Aggregate Reserves of Monetary institutions

[Celebration]

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

Look at the nonborrowed reserves of the monetary institutions in January 08 compared to the prior periods.

The nonborrowed reserves have gone negative! No money to lend?

Here is one interpretation of this--

http://elainemeinelsupkis.typepad.com/money_matters/

We are in the negative. I have never seen this in my life. I know it happens in history. Rich people better watch out. They should not say, 'Let them eat...' ANYTHING. The easy loans can only happen when banks have savings and since their asset base in the form of previous loans are now being dragged heavily into negative territory and much of this is since Xmas, they CANNOT give loans of ANY SORT at any price. They are in a negative flow trap. The ONLY out is to RAISE INTEREST RATES. Volker is chomping at the bit on the sidelines with fury. He knows, like me, this is the only way out.


Since the US has chosen to run all things in the red, it doesn't surprise me much to see ALL things running in the red. Nor should it shock the Fed. Lowering interest rates so money flows in the red all the time will make this red ink sea worse, not better.

[Fovea]

1. I can hear the chainsaws in the distance

as more wealth is about to be created.


Or something. We are now in a zone marked non-discretionary debt monitarization.


And it worked so well for Weimar.

http://en.wikipedia.org/wiki/Hyperinflation

[papau]

2. I did not know of this Vermont blog - interesting writer - but she is a little over the top

as to derivatives and the danger of asset write downs that causes banks to depend on the Fed for "reserves".

Credit risk is real - and derivative payoffs that should just involve the transfer of wealth can get interesting if their are defaults - but it is not the end of the world.

[Celebration]

3. I agree

This does look significant. The Fed is usually the lender of last resort, isn't it? I am not sure why shd thinks raising interest rates would help. I know the risk of inflation, even hyperinflation, down the road, but I am not sure they have much choice.

I think her premise overall is that, but for our military might, other countries would not put up with our fiscal situation. She feels we are holding a gun at everyone's back to take our paper.

[Warpy]

4. I've said with every stupid rate cut that they needed

to be counterintuitive and RAISE rates. If they keep cutting rates, the dollar is going to look much less attractive to foreign central banks than it does now, and it's already the red haired stepchild. The danger is that they will cut them low enough that China will be forced to let the Yuan float against the dollar, something that was necessary 20 years ago but which will kill what's left of the consumer economy if it happens now.

Maybe Volcker will advise the new Democratic president, who will then lean on that boob Bernanke to raise interest rates. Yes, the stock market will decline, but it's overvalued and needs to.

We've been on a ridiculous credit binge thanks to the concentration of wealth away from working people and the medicine to correct it is going to be very nasty. However, correction is necessary if we are to survive, at all.

[Celebration]

5. repeat of 1990

Back then when we lowered rates, banks were able to make money just by existing. They just borrowed at the really, really low short rates, and then invested on the yield curve one, two or five years out, and raked in the cash on the spread. We are trying to do a repeat of that--the banks won't necessarily lend a lot of money, but they will come out on the back end with some reserves.

Whether this will work again, we don't know.

[AnneD]

24. Warpy....

let me play the devil's advocate here. Suppose the dollar floats against the Yuan and the Yuan goes up. It will kill the consumer market here. But it will have repercussions in China. Once their goods become overpriced here folks will buy less-China will have to cut back or have less production demand. That will cause a slump in China's economy. China's development has been uneven and there is a very good chance of political upheaval-esp if there is a downturn in their economy.

What's in you crystal ball, Warpy. I always appreciate your POV. You can pm me if you want.

[Warpy]

26. The Chinese aren't stupid

and they've been opening alternative markets wherever they can in anticipation of the collapse of the US financial house of cards.

What might kill them is not so much the collapse of their biggest marketplace, but their own maldistribution of wealth. The peasants that supply all those yuppies in the fancy towers in the big cities with their food haven't shared at all, and in fact have felt the worst repression combined with an end to the benefits they had when the government pretended to be Communist.

We're heading for a world wide mess. Fed rate cuts are contributing to it.

