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1

The important thing to note here is that most if not all this borrowing has been out in the open and reported on by various news sources.

Posted by Bellevue Ave | August 1, 2008 9:19 AM
2

Factors (1) a shrinking manufacturing sector with fewer jobs (2) a growing fraction of foreign-born workers who are earning lower wages (3) rising rates of unemployment (4) increased fractions of workers with advanced degrees.

Posted by I blame liberals. | August 1, 2008 9:20 AM
3

Oh don't worry! That graph is going up up up now!! And THAT'S always good!!!

Posted by Cato the Younger Younger | August 1, 2008 9:21 AM
4

If you are an economic masochist and enjoy having the crap scared out of you, check out: http://www.rgemonitor.com/

Posted by Westside forever | August 1, 2008 9:24 AM
5


I dunno, maybe it's time to raid the Fed and get rid of it all together. Why is government in the banking business anyway? Let rates float like every other commodity.

Posted by John Bailo | August 1, 2008 9:27 AM
6

@5 Then we could be in a depression instead of an almost recession.

What the graph shows is the Fed responding to the liquidity crisis brought on by the credit crisis. The last time we had major liquidity issues and asset devaluations it took a world war to pull us out. That time the Fed hamstrung by partial gold backing and other issues did not inject liquidity. This time they learned their lesson and are doing whatever they can to keep things moving so we can ride it out without a deflationary spiral.

Posted by sgiffy | August 1, 2008 9:34 AM
7

The Federal Reserve is ultimately necessary. The problem is the role it has been given unlike the ECB.

Posted by Bellevue Ave | August 1, 2008 9:35 AM
8

sgiffy, the problem that isn't being talked about is the credit quality crisis.

Posted by Bellevue Ave | August 1, 2008 9:39 AM
9

Air-conditioned trains from downtown to the airport are going to start up. With the new ballot measure, we'll have more trains in a couple of decades to the exurbs and Bellevue. Woot! We'll borrow the money - billions and billions - and then it won't be our problem whether it gets paid back. It'll be like what Bush does, only it's our Democrats doing it. THAT's the difference - remember it!

Posted by "ST2 - The Do-Over" | August 1, 2008 9:40 AM
10

B-b-b-but . . . terrorists!

Posted by Ziggity | August 1, 2008 9:45 AM
11

it's bad.

Posted by max solomon | August 1, 2008 9:45 AM
12

Well, what it shows quite immediately is that banks are operating at leverage much closer to their reserve requirements than ever before. Banks have to meet those, and when they can't they borrow from the Fed, usually overnight or very short term, to cover their position.
As mortgage assets are written down, net liabilities go up. As net liabilities go up the banks need to retain more liquidity to satisfy reserve requirements. In the short term they borrow from the Fed. In the long term they attempt to liquidate other assets.
The main impact of all of this is really just on the balance sheets of banks. They become less and less profitable as they are forced to liquidate assets that produce a return in order to meet reserve requirements. So unless you own shares in a bank, there's not much to worry about right now.

Posted by kinaidos | August 1, 2008 9:59 AM
13

I think the spike is the Great Depression II, which hasn't happened precisely because of the spike.

Posted by Fnarf | August 1, 2008 10:01 AM
14

why isn't this graph adjusted for inflation BTW?

Posted by Bellevue Ave | August 1, 2008 10:04 AM
15

Certainly more interesting than the Athens Boys Choir.

Ya can't spend your way out of this one, America...

Posted by Andy Niable | August 1, 2008 10:07 AM
16


Tarpaper shacks are the new black.

Posted by It's Mark Mitchell | August 1, 2008 10:08 AM
17

@9: ST-2: This time it's PERSONAL.

Posted by Original Monique | August 1, 2008 10:10 AM
18

That is an assload of money! $171 billion in 2008, as of June 1. That's even more then we spent in Iraq last year.

Where's are wealth going?

Did I mention that in FY-2007 we spent $133 billion in Iraq? And $562 billion total? How's our return on that investment?

