A conservative economist gives credit to the US Fed for increasing the pool of liquid assets available to banks. He believes that they shield the US banks from potential spillover effects from the crisis in the eurozone.
Tyler Cowen raises the issue of the shortage of safe assets in the global financial system. One of the problems with this shortage is that banks use these save assets as collateral that is used to borrow dollars with short-term maturities from US money market funds. Many of their sovereign debt assets can no longer be used to borrow dollars from money market funds. That will affect their ability to provide credit on the European market.
Since the Fed has also increased bank reserves by purchasing their supply of safe US treasuries, these safe assets have also been removed from the market. This is a problem in emerging markets because the US dollar is the global reserve currency. They have been large purchasers of US treasuries as they accumulate current account surpluses that are used in their reserve accounts. That relationship requires the US to run budget deficits that require the issuance of US treasuries to supply their reserve accounts. The dollar is used as the global reserve currency because it is perceived as a safe currency. On the other hand, if the US must continue to run budget deficits and issue debt to supply treasuries for reserve accounts, the dollar may become less safe.
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