The Fed just pumped $1.5 trillion into the financial system. Where did the money come from? Where does it go? : AskEconomics

so basically the banks sell their assets to the FED at a price that is higher than what that assets would cost during the current financial situation

OK. So let's be clear. If things got to the point where banks were selling us treasury bonds below what they were worth to raise enough cash... We would already be in a serious economic nightmare. So please don't discuss that situation like it's normal or even bright on by bad judgement. Think about the fact that the Bay Area, one of the top economic areas in our country, has just literally shut down. This is the equivalent of the house being on fire.

Why would banks "selling US Treasury bonds below what they were worth to raise enough cash" imply that our economy is crashing?

  • 2
    $\begingroup$ I empathize with you, it sucks to be stuck in the house all day, but you can do so many more productive things then trying to learn economics from news articles. If you are really interested, I recommend buying some textbooks on macroeconomics and monetary policy and reading those, instead of posting two questions a day about random news articles. Take care of yourself and of how you spend your time. $\endgroup$ – Giskard Apr 12 '20 at 8:45
  • $\begingroup$ @Giskard I actually have a B.A. in economics. "I recommend buying some textbooks" Perhaps YOU can do this. But I'm in Toronto, and every bookstore and library is closed. Amazon isn't shipping them either. $\endgroup$ – Nai Apr 12 '20 at 19:49
  • $\begingroup$ Again, I am sorry about your situation. If this is important & urgent for you, you can purchase e-books, those are delivered quite free of risk. $\endgroup$ – Giskard Apr 12 '20 at 20:33

Trying to use any single banking indicator like that is probably not incredibly powerful for predicting the trajectory of the entire economy, although the one you've mentioned is indicative of a liquidity crisis, in which

Market participants in need of cash find it hard to locate potential trading partners to sell their assets. This may result either due to limited market participation or because of a decrease in cash held by financial market participants. Thus asset holders may be forced to sell their assets at a price below the long term fundamental price.

If however you doubt that the economy is "crashing", look at the predictions from The Economics of Coronavirus. There's hardly any prediction that says otherwise, i.e. the [world] economy is "crashing" at least temporarily. The longer term effect is being debated (i.e. there's a lot of uncertainty in longer time frame predictions, right now).

And yes, illiquidity in the banking sector can/does result in a credit crunch that affects the rest of the economy. See e.g.

  • "The real effects of liquidity during the financial crisis: evidence from automobiles"

    Illiquidity in short-term credit markets during the financial crisis might have severely curtailed the supply of nonbank consumer credit. [...] the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market. These results also imply that interventions aimed at arresting illiquidity in short-term credit markets might have helped contain the real effects of the crisis.

  • "Flight to liquidity and the great recession":

    A financial crisis, simulated as an abrupt decline in the collateral value of bank assets, triggers a flight to liquidity, which strongly amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.