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Minyan Mailbag: The Discount Window Solution?

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Heavy borrowing at the discount window simply illustrates there are no other sources of liquidity to service current liabilities.

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Mr. Practical,

I'm confused. The big four took out their $2 bln from the discount window on August 22nd, and here we are a week later and discount window borrowing rose? Are we to believe that these guys are borrowing more money than they need and paying a higher rate than they need just for the heck of it? Isn't that doing a disservice to their investors?

I suppose another scenario would be the banks paid back their loans, yet more banks were in trouble and had to borrow over and above what JPM/BAC/etc. took out last week. In that case perhaps they knew other guys were in trouble and by borrowing a lot of money early we now have less transparency about if anyone else is in trouble and who it might be. Just thinking out loud here.

-C


Minyan C,

The inevitable is beginning. The government, with its proven abilities to "manage" markets, is coming up with solutions. Those solutions are placebos at best and poison at worst.

Your implication is correct. Heavy borrowing at the discount window simply illustrates there are no other sources of liquidity to service current liabilities. Of course this does nothing to expand the credit base (it is trying to shrink, not expand), which is necessary to re-inflate growth. The forces of deflation are growing.

So the U.S. government is beginning to pull out all the stops. We now see Republicans bending over to bail out lenders (this has nothing to do with the borrowers) by reforming laws and using taxpayer money and foreign borrowing to bail them out. If I was a U.S. taxpayer who has been prudent with my money I would be furious. If I were a foreign lender I would pull my money out of the U.S. as fast as possible (lower dollar).

This is the beginning of the end. The markets will incorrectly rally on this last step by a Republican president to appease the banking industry. The more government control, the more inherent debt in society and the less future growth.

As markets rise this morning I would use the strength not to increase risk, but reduce it even more.

-Mr. Practical

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