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Minyan Mailbag: Is Liquidity Completely Drying Up?


Every ounce of new Fed liquidity is being sapped up by banks' balance sheets to fund declining asset values.

Editor's Note: The following is a discussion between Minyanville Professors Mark Bloudek, Todd Harrison and Mr. Practical.

Fellow Profs,

Is it just me or are we witnessing the complete drying up of liquidity in the entire financial system? I ask you this because even treasuries are all over the place (this can't be good for Fannie (FNM)). Frankly, I am more scared about what is going to happen in the very near future than I have ever been in my life. Forget being bullish or bearish, I am talking about the financial system (the mechanism) being in huge trouble.

Your thoughts?
Prof. Bloudek


I agree, it's desperation. But it's a function of time. In my humble opinion, we're nearing (if not past) the tipping point. If we open U.S. doors to foreign buyers (Citigroup (C), Bear Stearns (BSC)), it could be perceived as positive, the transfer of wealth and all. But it's a matter of time, unfortunately, or at least that's my take.



The financial system, here in the U.S., is not functioning. It is burdened with debt and cannot take on any more. The wheels have stopped. Every ounce of new Fed liquidity (FL) is being sapped up by banks' balance sheets to fund declining asset values. There is no solution except for what we are seeing: massive write-offs by banks (which have just begun) to destroy the debt and required new capital.

This will spread, for there is debt everywhere. Certain governments around the world are flush with fiat foreign currency reserves and are now allocating that to investments in dollars for they have nothing else to do with it. But future appetite and trade dollars will evaporate as deflation kicks in, so this source of funds will dwindle over time.

Look for continued massive appreciation of yen over the dollar, massive bank write-downs, and years of deflation to unwind central banks' decades of inflation.

Mr. Practical
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