[AnneD]

27. I've been watching the farm distribution system....

in China. They pay the farmers poorly and the kids want to leave to make their fortune in the cities. I think that is a disaster in the making. I remember the famines in China and India. It wasn't too long ago.

[CGowen]

6. Could someone explain to me why the banks were so high in the positive around 911?

http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19




They added discount borrowings to the chart in 08, maybe that's it

Prior to 2003-01-01, the data are calculated as excess reserves minus total borrowings plus extended borrowings. From 2003-01-01 till 2007-11-01, the observations reflect excess reserves minus total borrowings plus secondary borrowings. From 2007-12-01, the definition changes to excess reserves minus discount window borrowings plus secondary borrowings.

[Celebration]

7. Not sure how the accounting works

9-11-2001 I know the fed stepped in and greatly increased the money supply then, probably through buying securities from the banks (with an agreement from the banks to repurchase).

As for the change at 12-1-2007 (good catch, by the way), it didn't seem to make a difference in Dec. 01.

Another thing, look at

total borrowings
discount window borrowings

Total borrowings actually sounds like a broader definition than discount window borrowings. If so, then it seems like they are hiding something. And, to make matters worse, if that is the case, it seems like there would be even less reason to go into negative after the change in definition.

[Celebration]

8. changes

Okay, I think around November some off balance sheet items for banks were made to come on the books. These included a lot of subprime mortgages, so this accounted for the sudden difference in the reserves.

But what you uncovered in the notes is really interesting. Discount window borrowings are almost zilch now compared to the special auctions now being held for banks, and the rates are below the discount window rates.

See--

http://online.wsj.com/article/SB120040939637591379.html?mod=googlenews_wsj


So, the "change" to subtract out "discount window borrowings" now rather than "total borrowings" looks highly suspicious to me.

Where are the borrowings from these new auctions being reflected in this graph. Are they being left out? Is this situation much worse than even these figures?

Does anyone want to take a guess at this?

[CGowen]

9. Discount rates were set higher to remove the stigma for banks, but

it wasn't used much when the crisis started in mid 2007.

Explaining the Discount Window

The discount window is a channel for banks and thrifts to borrow directly from the Fed rather than in the markets. Until a few years ago, the discount rate was set below the fed funds rate and loans were subject to numerous conditions.

Banks were reluctant to access the window because it was associated with a stigma usually reserved for distressed banks. A few years ago the Fed overhauled the discount window to try and alleviate that stigma; the rate was then set one percentage point above the funds rate and subject to far fewer conditions. In spite of that, discount window borrowing has remained paltry.

...

http://blogs.wsj.com/economics/2007/08/17/explaining-the-discount-window/

UPDATE 2-Fed discount window borrowing largest since 9/11
Thu Jan 3, 2008 6:54pm EST


NEW YORK, Jan 3 (Reuters) - U.S. banks' direct borrowings from the Federal Reserve for the week ended Wednesday surged to the largest amount since the week shortly after the Sept 11, 2001 attacks, data from the U.S. central bank showed on Thursday.

Primary credit borrowings at the Fed's discount window totaled $5.770 billion for the week ended Jan. 2. That was the largest weekly amount since the week of Sept. 12, 2001, when it hit $11.742 billion.

...

http://www.reuters.com/article/bondsNews/idUSN0323047220080103

UPDATE 1-Fed discount window borrowing falls sharply in week
Thu Jan 24, 2008 4:54pm EST


NEW YORK, Jan 24 (Reuters) - Lending by the U.S. Federal Reserve at the primary credit discount window dropped sharply from the previous week, Fed data showed on Thursday.

U.S. banks on average borrowed $744 million in the week ended Wednesday, down from $1.230 billion a day on average in the previous week.

...
http://www.reuters.com/article/bondsNews/idUSN2427793420080124

edited to add:

I would say it went up on 9/11 because discount was not counted(subtracted) and in went down in Jan 08 because they included it. Just my speculation

[Celebration]

10. financial reporting sucks-BUT

I think here is the basic reason for the deterioration of bank reserves.

http://www.rgemonitor.com/content/view/233974/85/

And with the maturing and likely roll-off - starting in January - of many of the medium term notes - on the shorter term asset backed CP that is already falling off the cliff of a massive roll-off - the unraveling and meltdown of the SIVs was certain to build momentum. So bringing back on balance sheet assets backed by paper - short term or maturing medium term - that was inexorably being rolled off was the only feasible solution to prevent a scary fire sale of the toxic assets and a more immediate recognition of the massive losses that these schemes have already engendered.

