Ugh... stuff like this makes me queasy 
http://www.newmogul.com/item?id=798
Nouriel Roubini: The Fed keeps on wasting time while the mother of all bank runs is underway
Last Friday I pointed out in my âFinancial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runsâ that we were at the point of a risk of a systemic financial meltdown with the beginning of the mother of all bank runs: stock markets gave a vote of no confidence to the Senate passage of the TARP legislation (equities down 4% on Thursday) and to the House passage of the legislation on Friday (equities down 3% after the passage of the bill in the House). At the same time last week money markets, interbank markets, credit markets were all imploding with all interbank spread at new all time highs, credit spreads going up through the roof and the roll-off of the financing â via commercial paper â of the corporate system. As I put it last week we were facing:
- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;
- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);
- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;
- a total seizure of the interbank and money markets.
This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.
Indeed by last week a mother of all bank and non-bank runs was underway and even a well designed and well implemented TARP (let alone the poorly designed one passed by Congress) could not address the problem of a short term liquidity panic and run.
And with the liquidity and credit and banking crisis hitting European financial institutions this severe crisis was becoming global last week. I then suggested that only radical and urgent action could stop this mother of all runs such as the following ones:
- blanket guarantees of all deposits followed by triage between solvent and insolvent banks; and if a guarantee requires delayed legislative action the Fed could announce that it will provide unlimited and unconditional liquidity support to any bank that experiences a run on its uninsured deposits;
- drect extension of the Fedâs PDCF liquidity support to other member of the shadow banking system as the small number of broker dealers accessing the PDCF are not relending the liquidity to the rest of the shadow banking system; finance companies, leasing companies and other non-bank financial institutions lending to the corporate sector and real economy should have access to the PDCF and TSLF;
- drect Fed lending to the corporate sector via Fed buying the commercial paper that corporates are not able to roll over; and possibly even lending to state and local governments that are a now also facing a roll-off of their maturing short-term liabilities.
- a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks;
Since the crisis of confidence and liquidity was becoming more virulent over the last few days and during the weekend in Europe one would have expected a radical response over the weekend along the lines suggested above by the Fed and other central banks. After all Bernanke stated on Friday that the Fed would do whatever was necessary to deal with the liquidity crisis.
Instead the Fed did nothing over the weekend (before the crucial opening of markets in Asia and Europe) and then announced steps this morning that donât even start to address the liquidity problems of the financial system: paying interest on reserves of banks only allows the Fed to provide more liquidity to banks (and only banks) while automatically sterilizing the effects of that liquidity support on base money; while doubling the size of the TAF (that only banks have access to) does nothing to address the run on the liquid liabilities of non-bank and the corporate sector. Also the liquidity support of banks (short of a formal guarantee of deposits and/or a commitment to unconditionally support any bank subject to a run) is not enough to stop the concerns by uninsured depositors of banks.
So the Fed wasted an entire weekend announcing nothing and then announced this morning a set of modest steps that does nothing to address the ongoing silent run on banks and the non-silent run on the short term liabilities of non-banks and of the corporate sector. This at a time when the markets was expecting â given the Friday statement of Bernanke â such radical and urgent policy actions. So no wonder that Asian and European equity markets collapsed at their Monday opening and no wonder that US equity markets are down 5-6% today (as of mid-day). So the time to move is now or, better, it was yesterday or a week or a month ago. Any further delay may lead to an implosion of the financial system and serious damage to the corporate system tilting a severe economic recession in a much more grave economic depression.
And even an emergency 50bps or 100bps Fed Funds cut will not do: the Fed has already done 325bps in the last year and interbank spreads have kept on widening while short-term lending in the private sector (banks, non-banks and corporates) is now close to being shut down. Given the risk of insolvency of even the most safe counterparties in the financial and corporate system reducing policy rates will not affect interbank and credit spreads. The only way to stop this liquidity panic is a blanket guarantee of financial sector liabilities and direct public provision of liquidity to the parts of the financial system and the corporate system that are now at risk of a meltdown driven by a liquidity run on their short term liabilities. So it is time for the Fed to stop wasting time and start the actions that will make a difference. We are now at risk of a systemic financial meltdown of the financial system and the corporate sector too.