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... the solvency crisis in the talk in May by NY-FRB executive VP William C Dudley, May You Live in Interesting Times: The Sequel

There's lots of phrasing to make is sound like a liquidity crisis:

In essence, the Federal Reserve's willingness to provide liquidity against less liquid collateral allows the reintermediation and deleveraging process to proceed in an orderly way, which reduces the damage to weaker counterparties and funding structures. ...
The Federal Reserve has introduced three new liquidity facilities during the past five months. ...
This bolsters confidence in the triparty repo system and reduces the risk of the type of funding run that led to Bear Stearns' illiquidity crisis. ...

However, while carefully never once including the word "solvency", at least in the online prepared remarks ... in May, while talking about a series of measures to provide liquidity, he says that the main problem is:

So what has been driving the recent widening in term funding spreads? In my view, the rise in funding pressures is mainly the consequence of increased balance sheet pressure on banks. This balance sheet pressure is an important consequence of the reintermediation process. Although banks have raised a lot of capital, this capital raising has only recently caught up with the offsetting mark-to-market losses and the increase in loan loss provisions. At the same time, the capital ratios that senior bank managements are targeting may have risen as the macroeconomic outlook has deteriorated and funding pressures have increased.

... and if "balance sheet pressure" itself actually comes to a head, that is a solvency crisis.

I wonder how much liquidity-not-solvency groupthink in the FRB system is driven by the ability to talk forthrightly about systemic liquidity problems, but the perceived need to avoid talking forthrightly about systemic solvency problems, so that actual, valid, detailed analysis has its most important conclusions lost in the pyramid of executive summaries based on executive summaries between the actual detailed analysis and the top level decision makers.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Sep 26th, 2008 at 05:42:15 PM EST

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