Are $370,000,000,000 enough to calm Y2K fears?

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Sometimes read posts here about finance markets liquidity will / is drying up due to Y2K fears of investors AND urgent need of short term loans by smaller banks. Will this fix the issue?

This is from Financials Times, Tuesday issue: <<<<<

US: NY Fed eases Y2K liquidity fears By Edward Luce, Capital Markets Editor

The New York Federal Reserve has sold almost $370bn in "liquidity options" to leading banks in an effort to quell panic about the millennium bug.

Bankers said the popularity of the options, which offer buyers insurance against the possibility that markets could dry up because of Y2K problems, had already eased fears about the bug.

The New York Fed, which conducts open market operations on behalf of the US Federal Reserve in Washington, said it is planning further auctions of liquidity options in the next few weeks.

The Fed's unprecedented venture into options sales has turned it into one of the biggest derivatives dealers in the world - an unaccustomed role for the guardian of US monetary stability.

The liquidity options are especially popular with marketmakers, because they assure their funding even if financial markets should suddenly dry up over the end of the year.

"The markets were expecting liquidity to get progressively worse as the millennium approached, but liquidity has improved in the past two weeks," said Avinash Persaud, head of global research at State Street Bank. "Part of this can be attributed to the success of the Fed's liquidity options."

The options, which are legitimate for five days and encompass three five-day periods starting December 23, December 30 and January 6, give the holder the right to access cash from the Fed at a "strike" price of 150 basis points over the Fed funds rate.

This means the options would be exercised if liquidity dried up to such an extent that it was only available from the normal inter-bank market at a higher spread than 150 basis points over the Fed funds rate.

Bankers say that the popularity of the options combined with the Fed's decision to expand the pool of collateral available to the market to borrow money from its discount window had significantly eased fears of a liquidity crunch over the millennium.

"We believe the markets have understood our message that we want the transition to the new millennium to be as smooth as possible," said an official at the Fed in New York.

Concerns have also been eased by the belief in bond markets that there is little possibility that the Federal Reserve and the European central banks will raise interest rates in the near future.

The Fed and other central banks have printed additional supplies of banknotes in case of a rush by individuals to hold cash over the new year.

-- Rainbow (Rainbow@123easy.net), November 24, 1999

Answers

Oh good, the Fed is into derivatives. Now I feel better.

-- bw (home@puget.sound), November 24, 1999.

WEEEEEEEEEEEEEEEE!!!!!!!!!!!!!! Let's pump some MORE air into that puppy!!!!!!!!!!!!!!!

-- I'm Here, I'm There (I'm Everywhere@so.beware), November 24, 1999.

Hey, this sounds reassuring to me. If anyone believes it isn't could they explain why?

-- Gus (y2kk@usa.net), November 24, 1999.

Who's able to explain this to really everybody? Sorry I'm not due to limited knowledge of English technical words.

-- Rainbow (Rainbow@123easy.net), November 24, 1999.

Here is an editorial opinion (gold-eagle) as to why this may be trickier than it looks:

Y2K - The Fed's Fatal Flaw; Nov 24, 1999

-- King of Spain (madrid@aol.cum), November 24, 1999.


Link

Wednesday November 17, 7:10 pm Eastern Time

Fed's Y2K liquidity measures keep markets calm

By Ross Finley

NEW YORK, Nov 17 (Reuters) - While the Federal Reserve has financial markets guessing whether Tuesday's interest-rate increase may be the last for several months, the central bank has taken great pains to quell fears about year-end liquidity.

The Fed has put in place a series of measures to make sure markets work smoothly when the clocks on the world's computers change over to 2000 and investors decide whether to hold their positions or convert to cash because of fears of technology-related disruptions on the financial markets.

New York Federal Reserve Bank President William McDonough affirmed on Wednesday that the Fed had ``gone a long way'' toward addressing year-end liquidity fears that peaked in August and September of this year.

Analysts, economists, market players and primary dealers -- the firms that conduct securities transactions with the New York Fed -- agreed.

``It's certainly been useful -- it's a valuable backstop to have there. The mere fact that the Fed has been so aggressive has been helpful,'' said Lou Crandall, chief economist at R.H. Wrightson & Associates.

Economists also say market interest in the Fed's new liquidity insurance scheme means investors are approaching the issue calmly rather than with panic.

Until the Fed came to the rescue, many investors said they were content to park money in safe, liquid short-term U.S. Treasuries and keep their money away from riskier assets such as stocks or debt from corporations and government-sponsored agencies. If that occurred, it might have led to a liquidity squeeze similar to what was seen last year at this time.

Instead, stocks have rallied and so-called spread products have also performed rather well.

But many analysts added that the bond market's resilience running into the last quarter before the date changes to 2000 is only partly a result of the Fed's preemptive measures.

Crandall cited the concern several months ago in the corporate bond and mortgage-backed markets about widening of spreads -- which indicated a preference by investors for Treasuries, securities which are much easier to turn over in the event of a crisis.

