==================== SPECIAL SATURDAY POST =======================
The US banking system is not as robust as its economy.
I warned of this earlier this month and took many boo-bird comments as being wrong due to the strength of the markets. Wrong markets are the last to know.
Over the past ten days the Federal reserve has had to inject through overnight repurchase agreements (repo) more than $650 billion in liquidity through its window. On many nights the amount offered by the Fed was exceeded by demand from Wall Street banks.
Generally, this is a repo operation where banks pledge short-term securities to borrow overnight and payoff in the morning with the pledged securities being returned.
However much of the liquidity injected by the Fed recently was through sales of “assets” and not repo. In fact last week the overnight funds rate for intra-bank repo operations rose to 10%, that is how restrictive the overnight lending market had become.
Point of reference, this “constricted plumbing” of overnight funding is what took down Lehman Bros. in 2008 and created the Great Recession.
You saw on Friday many talking heads, such as ex-NY Fed chief Bill Dudley, saying that all is well and that it was merely a confluence of events that created the liquidity squeeze and not to worry.
Well this is the exact time to worry.