Hi Aspro,The problem is a banking liquidity crisis. As I see it...

Hi Aspro,

The problem is a banking liquidity crisis.

As I see it the banks borrow money on relatively short time spans, of the order of months to a year or two, as commercial loans and of course agree to pay interest. The banks then loan the money for housing etc on a much longer time scale. As long as the loans are above water and those who have taken out loans continue to pay no problem. But as they start defaulting the banks don't have the money to repay the commercials with interest. Again probably not a huge problem with a low level of default and if the commercials are still happy to roll over the loans; which has normally happened in the past. But now the commercials are starting to get jittery and demanding their funds (with interest), probably to start looking at other avenues for investment. So the injection of funds into the banks is allowing them to cope with the liquidity problem of repaying the immediate commercial loans which are not being extended.

It gets them over the short term problem but in the long run this just makes things worse when all that extra money gets reinvested somewhere else, flows back into the system and causes a new round of inflation. And if it starts snowballing then really look out. Either the banks go under or Bernanke has to start hiring helicopters.


Cheers

Andrew