Posted on 11/06/2009 9:15:06 AM PST by TigerLikesRooster
Dear Fed: The Problem is Solvency, Not Liquidity
John M. Mason
The Federal Reserve, the Bank of England, and the European Central Bank are all keeping interest rates exceedingly low and are continuing to engage in “quantitative easing.” The central banks have claimed that they are caught in a “liquidity trap” and cannot force interest rates to go any lower, especially below zero. Their solution is to continue to force liquidity into the banking system in order to keep the financial system functioning and to encourage commercial banks to start lending again.
/snip
The classic central bank response to a “liquidity crisis” is to throw open the lending window and to engage in repurchase agreements to provide liquidity for the market in order to help it stabilize. A “liquidity crisis” is usually over in a matter of days, if not weeks. A “liquidity crisis” is resolved without recourse to massive amounts of government support as a substitute for buyers who have left the market.
A “solvency problem” is an entirely different matter. Here borrowers have problems repaying loans and, as a consequence, the solvency of the financial institution is brought into question. However, the “solvency problem” is not just a short run problem as is the “liquidity problem”.
(Excerpt) Read more at seekingalpha.com ...
Ping!
http://www.bloomberg.com/apps/news?pid=20601039&sid=amqH8lCSKz7E
http://www.bloomberg.com/apps/news?pid=20601087&sid=albMYVE7D578&pos=6
Good article.
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