Monetary Policy -- Liquidity

The Fed has started to step on the liquidity accelerator again after
a 3 month hiatus. The growth of the basic money supply has
stalled after a rapid increase over Half 2 '08, and the Fed has
recently stepped up the expansion of the monetary base to
counterract slow M-1. The Fed should probably push for another
$100 billion of cash for the system given how slow credit is. The
new round of tax cuts and the Fed's Treasury purchase plan should
help. I scratch my head about it, but it could be the case that the
tightening in monetary liquidity we saw from 12/08 - 3/09 did
adversely affect the stock market.

The broader measure of credit-driven liquidity growth has slowed
to 0.9% yr/yr through Mar. Here, one can more readily see how the
Fed is battling weaker credit demand via a deep recession. The
banking system's loan book has declined. As you would expect, the
major shortfull has come in the real estate loan book, which is running
15% below the long term trend and will fall further behind in the
months ahead. The C&I loan book is also running off, but slowly, as
businesses keep their credit lines drawn against any possible
negative policy reviews by the banks. As a consequence, the banks
are experiencing a run-off of jumbo deposits to go along with the
reductions in commercial paper offerings. Thanks to TARP, the
system's capital book has steadied out despite the large increases
in loan loss reserves and charge-offs.

Significant expansion of the broader base of liquidity is going to
require help from a turnaround of the economy.