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|User Info||Special weekend edition - Bank Reserves?; entered at 2008-02-04 10:15:57|
If I understand what you are saying correctly, the banks either have to come up with the $50 billion in "hard money" necessary to pay back the Fed or the Fed has to keep rolling over the $50 billion in TAF every 2 months. However, this does not mean that the banks are necessarily insolvent because theoretically they may have sufficient Tier 1 capital to cover their losses (or they may not). However, if the banks are unable, in the very near future, to make a market in their held for investment portfolios such that they can put these loans back in their for sale portfolios and sell then them off (other than in fire sale conditions) then the banks will be unable to pay off their TAFs putting extreme pressure on the Fed to continue rolling over the TAFs. However, the rolling over of the TAFs merely serves to further undermine trust between the banks as their investment portfolios continue to deteriorate and they are forced to take further write offs against their balance sheets, thereby, further reducing available Tier 1 capital. Consequently, the banks will be unable to initiate additional lending leading to a potential deflationary collapse.
Is there anything I am missing?