Financial System Liquidity

The financial system continues a process of a slow thaw. Non-financial commercial paper out. --
prime credits -- is moving up sharply, commercial and industrial loans have turned around, and
consumer credit demand is inching ahead. Banks and other financial service companies are also
issuing more commercial paper  and the banks are bidding successfully for large or jumbo
deposits. Liquidity or funding for the short term credit markets is thus slowly experiencing
reduced dependence on the Fed's QE program. This development is a necessity if the economy
is to sustain recovery without utter dependence on the expansion of Federal Reserve Bank credit.

The markets for longer duration real estate loans remain moribund, but the pace of decline is
now very shallow and no longer harrowing. With sectors of the market for asset backed paper
also recovering, the US appears close to a bottom in the real estate credit cycle.

But, the hard truth is that save for prime industrial commercial paper and business loans, the
credit funding of the economy is still sparse, and without vigorous mortgage and real estate
development markets, the build up of credit driven liquidity is slow enough that it is hard to
argue with conviction that the system will stay liquid enough to support ongoing economic
recovery without further quantitative easing by the Fed. The situation is far better than it was
in 2009 and is stronger than it was in 2010, when the Fed had to reinstate QE in both years to
maintain liquidity in the system. Freezing Fed credit is less risky now than in the two immediate
prior years, but with the new freeze to Fed credit, we are still looking at a chancy effort to
make a normal transition in the liquidity cycle. If the credit markets were even moderately
further along in recovery, I would say do not give the wind up of QE2 a second thought.

On another matter, I would also note that since the end of Feb. 2011, institutional money
market funds have been boosted by nearly $100 bil. Since the stock market is lower now than it
was in the latter part of Feb., you can deduce what the bigger money has been doing re: stocks.