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The Dearth of Safe Banking Collateral in the Euro, US Dollar


Why the shrinkage? The Fed and other central banks hold much of it, or it is now encumbered via direct bilateral funding agreements or by sitting at the central bank drawing liquidity.

A chart that few are looking at explains the concept of the dearth or shrinkage of so called safe collateral in the Euro and USD. The reason is that the Fed and other central banks hold much of it, or it is now encumbered via direct bilateral funding agreements or by sitting at the central bank drawing liquidity. At the same time a large chunk of sovereign debt has been downgraded. The end result is that the banking system holds more and more junk assets and less in acceptable securities to use as collateral. Even more incredible is that most of the remaining publicly held "safe collateral" consists of US Treasury Old Maid Cards. How ironic! What does this mean?

From an article from Cardiff Garcia:

A shortage of acceptable collateral would have a negative cascading impact on lending similar to the impact on the money supply of a reduction in the monetary base.

In the minds of the masters of the universe who run this travesty, the idea is to issue even more "safe collateral" and hope the credit agencies play along. This also illustrates in spades what the effect will be of ratings downgrades for France, Germany and especially the US. And what would be the effect on the "safe assets" if the Fed buys them and takes them out of the market? The answer is that I am not so sure that the Fed will be able to buy much of the remaining "safe" collateral. Instead the Fed will enter into the markets via the IMF, focusing on European sovereigns, notably the big names such as Italy and Spain. The ECB will fund France directly after its downgrades, which I covered in Fed Sovereign Loan Plan: From the Frying Pan Into the Fire?

This IMF talk is one rumor that makes sense to me. This is highly controversial politically, but since when has that stopped the Fed and the current administration? The main characters, Obama, Geithner and the doves on the Fed have another year to carry these bailout schemes out. As the great protest comedian Lee Camp says, don't even use the word bailout, use heist. This is not to say the heist execution will be easy, it won't be, but that won't stop the attempt. The idea is to endrun funding from IMF members, and run some kind of back door bankster lending heist. Incidentally while all this is being ramped up, Brent oil is already over $110.

As for the Fed, Societe General points out, there are three so-called hawks on the Fed that are on the way out, to be replaced with sycophants.

Editor's Note: This article was originally posted on Wall Street Examiner.

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