in the endgame of the great repricing of risk as previous business models go by the wayside and new ones emerge.


>   -Pat–


9 Responses

  1. Warren,

    What indicators will you be following to judge when sufficient delevering and risk pricing has occured? And what does your experience suggest will be a time frame for the fear premium to recede?


  2. So will corps have to go back to using bank lines of credit rather than commercial paper? It doesn’t seem like they’re gonna like that. And why are the spreads so much greater? Is it just that banks are less efficient than the bond market?

  3. I really like the overall theory and am working my way through the “required readings”. Excellent stuff that builds from a logical foundation.

    “it’s all returning to bank funding at the moment”

    This is only temporary, but that could mean a few months.

    so is the problem that there is plenty of money but nobody wants to lend due to potential bankruptcys? or is it that there isn’t enough money to lend?

  4. thanks- spread the word!

    the causation is ‘loans create deposits’ so there are always infinite amounts of funds available to credit worthy borrowers at a price suffient to give the lender an acceptable risk adjusted return on equity.

    the question is whether fiscal policy is ‘loose’ enough to allow the income and financial equity to support expanded lending.

    up to now at least it has seemed to be sufficient to support GDP growth at modestly positive levels with the current modest levels of credit expansion.

    And if demand is deemed too low it’s easy enough to cut taxes or increase govt spending to support it.

  5. “always infinite amounts of funds available to credit worthy borrowers” Credit worthy? BWAHAHA Senore Mosler! You always make me laugh inbetween my burrito sandwiches. From the high halls of the rating agencies in Shanghai to the trenches of the local payday lender in peoria, Ill. to the FREE microloan system for zimbabwe – credit worthiness is fascinating subject!



    Si Senore! Plenty munny 4 me! I went to my local bank in Miami where my cousin who fled cuba a few years ago is bank prezident, and my brother in law who fled argentina last year is de loan officer – dey gave me lotsa lotsa dinero to buy big nice miami condo and new ford pickemup truck 350 that I haul all my friendz around and da marijuana plants I grow in da spare bedroom – I lub Amerika Senore – ARIBA! ARIBA! Dey say soon I can be working in da bank too as long as I look da udder way when da big Al Pacino scarface types dat want to launder some money come do business wit me. Si Senore – I can doo dat! I zay everyone is credit worthy!

  6. PS Senore Mosler, my couzin in da bank zay all ponzi schemes require more and more new suckas to keep growing, but if you zay world population levels are not growing anymore, but in fact ave started too decline – then how does we find new suckas to grow da ponzi pyramid? My wife – senorita poot already have 14 babies and even wit all da welfare and freebies she say she tired of having babies. We have too find woman who happy to have 15 babies and then have another 15 more so population level and ponzi pyramid keep growing – how many babies do you want Sada to have?

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