cash balances in almost anything they want to, given acceptible risk levels. Hedging has now become synonomous with arbitrage and given the level of arbitrage opportunities available utilizing HFT, why would a bank make a loan or build reserves? (that is of course, unless it had to). The recurring problem to all hedging/arbitrage strategy, investment returns are not always normally distributed so, at times, even perfect arbitrage/hedges can and do blowout. Just ask Long Term Capital, MF Global or now, added to the list, JPM. Two things have to happen: 1. Primary Dealers should be limited as to how they "invest" Fed Cash. 2. All financial entities 1) with federally insured deposits or 2) have been classified by regulators as "too big to fail" should be bound by Glass-Steagall. Given the fact that money is fungible it is hard to pinpoint what exactly the banks are doing with the funds. The Fed looks at the overall level of money supply in the system and then establishes capital levels which banks need to maintain for different business activities. These capital levels are obviously very important in determining how much capital is allocated to selected businesses. While the Fed obviously has an enormous impact on the overall level of money in the system they are not able to control the velocity of that money. There are a whole host of issues to address. Glass-Steagall has some very compelling and appealing characteristics. Easier said than done though especially at this point in time.