More signs of liquidity withdrawal, now from the U.S. Treasury

Yesterday I mentioned the announcement by the FDIC to end its debt guarantee program and opined that this was the first sign of tightening/liquidity withdrawal by the U.S. government.  Today the evidence is mounting that this is indeed an orchestrated move toward policy normalization.

The FT spoke to treasury officials who confirmed this interpretation:

A senior Treasury official said “we are pivoting and starting to pull back on certain programmes.” The administration will allow the money market mutual fund guarantee programme to expire as scheduled on September 18, and is backing a review by the Federal Deposit Insurance Corporation that is likely to see funding guarantees for bank debt either ended or restricted to emergency cases on penal terms.

How the Federal Reserve acts is the key missing component here, both in terms of returning repoed assets to the banks which own them and in terms of eventual interest rate decisions. My guess at this point is that the Fed will look to reduce its balance sheet well before it looks to increase interest rates.

In addition, the Fed had provided up to $650 billion in swap lines to other central banks at the height of the financial crisis.  Those swap lines are now down to $70 billion (source: Marc Chandler, Brown Brothers Harriman). This reduction in a liquidity-induced appetite for U.S. dollars may be a major reason the Dollar is falling right now even against the Pound and the Swiss Franc where the central banks are engaging in quantitative easing.

Update 1530ET: See also Bailouts Are Shrinking, Geithner Says from DealBook:

One of President Obama’s top economic strategists said on Thursday that the government was now starting to shrink many parts of its gigantic financial bailout following the collapse of Lehman Brothers last September, The New York Times’s Edmund L. Andrews reports.

“We must begin winding down some of the extraordinary support we put in place for the financial system,” said the Treasury Secretary, Timothy F. Geithner, in written testimony prepared for the Congressional Oversight Panel on the Treasury’s $700 billion rescue program. (Go to a Webcast of Thursday’s hearing.)

  1. Anonymous says

    I’m a little skeptical. I highly doubt they will remove the crutches this soon. This is an administration bent on continuing the bubble boom years, with little regard for the principals of fiscal and monetary responsibility. Bernanke laughed when he said something along the lines of “I hope no one thinks now that letting a bank fail is a good idea”. They are paranoid about repeating the so called ‘mistakes’ of the 1930s during which they believe they withdrew too early. With the country so on edge over this crisis, the last thing they want to do is risk a downleg as a result of sopping up liquidty prematurely. The people will simply not tolerate it. They would rather risk hyperinflation than a collapse of the system. Just my opinion.

  2. doctorx says


    The 2 yr T-note is down about 30bps in the past month. My first rxn is that indicates a significant increase in risk aversion/decrease in demand for credit.

    Have you any comments on how that ties in, if at all, to withdrawal of liquidity?

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