Posted by Mahtli69 | August 1, 2008 10:23 AM
19

The Federal Reserve is no more Federal, than Federal Express. It is not run by the Govt. It is private.

The graph is Billions with a B

The problem is fractional lending.

Banks currently are regulated by lending money 10 to 1 on what it has in deposits.
This is like creating money out of thin air, instantly depreciating the dollar.

When money isn't paid back and lenders buy secondary loans the fed prints more money graph goes up the dollar loses value.

In even worse news... the Fed is set to deregulate banks come 2012. Banks will be able to loan at any fractional rate.

This actually is not good they could loan at 100/1 creating even more money out of thin air... the dollar loses even more value.

The Fed should not be private for profit, fractional lending should at the least be cut in order to bring value back to the dollar.

Gold/Silver backed would be ideal.

Posted by Journalisnt | August 1, 2008 10:26 AM
20

I don't see the point of the shaded "recession" areas, they don't have much correlation with the spikes in the blue line.

Posted by jmr | August 1, 2008 10:33 AM
21

Journalisnt, fractional reserves are integral to our banking system. While we could debate the size of them, to think we can all of a sudden go to a 1/1 ratio is ridiculous and untenable. Also the premise that we can go back to a precious metal backed currency is even more ridiculous and out of place.

Posted by Bellevue Ave | August 1, 2008 10:33 AM
22

and the fed only encourages or discourages the creation of money, it doesnt actually print money itself. the entire theory of quantity of money either needs to be updated to reflect modern money creating or scrapped completely.

Posted by Bellevue Ave | August 1, 2008 10:35 AM
23

The economy may be phucked, but this graph should not stress you out. All that you can know from a big spike like this is that something happened - its not reflective of a trend. There must be some reason for it, but you won't know that from this graph.

Posted by blank12357 | August 1, 2008 10:36 AM
24

Gold or silver-backed currency is ridiculous. Why not a fudge- or tinfoil-based currency instead? What's so special about gold? What we have, and what EVERYBODY has now, is a VALUE-backed currency, which is ideal. Gold is only appealing to people with 10,000 cans of baked beans in their basements, waiting for the apocalypse.

Posted by Fnarf | August 1, 2008 10:40 AM
25

Stranger babes give novel Rize, novel drink Rize, NOVEL BECOME HAIKU!

No, I don't.

Posted by The Incredible Haiku | August 1, 2008 10:49 AM
26

The reality is that the only graphs that matter are how much China and other governments are willing to buy US treasuries to prop up our red-ink economy.

If they stop, it doesn't matter what the lending graphs say.

Posted by Will in Seattle | August 1, 2008 10:53 AM
27

I'm not an economist, but isn't this huge spike just because banks are borrowing from the Fed *instead* of borrowing from eachother? The only thing that graph shows is that banks are no longer so willing to lend to eachother, and are willing to pay a slightly higher rate to borrow from the fed. I think.

Posted by not an economist | August 1, 2008 10:54 AM
28

@26 - China depends on a strong dollar to keep their devalued currency, well, devalued. A Depression in the US would be a Depression in China.

Posted by Mahtli69 | August 1, 2008 11:04 AM
29

Yeah... It means that the banks, desperate for liquidity are borrowing from the Fed because nobody trusts each other. This is the core of the credit crisis and what you need to know is that your government through the proxy of the fed is now accepting the shittiest of collateral that NOBODY on the planet will take for loans.

The fed is eating these shit sandwiches as quick as it can to ensure that there is some velocity of money left in the system. Remember though, it's backed by the full faith and credit of the US government meaning YOU AND YOUR TAXES.

They did it for Bear Stearns, they just voted to assume another TRILLION dollars in crap for Fannie and Freddie and who's the bagholder? YOU ARE.

BTW, for the corresponding graph called BOGNONBR check the St. Louis Fed here:

http://research.stlouisfed.org/fred2/series/BOGNONBR?cid=50


Posted by Pondscum | August 1, 2008 11:05 AM
30

@14

I thought the same thing. I can't post the graph easily, but I did a quick mashup of the data with inflation figures in Excel. Looks better, but the current spike is still 6x higher than the next highest - in 1920. Nothing else even comes close.

