Bank Reserves Go Negative
February 7th, 2008Reader Brad tipped me off to this situation.
Via: Minyanville:
Here’s an interesting excerpt from the book Investing Public Funds by Girard Miller about borrowed reserves:
“Another useful indicator of the Federal Reserve’s relative monetary policies can be found weekly in the Federal Reserve data. A key statistic is the net free reserves or net borrowed reserves line item. This statistic measures the degree to which depository institutions have found it necessary to obtain funds in the Fed Funds market and through the Fed discount window in order to obtain required reserves.
During periods of central bank credit-tightening operations, the depository sector might find it necessary to borrow funds to meet reserve requirements. This practice results in net borrowed reserves, which shows as a negative number. Conversely, if ample funds are available through the banking system to meet reserve requirements, banks can become net lenders of reserves through the Fed Funds markets.”
Given that the Fed is not in a credit tightening mode, we must look for a better explanation. Here it is: Banks in aggregate have now burned through all of their capital and are forced to borrow reserves from the Fed in order to keep lending.
Hoo Boy.
This is bad-weird news.
I know through work-required Continuing Education Courses that banks were by law- required to estimate values of all the “stuff” on their balance sheets at year end 2007.
Reserves-schmerves.
Clinton I (just in case we end up with a Clinton II) made it hunky dory for banks to go out and invest in the markets, while at the same time holding depositor’s cash in trust (and mind you, paying the worst interest since the concept was born).
One of the stupid-ist logic breaking, ball busting clause in the law – was letting banks invest in, whatever. Like it wasn’t enough for them to charge the arm and leg for a loan, credit cards, home equity loans, etc, but pay piss-poor interest – almost negative- for cash deposits.
I forget the law that allows this – but look what this law has wrought:
– The subprime mortgage lending debacle;
– Bank cash reserves lower than necessary to cover even a fraction of deposits re a pay-out (In today’s lingo – that’s a run on the bank).
There is only so much bailing out that will be successful.
Here’s a chart on bank reserves:
http://www.federalreserve.gov/releases/H3/hist/h3hist4.txt
Here also is an articl where there is a massive move of money out of mutual funds today.
http://www.nasdaq.com/aspxcontent/NewsStory.aspx?cpath=20080207%5cACQDJON200802071700DOWJONESDJONLINE001010.htm&
Looks like a lot of money is moving to bonds but – Where is all the rest of this money going?
Are people now stuffing it under the mattress?
I overheard a high income coworker discussing the limits on a 401K with a coworker today and wanted to laugh out loud – hysterically. I kept my mouth shut for this one time because for me, keeping cash assets right now – anywhere- a bank, in a dead end no interest paying bank account – even credit unions are failing!; the stock market- which will drop by 4000 points if the Fed has it’s way – ALL appear to be risky gambles against the odds.
At least for me, it seems there is no CLEAR VISION ahead – at least in my senses -as to what to do with US dollars – or even other currencies.
There is a common sense limit to how much one should invest in gold.
The concept of the Anero is still in play (dig the outfit/uniform on Bush )- can he ever stop playing like he is a Ken doll?
http://www.youtube.com/watch?v=Br31mdP8-Ug
Anyways, I am giving serious thought to building a dugout stone house for me and mom at the bottom of the hill next to the garden. Solar, off the grid. With a natural swimming pool and a wood stove. Not the best Feng Shui but Sherlock – we got to get off of the road.
My treadle sewing machine, a loom, I dunno. But I’m thinking if death and taxes don’t do us in, we’ll make do and have a good life.
Where did he get his graph from? Looks like he did some, er, very creative extrapolation.
Compare:
https://image.minyanville.com/assets/FCK_Aug2007/File/christy/m291.gif
http://research.stlouisfed.org/fred2/fredgraph?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s%5B1%5D%5Bid%5D=NFORBRES&s%5B1%5D%5Btransformation%5D=lin&s%5B1%5D%5Bscale%5D=Left&s%5B1%5D%5Brange%5D=Custom&s%5B1%5D%5Bcosd%5D=2000-01-01&s%5B1%5D%5Bcoed%5D=2007-12-01&s%5B1%5D%5Bline_color%5D=%230000FF
@ outslaw,
The chart is different now. The NFORBES series data is different now. I sent Mish an email about it.
Hi Mish,
One of my readers was having trouble reproducing the chart of the NFORBES series data. Indeed, the link that you provide to the chart now produces a different chart than the one represented in the screenshot on your story.
Check out the difference:
http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19
Note: It says, “Last Updated: 2008-02-08”
and…
https://image.minyanville.com/assets/FCK_Aug2007/File/christy/m291.gif
Do you have any ideas about what may have happened?
Best,
Kevin
cryptogon.com