However parking these assets on the balance sheet of the banks will only provide a temporary reprieve to the need to mark them to markets; a fire sale would have led to immediate losses; but the need to value these assets according to FASB 157 will force the banks to provide a more realistic and market based assessment of their value once on balance sheet. You can certainly expect - by keeping the assets on balance sheet rather than selling them - some accounting fudge - i.e. attempts to not fully recognize that many of these illiquid assets are now worth much less than par; indee, the alternative of a fire sales would have determined the true current market value of these assets. But given the extreme current illiquidity of the secondary market for these assets a fire sale today would have implied even larger losses than those warranted by the fact that these assets will never have the value that was assumed in the first place. So hopefully application of FASB 157 will limit the amount of accounting fudge that will be certainly be tried once the assets are parked back on the balance sheet of the banks.

http://www.fasb.org/st/summary/stsum157.shtml

This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.

http://paul.kedrosky.com/archives/2007/11/13/credit_markets_1.html

Relatedly, and not to get all obscure and accounting geek-ish, but it's hard not to wonder if FASB Rule 157, which comes into force this Thursday, will turn out to be the fire that lights the final fuse here. While it's laudable and all to force transparency and push market pricing, when everyone is forced to find a market price for illiquid instruments simultaneously during a credit crisis the result is a regulation-imposed death-spiral, with devastating implications all around

Note that the above was written November 13, 2007.

PS--I think I just outed myself as an accounting geek.

[Celebration]

11. So, my tin foil hat theory

Banks were required to implement FASB 157 in late November, meaning that they had to attempt to value their assets at fair market value (interesting concept, eh?). So everyone knew this was coming, and that it would at the very least erase all the banking reserves of our entire country.

So, simultaneously, some other things were going on--

Discount window borrowings just about stopped, in favor of special auctions by the Fed. The special auctions are actually below the discount rate, so the banks benefit. Also they don't have the stigma of having to borrow at the discount window. So discount window borrowings are now NEARING ZERO.

When the net borrowings were calculated, the past formula, from 2003, at least was

excess reserves minus (total borrowings plus secondary borrowings)= net borrowings

IMHO, discount window borrowings would definitely have been included in the total borrowings figure.

NOW it is

excess reserves minus (discount window borrowings plus secondary borrowings)= net borrowings

Note that discount window borrowings, which are nearing zero, have been substituted for total borrowings.


So, now the questions:

What was in the total borrowings figure?

Discount window borrowings had to have been included in "total borrowings." But that certainly wasn't the only type of borrowing included there.

Where are the borrowings from the Fed in these new auctions put into the new formula calculating net borrowings?

By narrowing the "total borrowings" to "discount window borrowings" as being subtracted now, is there a loophole by which the new auction amounts are left out of the formula completely.

Those are the questions I want answered. There may be a simple explanation. I don't know.

[CGowen]

12. I was reading something on hyperinflation, it's from wiki, I know, but nevertheless

Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:

* Outright lying as to official statistics such as money supply, inflation or reserves.
* Suppression of publication of money supply statistics, or inflation indices.
* Price and wage controls.
* Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or similar.
* Adjusting the components of the Consumer Price Index, to remove those items whose prices are rising the fastest.

http://en.wikipedia.org/wiki/Hyperinflation

For M3 or inflation it's certainly true

[Celebration]

13. Love Wiki

Anyway, if my speculation as outlined above is correct, then, yes, outright lying is the appropriate term.

I have to say, though, even though I am a complete supporter of open government in theory, I see the value in trying to avoid outright panic. Our monetary system is smoke and mirrors anyway. So what's a little more smoke, and a few more mirrors going to do?

But if people catch on to this, well, I just don't know. I am guessing, though, that we won't see anything about the notes you discovered in the NY Times Business section.

