One of the big questions on everyone's minds is, if the US government and Fed is pumping so much money into the banking system, where did it all go? Why isn't it being lent out?
Traditionally, the answer has been that the banks are too scared to lend it. However, this article suggests something different - a big portion of it is being used as collateral (a margin call, if you will) for OTC derivative bets which have moved against one of the parties.
(a) What happens when these bets either end or reverse? The capital becomes available to be used (rather than being quarantined as collateral).
(b) What happens if credits deteriorate further? (Highly likely and for some time to come.)
It's (b) which exercises my mind. Where do they get the extra cash? Does this result in another demand-driven increase in the $US? Another order of magnitude increase in the Fed's money-printing? More bank failures, if they don't have the liquidity to meet their collateral calls? In other words, do we have a direct repeat of 2008 again?