``We've seen liquidity in lots of other markets hold up,'' Crandall said. ``The corporate bond market had this expectation spreads would widen dramatically and they haven't.''

One of the Fed's main tools in fighting Y2K fears is STRIPs options -- securities that allow dealers to cash in the value of the option on one of three maturity dates offered.

This ability to exchange STRIPs for cash readily if needed is the kind of safety net prudent dealers crave as insurance against a year- end liquidity crunch. The December 30 maturity date, two days before computer clocks change over, has met the highest demand. The other two maturities are December 23 and January 6.

The Fed has auctioned five separate offerings of STRIPs since October 20, all of which have generated widespread interest, according to the New York Fed.

``There has been a tremendous amount of interest in the options auctions that have taken place,'' the New York Fed's McDonough said on Wednesday.

Analysts say that with five of seven STRIPs options auctions already behind them -- totaling just over $370 billion -- many market players who were concerned about cash on hand at year-end have already taken out their respective millennium insurance policies and are now sitting comfortably.

Citing strong demand, the Fed on November 4 added two additional STRIPs auctions to the original total of five and said it could add more if there were a further strengthening in demand.

The Fed has twice increased the amount of securities offered in individual auctions, also citing increased demand. But the amounts offered in the November 17 auctions decreased slightly, indicating the market may be more confident about year-end cash flows.

``In terms of why they were recently cut back, I would say it could reflect a number of things -- perhaps some greater confidence in the market about Y2K itself and how it will go,'' said Spence Hilton, associate vice president at the Federal Reserve Bank of New York.

In addition to the STRIPs auctions, the New York Fed also announced in September that it would begin entering into repurchase transactions with maturities up to 90 days, up from the previous maximum period of 60 days.

The Fed has already tied up approximately $30 billion in long-term repurchase agreements, a further reinforcement against liquidity concerns in the repo market.

``The only risk at this point is customers -- and by that I mean mutual funds having large withdrawals at the end of the term,'' said Marc Wanshel, economist at J.P. Morgan & Co. ``But the dealers, I think, are very comfortable.''

Vincent Verterano, head government bond trader at Nomura Securities International, said the STRIPs options provide good insurance for dealers who need extra liquidity toward year-end. But he underlined that insurance doesn't come for free.

``The Fed's going to make a ton of money on this,'' Verterano said. ``Chances are they (the options) are not going to be exercised.''

The interest rate on options is 150 basis points (1-1/2 percentage points) above the Federal funds rate, now at 5.50 percent, but traders see the insurance as cheap.

Before Wednesday's auction, the total amount the Fed had received in premiums was ``just shy of $5 million -- a little bit more with today's sale,'' Hilton said.

Many traders say that the premium is a small price to pay for what amounts to peace of mind running up to the new year.

In addition to the options auctions, The Fed now accepts a broader range of collateral for its open market repurchase operations. And it introduced in September a special facility to ease pressure on smaller regional banks toward year-end.

Despite the fact few banks have stepped forward and used the facility, Crandall and other analysts acknowledged that the very fact the Fed made the liquidity facility available to small banks if they needed it was a positive step forward.

-- (M@rket.trends), November 24, 1999.


Actually, this is good...glad to see that Greenspan has another rabbit to pull out of his hat.

Ya know, we faced a mini - Y2K when the 360 -370's came into widespread use. In August 1970 Wall Street faced a computer related panic...tons of source and object code were tossed as "ticker tape" for a Broadway parade for returning Astronauts. The resulting panic when the machines stopped almost drowned Wall Street.

The Small Investor Protevtion Act was a result, as was Ross Perot who rode in to rescue Hayden Stone.



-- K. Stevens (kstevens@ It's ALL going away in January.com), November 24, 1999.


KOS: Very BIG point in the article you hot-linked above: It doesn't matter how much "liquidity" the FED pumps into the system IN THE FORM OF DERIVATIVES, DIGITAL BITS, ETC.

The TRUE weak point is that the FED's vision was SO shortsighted (what do you expect when Greedspin spent all of the last few years kissing Klintoon's ring?) that they CANNOT NOW print up enough PHYSICAL money to keep up with that that is disappearing out of circulation.

Interesting that this is EXACTLY what happens in DEflation i.e. debt(represented by bills/money in circulation) gets extinguished at a fearsome rate, resulting in an INCREASE in the value of any remaining money. Simple supply-demand!

Like Mr. Mcintosh says, if anyone thinks we have seen money disappear from circulation to this early date, just wait until DECEMBER.

BTW, I am in Canada, and I have NOT seen any shortage of cash small bills in this city to date. No signs at stores pleading for small bills. All I have posted is that the ATM's, starting about a month ago, when dispensing cash, request on the CRT that you enter the amount in multiples of $20!

I'm certain that Cretien's cretins can obfuscate/stall/deceive for another 5 weeks.

-- profit of doom (doom@helltopay.ca), November 24, 1999.


They sold these liquidity options to me, as the price of a toilet seat. Foolish mortals, and you wonder why you can find no small bills.

