On September 17th the global financial system's plumbing sprang a major leak. The cost of short-term (usually overnight) lending skyrocketed suddenly to more than 10%. In just two days the Federal Reserve injected a massive $128 billion into the global financial system via the overnight lending market in an effort to maintain cash liquidity for corporations and banks. (As of this writing, they are still pumping away.)
The financial and business media were abuzz with attempts to explain the sudden crisis in cash availability. Was it a transient effect of corporations withdrawing money from short term money market funds to pay quarterly taxes in the U.S. on the 15th? Or of a large Treasury bond auction settling at the same time? Did the transient but severe spike in oil prices immediately after the attack on Saudi Arabia trigger margin calls in oil futures markets, requiring those who had sold futures to come up with U.S. dollars to meet their obligations?
Some analysts noted more structural factors, ranging from the Fed shrinking its excess currency and bank note reserves, which in turn shrinks cash available for overnight lending to banks, to shifts in foreign capital, to geopolitical issues. Others noted that there had been growing rate instability for some time that flew under the radar of most observers.
Read Full Article »