Selecting Reverse Gear, US Style

22nd September 09 – Selecting reverse gear, US style

The motoring theme has tended to dominate this diary in recent times (and the Canadian Magna outfit with its Russian supporters has finally won the Opel/Vauxhall stakes) but this reverse gear has nothing to do with driving. Rather it is about money supply.

One of the biggest crutches applied to the US financial market following the collapse of Lehman Brothers a year ago was a $2,500bn guarantee for the money market mutual fund industry. This guarantee is to be allowed to expire on schedule this month. In addition, there is to be a review by the Federal Deposit Insurance Corporation that is likely to lead to funding guarantees for banks either to end completely or be restricted to emergency cases.

Tim Geithner, the US Treasury secretary said “As we enter this new phase we must begin winding down some of the extraordinary support we put in place for the financial system. We must continue reinforcing recovery until it is self-sustaining and led by private demand.”

Commentators think that whilst the timing of the strategic shift towards pulling back support is symbolic, it is a fact that US banks have repaid more than $70bn of the emergency bail-out funds. It is estimated that a further $50bn will be repaid over the next 12 to 18 months. The size of the Federal Reserve emergency fund loan programmes has diminished greatly with commercial paper funding facilities down 87% from the peak and the cash auction scheme down 57%.

Only time will tell if these first reversals of the emergency moves last year will prove to be timed correctly or be premature. Certainly, initiatives to mitigate home foreclosures and increase available credit to small businesses is continuing. Professor Tim Congdon referring to bank loans in the US falling at 14% in the quarter to August 09 said “The rapid destruction of money balances is madness.”