BruteForce wrote:
If another theory or opinion can be offered, please share it.
Here's my opinion. You are being sold a bill of goods by someone that either has bad intentions or is a fucking idiot.
The charts you posted do NOT show what you think they do. We are NOT on the edge of financial collapse (at least not for this issue!) The Fed is NOT out of money.
Try this thought experiment - you are the Fed. You are holding $50 in non-borrowed reserves. You make it easier to borrow money than before because you want to stimulate the economy and get bank activity moving. Your terms entices me, a bank, to borrow $60 using my bond portfolio as collateral. $50 (Non-B Res) - $60 (my borrowing) = -$10. Does that mean you (the Fed) are out of money? Answer: No, for two reasons. One, the loan is collateralized, two, the Fed creates money. By definition, it can't be 'out of money'.
The Fed is the one and only provider or reserves. It also sets interest rates via the Fed Funds and Discount rates. Banks lend that money, which increases money velocity, which makes the economy tick. But now credit markets are tight due to mark-to-market uncertainties. Right now the Fed wants to put more money out there and provide confidence to markets, so in December it created the Term Auction Facility, which provides a cost of funds that is cheaper than the Fed Funds rate. What did the banks do? Just what the Fed wanted, they borrowed more than they normally would have, making the negative number you see.
How's the TAF work? The Fed decided to make 28 day loans to banks based on a broader array of collateral than it had in the past. The loans are still fully collateralized, the terms are just more flexible with respect to securities pledged. This decision was, most likely, a response to the mark-to-market mess that was causing credit markets to go 'no bid'.
Don't get the idea everything is peachy - it isn't. But this non-borrowed reserve issue is irrelevant. Its an accounting trick, nothing more.
Hooah?