Still, not sure what this means from an economic point of view...

Posted by Mr. No | August 1, 2008 11:05 AM
31

@27 is very close to correct. This represents a shift in borrowing patterns, not an increase in the total amout of borrowing. The only point is that the fed actually charges a slightly lower rate than banks charged each other, back when they were willing to lend to each other; banks didn't take advantage of it at the time because the market attached a stigma to using the fed's window.

Posted by David Wright | August 1, 2008 11:08 AM
32

"Still, not sure what this means from an economic point of view..."

It means the banks are insolvent. Indymac one week, two more smaller banks last weekend... Who's going down tonight? (friday after the market closes is the preferred time for seizures) Pretty soon it's gonna be WaMu and then the whole thing is going down the shitter.

Posted by Pondscum | August 1, 2008 11:08 AM
33

#31.. They are borrowing from the Fed because they all hold Billions of dollars in MBS and CDOs that nobody will touch with asbestos gloves on. The Fed will because they are desperate to keep the system alive.

It's not just a strange circumstance that suddenly they won't borrow from each other but only will from the Fed.

Posted by Pondscum | August 1, 2008 11:11 AM
34

As @12 said, one of the indications of this graph is that banks are operating much closer to their reserve requirements than they ever have in the past. As far as that goes, it's good that the banks have the option of borrowing from the Fed; tightening the money supply would almost certainly lead to an immediate depression, as in the case of the Great Depression. But the shrinking margin for error in the banking system -- the vast pool of bad debt out there -- and the fact that the banks are operating with less and less margin for error does suggest that we may soon see some major bank failures for the first time in 70 years. Because the economy is not going to improve any time soon, which means the pool of bad debt -- loans that default -- is going to grow over the next several years, not shrink. The borrowing that's happening now is a stopgap, but the gap is going to get wider, not narrower, and we only have so much Federal borrowing plaster we can jam in there.

If you have a lot of money in the bank, now might be a good time to start familiarizing yourself with the procedure for recouping your assets from the FDIC.

Posted by Judah | August 1, 2008 11:24 AM
35

It's also a fine time to switch your banking institution to one that isn't insanely over-invested in shit sandwiches. "may see" bank failures? It's already here.

Oh and about the FDIC. They have 50B at their disposal for depositors. How many Indymacs or worse WaMus is it going to take to burn through that? And what happens then? Nothing good.

The other issue is the limitations of the Fed's balance sheet. They control 800B of Treasuries and HALF of that is currently loaned on crap collateral.

Sorry to be so doomy, but Christ... This is a huge problem.

Posted by Pondscum | August 1, 2008 11:32 AM
36

I agree with @31. The Fed has the best rates and the most liquidity right now. So long as someone is willing to lend money, we're all in the clear.

Frankly, I'd rather see a private company eat these loans at a low rate than the government eat them.

The issue isn't how high the graph goes... it's how long the graph gets.

Posted by six shooter | August 1, 2008 12:02 PM
37

@26, I wish we had a fudge backing, then I could exchange my dollars for fudge whenever I wanted.

Posted by sgiffy | August 1, 2008 12:06 PM
38

@35, The treasury issues bonds to the Fed in exchange for dollars which are then used to prop up the banks. Not ideal, but not catastrophic.

Posted by sgiffy | August 1, 2008 12:12 PM
39

An interesting, relevant, and informative batch of comments on the Slog? The world really IS ending...

Posted by Postum | August 1, 2008 12:16 PM
40

what i heard is that banks rarely borrow from the fed because they just borrow from each other. but now they don't trust each other so thankfully they trust the fed. you do not want a collapse of banking and that's what a wise fed prevented. as for fed insurance of mortgage securities, i think that's a different graph. i believe these terms are like 28 days just to remain solvent. to contrast, show bank borrowing *from all sources* including other banks, and it might entail sums similar to 150 billion. except when they're freaking out. but they could have borrowed from the fed at any time for many decades. they just declined to, until now.