[CGowen]

14. I think they changed it because they changed "Total Borrowing"

They added "term auction credit" in 2007-12-01, this would probably push the graph further down if they included it.

http://research.stlouisfed.org/fred2/series/BORROW?rid=19&soid=1


The non borrowed reserves are still positive in this chart because they still use the Dec 07 numbers

http://research.stlouisfed.org/fred2/series/BOGNONBR?rid=19&soid=1


here are all the graphs
http://research.stlouisfed.org/fred2/release?rid=19&soid=1



What that all means is that banks have to use 50 billions from the "term auction credit" just to fill the reserve requirements

Were it not for the Term Auction Facility, banks would have had to raise $40 billion in capital by selling assets or some other means. We will look at "other means" in just a moment.

For now, the Fed is not disclosing who is borrowing under the Term Auction Facility, probably out of fear that people just might find out what banks are capital impaired and by how much.

http://globaleconomicanalysis.blogspot.com/2008/01/bank-reserves-go-negative.html

notice also the chart


and compare it to

http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19&soid=1


They stopped including the 2008 numbers in their charts, although they were using them just days ago

[Celebration]

15. Aha

They added "term auction credit" in 2007-12-01, this would probably push the graph further down if they included it.

Exactly. Sure it would. Thanks for finding that. I was right. Smoke and mirrors. Term auction credits are taking the place of discount window borrowing. So what do they do? Drop it from the reporting of net borrowed reserves......hahahahaha.

Oh, well the good news is at the end of January the demand for this stuff lessened somewhat.

Bernanke is just trying to buy some time while he tries to let banks improve their balance sheets by borrowing money at the lower short term rates, and investing it at higher rates a little bit further out on the yield curve, and, in the meantime, misrepresenting the health of their balance sheets by using the term auction credits instead of the discount window, and fiddling around with the reporting.

Maybe it's brilliant. I don't know. The next few months should be interesting.

[CGowen]

16. The Federal Reserve will conduct two auctions of 28-day credit through its (TAF) in February.

Release Date: February 1, 2008
For release at 10:00 a.m. EST

The Federal Reserve will conduct two auctions of 28-day credit through its Term Auction Facility (TAF) in February. It will offer $30 billion in an auction to be held on Monday, February 11 and $30 billion in an auction to be held on Monday, February 25.

To facilitate participation by smaller institutions, the minimum bid size will be reduced to $5 million, from $10 million in the previous auctions. The minimum bid rate, along with further details, will be announced at noon EST, the Friday before each auction. The results of each auction will be announced at 10 a.m. EST on the Tuesday following each auction; final settlement will occur on the Thursday following each auction.

The Federal Reserve intends to conduct biweekly TAF auctions for as long as necessary to address elevated pressures in short-term funding markets. Decisions regarding auctions in March will be announced by Friday, February 29.

http://www.federalreserve.gov/newsevents/press/monetary/20080201a.htm


They are going to do them every 2 weeks as long as it's needed

[Celebration]

17. It is a bailout

This is a government bailout, but it is being done without the benefit of our going through Congress, having hearings, passing bills, etc.

I think everyone will be watching these auctions very carefully.

In any case, I learned something in this thread. The Federal Reserve is purposefully issuing misleading data concerning the financial health of the banking system. Since our whole monetary system is dependent on trust, they are playing with fire. But there was a lot of fire anyway............

[fasttense]

18. This is a very informative thread.

Basically the banks don't have the money they claim they have or what they should have on hand. The Fed is acting as the banks' reserves right now.


Is this the Twilight Zone or are we back in 1929? How long can they play this game?

So that's why the bank got so touchy when I asked if a deposit I made in my son's account was available for him to use the same day. They said they were going to hold it for three days. It was only $300. They never did that before yesterday.
Now I have to deposits cash for my son to use that money the same day. Is that why suddenly my bank claims it will zero out my account if I don't have enough activity on it? So what other little games will the banks be playing with us?