-- PD (PaulDMaher@att.worldnet.com), November 24, 1999.

If I understand this correctly the Fed is selling insurance against the market tanking enough to bring down a bank and using *our* money to pay off the claims?

Looks like they finally figured out a way to avoid any messy S&L style hearings before Congress when we have bail them out/pay off the claims. After all, they did pay for the insurance...

-TECH32-

-- TECH32 (TECH32@NOMAIL.COM), November 24, 1999.



Federal Reserve at it's best WASHINGTON - US currency should include tracking devices that let the government tax private possession of dollar bills, a Federal Reserve official says.

The longer you hold currency without depositing it in a bank account, the less that cash will be worth, according to a proposal from In other words, greenbacks will get automatic expiration dates.

"The magnetic strip could visibly record when a bill was last withdrawn from the banking system. A carry tax could be deducted from each bill upon deposit according to how long the bill was in circulation," Goodfriend wrote in a recent presentation to a Federal Reserve System conference in Woodstock, Vermont.

The 34-page paper argues a carry tax will discourage "hoarding" currency, deter black market and criminal activities, and boost economic stability during deflationary periods when interest rates hover near zero.

It says new technology finally makes such a scheme feasible. "Systems would have to be put in place at banks and automatic teller machines to read bills, assess the carry tax, and stamp the bills 'current,'" the report recommends.

Goodfriend said in an interview that banks might place a kind of visible "date issued" stamp on each note they distributed. "The thing could actually stamp the date when the bill comes out of the ATM," he said.

Congressional critics say they would oppose any such move.

"The whole idea is preposterous. The notion that we're going to tax somebody because they decide to be frugal and hold a couple of dollars is economic planning at its worst," said "This idea that you can correct some of the evil they've already created with another tax is just ridiculous," Paul said. Other economists say a carry tax is not a wise plan.

"This is going beyond taxing banks for holding reserves. It's taxing the public for holding currency too long. That's even more wild an idea," says
-- (1929@ll over. again), November 25, 1999.


Well, that is interesting. Some of the information seems to have been deleted in the above post, but was in the original cut and paste. Someone seems to be censoring some of the important information. Lets try it again and see if it is censored.

Federal Reserve at it's best

WASHINGTON - US currency should include tracking devices that let the government tax private possession of dollar bills, a Federal Reserve official says.

The longer you hold currency without depositing it in a bank account, the less that cash will be worth, according to a proposal from In other words, greenbacks will get automatic expiration dates.

"The magnetic strip could visibly record when a bill was last withdrawn from the banking system. A carry tax could be deducted from each bill upon deposit according to how long the bill was in circulation," Goodfriend wrote in a recent presentation to a Federal Reserve System conference in Woodstock, Vermont.

The 34-page paper argues a carry tax will discourage "hoarding" currency, deter black market and criminal activities, and boost economic stability during deflationary periods when interest rates hover near zero.

It says new technology finally makes such a scheme feasible. "Systems would have to be put in place at banks and automatic teller machines to read bills, assess the carry tax, and stamp the bills 'current,'" the report recommends.

Goodfriend said in an interview that banks might place a kind of visible "date issued" stamp on each note they distributed. "The thing could actually stamp the date when the bill comes out of the ATM," he said.

Congressional critics say they would oppose any such move.

"The whole idea is preposterous. The notion that we're going to tax somebody because they decide to be frugal and hold a couple of dollars is economic planning at its worst," said "This idea that you can correct some of the evil they've already created with another tax is just ridiculous," Paul said. Other economists say a carry tax is not a wise plan.

"This is going beyond taxing banks for holding reserves. It's taxing the public for holding currency too long. That's even more wild an idea," says
-- (1929@ll over. again), November 25, 1999.


Yep, it was censored again. Guess someone doesnt want you to know the Richmond Federal Reserves email or Ron Pauls email address!

-- (1929@ll over.again), November 25, 1999.

(Actually, nothing too sinister. It looks like some HTML code that has left carets [those things that look like parentheses but are a lot more pointy] without corresponding right ones. I don't think the HTML code would work, even with the proper bounds attached.)

-- I'm Here, I'm There (I'm Everywhere@so.beware), November 25, 1999.

BTW, as far as it being "good news" -- when I see sentences like "The Fed's unprecedented venture into options sales has turned it into one of the biggest derivatives dealers in the world - an unaccustomed role for the guardian of US monetary stability," I get a real queasy feeling.

-- I'm Here, I'm There (I'm Everywhere@so.beware), November 25, 1999.


Suppose that the real reason the banks were so panicked WASN'T that they feared a run by the people who don't have savings account and only have a couple of thousand dollars in their checking accounts, but the knowledge that the longer their computers are offline, the more useless will be the information they contain, namely cyber money?If I were a banker, that would scare me a lot worse than JSP and his friends cleaning out their little accounts.

-- Liz Pavek (lizpavek@hotmail.com), November 25, 1999.

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