Friday, November 2, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", October 31

- Fed's Treasuries holdings: $782.7bn (+$2.1bn)
- Other central banks' Treasuries holdings: $1,231.5bn (-$2.6bn) (*)
- Other central banks' agency securities: $800.8 (+$4.3bn) (*)
- Global Dollar Liquidity Measure: $2,815.0bn (+$3.8bn)

(*) Off-balance-sheet items

[1] Not a bad month, liquidity-wise. The last weekly Fed balance sheet for the month of October yields little in the way of surprises. A modest increase in our Global Dollar Liquidity measure is enough to propel the annual rate of growth to 14.7%, a four-month high. Foreign central banks, as usual, are leading the charge: custody holdings are back at +20.1%. This could change, of course, if the effective Fed funds rate were to persistently trade above the new 4.5% target over the next couple of weeks.

[2] New York Fed conference on systemic risk. The Federal Reserve Bank of New York has just published an overview of its recent conference on "New Directions for Understanding Systemic Risk". If I had to summarize the findings in just a couple of words, I'd say two things. First, the new financial system —with "disintermediation" as its core feature— is less prone to systemic risk, as credit risk is spread more widely. Second, as more assets are subject to mark-to-market discipline, liquidity crisis are bound to create ... new sets of risks! ["New Directions for Understanding Systemic Risk", Economic Policy Review, Volume 13, Number 2, November 2007].

[3] "Great Moderation" Watch: liquidity & "global decoupling" [Liquidity @ Financial Times]. Manisha Girotra, chairman of UBS India, dismisses the notion of "global decoupling" as just another case of ... excess liquidity! "With growth in the US slowing down, funds are getting redirected to Asia". In other words, it's all down to ... funding liquidity (which, at least according to the numbers I follow, is still in pretty good shape) [Sundeep Tucker, Joe Leahy and Geoff Dyer: "Defying gravity? Asia’s continued rise spurs ‘decoupling’ debate", Financial Times].

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