[Celebration]

19. maybe they are taking their cues

from the cable companies, the phone companies, etc. who are using all sorts of tricks to nickel and dime the consumers. Here is an article about that--

http://finance.yahoo.com/expert/article/moneyhappy/64338

Be a squeeky wheel to avoid gotcha capitalism--

The average consumer pays $1,000 a year in hidden fees, Sullivan says, $5 or $10 at a time. His book is a must-read to avoid getting fleeced by banks, credit card companies, cell phone service providers, hotels, rental car companies, auto dealerships, mortgage brokers, and the like.

Sullivan tells readers what to watch out for -- including a $1,000 line item dubbed the "dumb-ass fee" by the mortgage industry, named after homebuyers who don't notice it on closing day. Sullivan also explains how to fight back, and helps you pick the battles you're most likely to win.

"You and I are lucky because we have access to a telephone and can sit on hold for half an hour," he says of my Comcast experience. "What about people who work outside in construction all day? Or shy people, or old people who can't hear well on the phone? The company strategy is to squeeze as much as they can out of the consumer, to layer on as many fees as possible, and then only refund the noisy people."

Do you have an account at the same bank? Do you have to cash a check and then deposit the cash for him to use the same day? That is strange (and somewhat amusing).

Oh, we may come out of this. The banking system is buying time now. However there is no breathing room at all, and if there is a deep breath the buttons may pop off. Hard to say how it will come out.

[Celebration]

20. The Red Ink Increases

Thought I would briefly update this thread--

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

It looks to me like the non borrowed bank reserves are now minus seventeen billion, but the banks owe an additional 60 billion on top of that to the Fed (term auction facility). It looks like they have muddied the waters even more with their funky footnotes, as they don't even attempt to explain this.

Unless I am reading this incorrectly-----------------it looks like the banks had to borrow 60 billion dollars just to come up with reserves of 43 billion dollars.

The footnotes don't make this clear at all of course. At least the last time we looked at this we could kinda sorta figure it out.

[CGowen]

21. Solution: dump more money

Fed boosts auction size in surprise action

WASHINGTON (Reuters) - The Federal Reserve on Friday announced emergency measures to add $200 billion into the banking system in a bid to ease persistent liquidity strains that are leading to a global credit freeze.

The Fed said it would increase the size of its two term auctions of short-term funding to banks this month to $100 billion from the $60 billion previously announced. It also would start a series of term repurchase transactions with the primary dealers that trade securities directly with the Fed, expected to be worth a total of $100 billion.

The two measures are intended to "address heightened liquidity pressures in term funding markets," the Fed said in a surprise announcement.

The move coincided with unexpectedly somber news that U.S. employers cut 63,000 jobs in February, the second consecutive month of job losses. Senior Fed staff said their announcement was not related to the jobs report but rather a reaction to a broad recognition that financial market deterioration had accelerated in recent days.


...

http://news.yahoo.com/s/nm/20080307/bs_nm/usa_fed_dc

[Celebration]

23. What is the end game?

Does anyone have a clue?

Well, Halliburton didn't move to Dubai for no reason.....................

[CGowen]

25. I don't know, but I heard the term "Endgame" before

...

Beginning in 1999, the government has entered into a series of single-bid contracts with Halliburton subsidiary Kellogg, Brown and Root (KBR) to build detention camps at undisclosed locations within the United States. The government has also contracted with several companies to build thousands of railcars, some reportedly equipped with shackles, ostensibly to transport detainees.

According to diplomat and author Peter Dale Scott, the KBR contract is part of a Homeland Security plan titled ENDGAME, which sets as its goal the removal of "all removable aliens" and "potential terrorists."

..

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/04/ED5OUPQJ7.DTL

[truedelphi]

28. And remember, John Ashcroft tried to have both environmentalists and also

Religious "fanatics" added to the lsit of terrorist suspects.

Do you recycle? Sign petitions to end pesticide use?

[Warpy]

22. I've been saying the same damned thing

These IDIOTS are doing exactly the wrong thing, time and time again! They need to RAISE the rates, not lower them. Yes, the stock market will correct, but it's been way overdue for that. Lowering the rates has been producing a 2 day sucker rally at most, followed by more inflation from another fall in the dollar. They take much more out of the dollar, our debt will be unattractive and we'll be sunk.

GOP economic dogma never changes and it always brings us to ruin.