An Interesting Monetary Detail In The Aftermath Of The London Bombings

Wednesday, July 13, 2005

The Cunning Realist has a very interesting post on liquidity operations by the Federal Reserve in the 48 hours prior to the London bombings. According to his post temporary liquidity hit a multi-year high on July 5 while securities lending saw a huge spike on June 30. Have a look at this chart and then follow this link for his highly recommendable article.


The Cunning Realist goes on to ask,
"why the need for all that easy money all of a sudden? The Fed doesn't take this sort of action for no reason, particularly when the price of oil is already at an all-time high. It does so in response to circumstances it predicts will create a need for liquidity, or when it specifically wants to support the stock market as it did after 9/11.
The terrorist attacks in London took place on Thursday. The Fed dramatically increased the pool of liquidity available for stocks to a multi-year high 48 hours before that---an ideal amount of time for that liquidity to filter into the market---and kept it elevated for the next few days. And indeed, it worked. The stock market saw heavy buying right at the opening bell on Thursday and has shot straight up since then.
Why did the Fed do this? Was it just another coincidence in our financial markets that somehow managed to immediately precede a major geopolitical event?
One person can give us some answers easily and quickly: Alan Greenspan. Doesn't it behoove him to do so before he rides off into the sunset a few months from now?"
There is a point to his questions.
UPDATE I: Indymedia UK reported last Saturday that a 1,000-strong London underground bombing exercise took place at the same time and places as the real attack. Excerpts from Indymedia:
A consultancy agency with government and police connections was running an exercise for an unnamed company that revolved around the London Underground being bombed at the exact same times and locations as happened in real life on the morning of July 7.
On a BBC Radio 5 interview that aired on the evening of the 7th, the host interviewed Peter Power, Managing Director of Visor Consultants, which bills itself as a "crisis management" advice company. Peter Power was a former Scotland Yard official, working at one time with the Anti Terrorist Branch.
The transcript is as follows.
POWER: At half past nine this morning we were actually running an exercise for a company of over a thousand people in London based on simultaneous bombs going off precisely at the railway stations where it happened this morning, so I still have the hairs on the back of my neck standing up right now.
HOST: To get this quite straight, you were running an exercise to see how you would cope with this and it happened while you were running the exercise?
POWER: Precisely, and it was about half past nine this morning, we planned this for a company and for obvious reasons I don't want to reveal their name but they're listening and they'll know it. And we had a room full of crisis managers for the first time they'd met and so within five minutes we made a pretty rapid decision that this is the real one and so we went through the correct drills of activating crisis management procedures to jump from slow time to quick time thinking and so on.
Am I wrong to remember that there were terrorist exercises on 9/11 in NYC?
UPDATE II: The Cunning Realist has posted a further clarification in his comments, ruling out a seasonal effect in the liquidity surge:
Before writing the post, I looked at data from the same time of year for several previous years. The only year that saw anything remotely similar to this year was 2004---and even then, the rise in the liquidity pool was not as sharp as this year when it increased by 60% in one day. Second, the far gentler rises in previous years---if they have occurred at all---have dissipated after the 4th of July. The massive increase this year took place after the 4th. Third, and perhaps most importantly, oil was trading in the 60's this year when the Fed took this action---thus it was far riskier for the Fed to print all that money now as opposed to years past, when its monetary policy was not constrained by the price of oil or other commodities.


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