Central banks and liquidity for Y2k. Will markets stay calm and is there risk from inflation?

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The Fed and the Bank of Japan in recent days have both taken steps to provide extra liquidity as we approach the end of the year. The Fed had already taken other steps within the last three months to ensure an ample supply of liquidity. Will central bankers be able to keep markets afloat till the end of the year? Plus if there is a pronounced flight to quality in financial markets at year end and liquidity is provided for that, is there risk from inflation?

I'm only an educated layman when it comes to economics and welcome any input you may have.


Friday October 22, 5:44 pm Eastern Time

U.S. asset-backed debt cheered by Fed window news

NEW YORK, Oct 22 (Reuters) - News that the Federal Reserve will expand the types of collateral it would accept for banks to borrow from its discount window tugged in asset-backed spreads to U.S. Treasuries and brought in dollar swap spreads on Friday.

``The announcement drove in spreads,'' said Tim Neumann, head of core fixed-income products at Chase Asset Management.

Another portfolio manager -- with an East Coast account -- said the announcement may benefit leveraged investors such as hedge funds but really may not be a major event.

``It is a backstop. It just adds confidence there will be additional liquidity at year-end,'' said the portfolio manager.

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Tuesday October 26, 4:42 am Eastern Time

BOJ to set rates above ODR on emergency Y2K loans

TOKYO, Oct 26 (Reuters) - The Bank of Japan will set interest rates higher than the 0.5 percent official discount rate on any emergency, uncollateralised loans to private banks necessitated by problems with the Y2K bug, a BOJ official said on Tuesday. Such uncollateralised loans would be made in accordance with article 37 of the BOJ Law, said the official at the BOJ's financial and payment system office.

``With regard to article 37 loans, the terms including interest rate will be decided by the Policy Board on a case-by-case basis, in accordance with relevant laws,'' the official said.

Under article 37, the central bank can provide uncollateralised loans to private financial institutions which suffer temporary liquidity shortages due to unforeseen mechanical malfunctions.

But it says such loans will be made only in cases where a liquidity shortage would severely hinder the operation of the financial institution and cause systemic risk.

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(from Sept.)

"While the evidence of precautionary inventory hedging to date is mixed, in the financial sphere, borrowers and lenders are clearly taking steps to build liquid assets and reduce their reliance on credit markets around the end of the year. This is reflected in a noticeable rise in deposit and commercial paper rates for funding that would be outstanding over year's end. Many corporate treasurers have moved forward their debt offerings to avoid any chance of a dearth of credit availability in the fourth quarter or difficulties funding short-term liabilities. The Century Date Change Special Liquidity Facility of the discount window that was approved by the Federal Reserve Board in July and the contingency actions of the Federal Open Market Committee announced by the Federal Reserve Bank of New York on September 8 should help to ensure an ample supply of liquidity and relieve funding pressures."

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-- John Q. Doe (johnqd@aol.not), October 27, 1999


The banking system realizes that it is in potential life and death struggle. If it fails to instill sufficient confidence in the public, a partial or total failure could occur. Hence, printing more money, allowing banks to access that additional cash, etc.

Will there be news suppression of bank runs? IF so, perhaps we can pass the word of the true situation here...

-- Mad Monk (madmonk@hawaiian.net), October 28, 1999.

Something in the first story up above reminds me of the efforts made during the Long Term Capital Management (LTCM) debacle from a year ago.

'Another portfolio manager -- with an East Coast account -- said the announcement may benefit leveraged investors such as hedge funds but really may not be a major event.'

-- Trends (in@the.market), October 28, 1999.

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