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Credit Crunch - Bank Reserves go Negative |
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Monday, 14 April 2008 |
There's a lot of talk about a "credit crunch" and speculation about what it means for the U.S. and global economies. To summarize it, I would say: "The banks have no reserves other than debt."
This chart shows the total "non-borrowed" reserves in the U.S. banking system (as an aggregate of the entire financial system). Negative non-borrowed reserves indicates basically that the reserves are borrowed for the first time in U.S. economic history. The sharp drop shown here indicates the beginning of the credit crunch in late 2007:
And the amount borrowed is rising rapidly as the Federal Reserve
assures financial institutions that they will have access to unlimited
liquidity through the Term Auction Facility. By April 09, 2008 - U.S.
banks had borrowed a total of $140 billion from the Federal reserve -
just to be able to have $40 billion on hand for reserves. 
This week, more banks are announcing their losses & writing down
more mortgages. The amount borrowed to cover reserves will be forced
to increase again.
You can see from the Excess, NSA number that the amount of reserves
able to be re-loaned is miniscule - perhaps some $20 billion in loans
could be generated for the entire non-bank economy. This is the effect
of the credit crunch on individual and business borrowers. If you want
a loan, you better have a good way to indicate that you'll actually pay
it back. Or, you could just be a bank and then you're able to get any
loan imaginable.
The reserves have collapsed - the banking system itself is bankrupt. Credit crunch is a very nice way of saying this, credit crisis is starting to sound a little more accurate.
Will the Federal Reserve forgive these loans, or seize the businesses
(nationalize) to recover its loan losses? Will the Congress authorize
the Treasury to put more of our dollars onto the Federal Reserve's
balance sheet so they can continue the infinite loans to banks?
Ah, but the Federal Reserve has saved us from a bank run! Well,
they've put up $140 billion (plus whatever they're adding this week) so
the economy could have $20 billion in loans - this is an amazingly
ineffective & convoluted means of generating financial activity.
The reserves backing your checking or savings account are all owed to
the Federal Reserve and the banks don't have the capital necessary to
generate enough profit to ever reasonably pay this debt back.
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Last Updated ( Thursday, 17 April 2008 )
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