Non-borrowed reserves of financial institutions

[Celebration]

[mia]

1. Sharp spike in banks borrowing from the Federal Reserve system too.

http://research.stlouisfed.org/fred2/

[Nay]

2. Since I'm no economist, I have to guess that that dropoff that

looks like a cliff in the first graph (non-borrowed reserves) is money that was on the books as reserves, but was actually that fake electronic money in all the evaporating CDOs, etc.? The money that financial institutions are now having to write off as evaporated? Holy shit.

And the Fed is lending them the same amount of money back so they don't look broke? But they still ARE broke, because when a financial institution BORROWS money (like from the Fed), that money isn't an ASSET, it is a DEBT,right?

Holy shit, we are teetering on the edge of a precipice as steep as that graph.

[Celebration]

3. you got it n/t

[Warpy]

11. That's right

but the Fed will keep pumping funny money into them so that they are able to stay in business and we won't have a repeat of the wave of bank failures we had during Hoover's reign.

Trust me on this, you don't want a repeat of that.

Banks and brokerages are all teetering on the edge of insolvency, as are most American families. We're heading into a period of suck and there's not much we can do about it now.

People are going to have to learn the hard way all over again that debt is poison, both on the personal and institutional levels.

[CGowen]

4. ah... just print it

...

The writer of the e-mail directs his readers to the most recent H.3 report, which shows total reserves ($41.6 billion) less TAF credit ($50 billion) less discount window borrowings ($390 million) equals non-borrowed reserves (minus $8.8 billion). The negative number is really an accounting quirk: If banks borrow more than they need, non-borrowed reserves are a negative number.

This gentleman is overlooking the fact that the Fed is ``a monopoly provider of reserves,'' said Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``This is a non-starter. There is no such thing as a banking system short of reserves. The Fed has absolute control over the supply.''

There may be times, such as late last year, when banks are reluctant to lend to one another for a period longer than overnight. ``And any one bank can have a problem'' funding itself, Glassman said. But in a world where ``the Fed can print money, there is no shortage,'' he said. ``The banks get the reserves they want.''
...
http://www.bloomberg.com/apps/news?pid=20601039&sid=a7EAJelhvLh0&refer=home


Or the Bernanke printing press speech in 2002

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

[Celebration]

5. Discount window

From your source--

Those hyperventilating over TAF borrowing may want to consider an alternate scenario.

``Suppose the Fed cut the discount rate so that it stood below the funds rate,'' Kasriel said. (He said this yesterday, not two decades ago.) ``Would these folks be upset if banks went to the discount window for funds? What's the difference? It's a difference without a distinction.''

I would say the answer to that is YES, because the Fed is the lender of last resort. The point is that the banks are having to rely on the Fed for funds, from whatever source, TAF or discount window. This particular set of circumstances has not happened in recent history--and it is in the aggregate. The difference between the discount window and the TAF is merely that they do not have to identify the particular banks who borrow money when it is the TAF, and, yes, the Fed is trying to avoid a panic, and, yes, this writer is trying to smoothe over a very disturbing development. After all, psychology plays a huge role in the functioning of our monetary system.

The Fed won't allow our banking system to go broke, it is true. So they will always be there to provide money. They have made that perfectly clear. But what are the costs? We don't know. It could be hyperinflation down the road. They are hoping we muddle through and the banks can build up their reserves by borrowing low cost, buying government bonds that yield more (though I doubt at this point this works well at all), gouging their customers on interest rates, etc. This may work, and it may not.

But where I do agree with the writer is that the banks will not be allowed to fail. But that really isn't the point of concern. Rather it is the contracting economy from all the cutting back of credit, and the possible consequences of the Fed printing money to compensate for the negative banking reserves. In other words, we are in uncharted territory. It doesn't mean that the world will end. It just means that the monetary system is a whole lot riskier.

[Angela Shelley]

6. and through globalization, many other nations are

interested in a healthy dollar, or else their reserves lose value too.

It´s uncharted territory also because the Fed is no longer the ONLY decision maker.

[Celebration]

7. In addition, she seems to fundamentally misunderstand the problem

I read her piece again, and she seems to think that this is some sort of accounting glitch because the TAF took over instead of the discount window. And that is just not so! LOL, that just confuses the issue, but the graphs would look just as bad if it was still discount window borrowing.

The problem was the required writedowns of securities by banks in late 2007, and she never even mentioned that. It's as if she can't read a balance sheet.

But yes, the banks will always have enough reserves as long as the Fed is willing to lend them to the banks. I certainly agree with that.

There may be times, such as late last year, when banks are reluctant to lend to one another for a period longer than overnight. ``And any one bank can have a problem'' funding itself, Glassman said.

Reluctant? May be times? The facts are that until this crisis, banks have always been willing to lend reserves to one another. Furthermore with net unborrowed reserves in the hole, there is no mathematical way that banks could have taken care of this by borrowing from each other.

But in a world where ``the Fed can print money, there is no shortage,'' he said. ``The banks get the reserves they want.''

True, uncharted, and scary.

[CGowen]

9. Hey it's the MSM, what do you expect ? n/t

[CanonRay]

8. Scariest thing I've ever seen.

I showed my wife and her jaw drop. This should be on the front page of every newspaper in the country.

[Celebration]

10. update

Don't have a graph, but it looks like the 20 billion or so in the red on non borrowed reserves has jumped to 60 billion in the red.

http://www.federalreserve.gov/releases/h3/Current/

I am just assuming a couple of big banks took some more writedowns, causing this figure to explode.