Financial Willies

I'm going to start right off by saying that there's plenty I don't know about the inner workings of the Federal Reserve and the day-to-day nuts-and-bolts of managing monetary policy.

That said, I have to admit that the following post from the Financial Ninja blog, "Really Scary Fed Charts: JUNE, 'Just' 1% of GDP Now," is enough to give anyone the willies.

In my last update Really Scary Fed Charts MAY: False Alarm? I presented two different views on the continued rapid deterioration of the U.S. financial system.

Over at CalculatedRisk they are being interpreted as a “false alarm” in Non-Borrow Reserves and the Fed’s Balance Sheet.

Over at MarketTicker they are being interpreted as evidence that “the system as a whole is insolvent” in Tall Tale Tuesday.

Another month and another couple billion later, the Fed Charts just keep getting scarier.

Last month Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) were around $140 billion.

Total Borrowings now amount to about $155 billion

Allow me to put that into context:
1) The entire Bush stimulus package was $145 billion.
2) The stimulus packages was 1% of GDP

How comfortable are you with the fact that stricken financial firms have borrowed the equivalent of 1% of GDP from the Federal Reserve? (Oh sweet baby Jesus, you better hope Ben ‘Helicopter’ Bernanke really really knows what he’s doing…)

Last month Non-Borrowed Reserves of Depository Institutions (BOGNONBR) were around negative $90 billion.

The balance sheets of almost all financial institutions, whether they are depository institutions or prime brokers, will deteriorate further. They have to. The vast majority of their balance sheets are now in the Level 2 or 3 asset buckets. I can’t imagine that these assets are currently being undervalued or even conservatively valued.

That’s just now how these fellows roll.

It’s Wall Street.

Clearly the credit crunch is far from over… (BORROW/BOGNONBR)

Most of this nightmare is the result of Bernanke’s new, innovative, and numerous liquidity facilities.

Comments

[Jes]

These charts leave me stunned.
For those of us who can't convert all our assets into gold and hide it in the backyard, when push comes to shove, I wonder how much of our 401(k)s we'll ever see.

[Ed H]

Michael, the Fed's offering liquidity for clearly risky paper like RMBSs is a sign that things have spiraled out of control. You talk about an exploding Fed balance sheet. It makes me wonder about M3 and how much money is being pumped into the economy.

http://www.creditwritedowns.com/2008/06/m3-i-wonder-what-it-looks-like-today.html

I find it 'convenient' that the Fed stopped publishing M3 two years ago.

My view is that the monetary inflation of the past few years showed up in asset prices mainly due to global wage arbitrage and other effects of globalization preventing consumer price inflation. Now that the bubbles from that monetary liquidity have popped, the Fed is bloating its balance sheet in a desperate measure to keep the daisy chain going.

What are your views on M3? Why did the Fed stop issuing it?