Posted by wax | August 1, 2008 12:43 PM
41

@pondscum, I wouldn't be quite so doom-and-gloom. While a few smaller banks have failed, most notably Indymac, the larger banks are fine, including WaMu. WaMu has 50B of liquidity. The reason you're seeing the small banks fail is because they were generally very specialized -- IndyMac was founded by Countrywide and had a massive loan portfolio with a small deposit base and very few products to attract deposits. The larger banks, including WaMu, are in very different - and ultimately much safer - positions. I realize it's fun to doom and gloom and bring out the dead, but it's just inaccurate.

Posted by Not so doomy and gloomy | August 1, 2008 12:52 PM
42

Hey not so... Do you have over 100K in WaMu? Would you? I doubt it. Fortunately they've never had to mark any of their crap paper to market so a few people seem to still believe they're solvent, but that piece of shit is holding more subprime and Alt-A garbage than you can shake a stick at. How anyone can look at it now at $5 and change and think it's a deal is beyond me.

I'd suggest a peek at Mish's blog http://globaleconomicanalysis.blogspot.com ... He's been tracking a pool of WaMu mortgages for the last year and it's NOT a laugh riot. Not Subprime, these are supposedly qualified buyers and out of a pool created one year ago (loans originated in 2007) they were staring down 25% default in April. That's the sort of shit sandwich that is going to bring the whole thing down.

checkit:

http://bp3.blogger.com/_nSTO-vZpSgc/R--_e0CrudI/AAAAAAAACY0/ntzjqbwl9EA/s1600/wamu-alt-a-March.png

Posted by Pondscum | August 1, 2008 1:16 PM
43

Just wait until the world considers US Treasury bills equal in strength with Mortgage Backed Securities(MBS).
The FED now holds more in MBS than they do in long term Treasuries.

Posted by Tien Kou | August 1, 2008 2:01 PM
44

That "little" spike we are in now should have a red flag waving from the top. It is a signal that there are tremendous forces at work under the skin of our happy republic. Already our complexion is souring and the visage we present to the world and ourselves cannot hide the sickness DEBT - the fever and delirium of inflation and bailouts, followed by the obtundation of deflation. We will be thankful for the loss of our diseased tissues that will be sloughed off or amputated.

Get out of debt if you can now!

Posted by udonotgetit | August 1, 2008 2:04 PM
45

@Not so doomy and gloomy,
That $50 billion that WaMu holds in liquidity was borrowed from the FED and FHLB, it's not cash on hand.
If WaMu fails it will require three times the dollars that FDIC has on their book.

Posted by Tien Kou | August 1, 2008 2:06 PM
46

what the graph means is the bursting of the non asset/production based counterfeit debt bubble, created from the virtual zero reserve lending and off balance sheet shadow banking system, results in the reflection of the defaulted debt beyond the equity of the entire banking system onto the YOUR wallet (HR 3221). The smart folks that understand a BANKRUPT financial system (expected RE loss > 1 T and banking system assets 1 T) took their ball (CA$H) and went home to leave the fools to fight over the few chairs being rearranged on the Titanic (FDIC) while Hanky Panky and BendUSover keep the music going until ObamaYoMama sucks the rest of YOUR money out of YOUR A$$. ----> United SOCIALST States of America. Enjoy the soup lines. :)

Posted by Th1 | August 1, 2008 2:12 PM
47

This was one of the most helpful and informative threads on Slog in a long time. Thanks for shedding light on this.

Posted by arduous | August 1, 2008 2:43 PM
48

Just got the first email of the night from the FDIC:

On August 1, 2008, the FDIC was named as receiver for First Priority Bank, Bradenton, Florida by the State of Florida, Office of Financial Regulation. All insured non-brokered deposits were transferred to the acquiring institution; for further information, please visit the FDIC web site: First Priority Bank (www.fdic.gov).

Posted by Pondscum | August 1, 2008 3:15 PM
49

@44, actually in such a situation as you think is coming (a deflationary spiral) the best option would be to borrow as much as you can and hide it away.

Posted by sgiffy | August 1, 2008 5:28 PM

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