If the FED were a normal bank …
If the Fed were a normal bank, it would be close to being closed 
How far the situation is out of control, an article in the new issue of Barron’s highlights:
- If the FED were a commercial lender, it would be a candidate for receivership, based on its capital ratios. Bank examiners generally view any lender with a ratio below 2% to be dangerously undercapitalized. The Fed’s current capital ratio, or capital as a percentage of assets, is 1.9%.
- its balance sheet, viewed one way, is as leveraged as any hedge fund’s: Its consolidated assets amount to 53 times capital. Only 11 months ago, its leverage on this basis was a more modest 25 times, and its capital ratio 4%.
- Its consolidated assets have swelled to $2.2 trillion from $915 billion in about 11 months.
- If the Fed had been [a savings-and-loan] ballooning its balance sheet so fast, the supervisors would have been all over it.
- The Fed has stretched its authority farther and wider than it ever has in its entire history. The risk is that they won’t be able or willing to mop up all this excess liquidity when it comes time to head off inflation a few years down the road.
- The central bank has poured so many billions into the commercial-paper and money-market mutual-fund markets that one in every seven dollars, about 15% of the $1.6 trillion commercial-paper market, is Fed-supported.
- Credit crunch, because … Reserve balances held with Federal banks now rest at $592 billion, up from the normal $15 billion in the months prior to September.
- The Fed has violated two principal tenets of central banking,” says Lee Hoskins, former president of the Cleveland Fed: “First, don’t lend to insolvent institutions, and second, don’t lend on anything but the most pristine collateral” — and at a penalty rate.
- [The Fed has] spooked the market with [its] scare tactics and ever-changing plans,” he says “The Fed’s actions coupled with the Treasury’s bailout of the banks have taken us one big step closer to corporatism — big business in cahoots with big government.”
AUTSCH!!!
November 24th, 2008 at 07:24
Thanks for the post, Oli. If the FED were a normal bank, pigs would fly. As for the moon, it would be blue.
I’ve been reading your posts for some time now….always interesting. Are you still a bull? Or do you see a bottom?
Keep up the great work.
November 24th, 2008 at 07:54
This is already pretty old news discussed in a lot of analysis paper within the industry many times.
The facts are easy: FED has 60 bill of AIG on its books. > 100 in dubious ABS and since today some 200 bill of Citi Crap.
Effectively we are at the point where all this banking crap has been nationalized.
The only questions are: Why isn´t the dollar trading at 1,75 to the Euro??
Why aren´t US interest rates at 10% as to be expected for a debtor like this?
The answer seems to be, that lots of folks expected this to happen and have to unwind their hedges. As their US asset implode they have way to much currency hedge and thus….
Funny: Somebody still has an interest to invest into US assets too expecially these funny 0,08% T-Bill yields.
So keep it very simple: Markets are unpredictable right now. Nothing fundamental or technical really works aside from pure panic trading. Just use the markets therefore and don´t try to think about the consequences: As long as you find stupid investors that are willing to lend to you take the money and try to turn the big US ship. Either it works or the investors are at risk anyhow. So let´s play!
November 27th, 2008 at 19:03
Hi Oli,
the conundrum: why is the Fed encouraging the ballooning of excess reserves (adjusted monetary base increases at 270% annual rate) by paying interest on them? Money that is pumped into the system comes right back to the Fed. Maybe that’s good for commercial banks balance sheets but it’s really bad for the real economy.
I go with Poole’s “unannounced policy shift at the Fed” … to excessive quantitative easing on the back of the american taxpayer.
http://www.bloomberg.com/avp/avp.htm?N=av&T=Poole%20Sees%20Evidence%20of%20Unannounced%20Policy%20Shift%20at%20Fed&clipSRC=mms://media2.bloomberg.com/cache/v8McvoicyJbs.asf
Dezember 1st, 2008 at 17:11
Scary …
Dezember 1st, 2008 at 17:40
Folks you don´t seem to get it. Too many stupid savers have too many claims against the banking system which invested the monies and lost. The only way to survive this and not enter 1929^2 is hyperinflation. They have to flood the system and try to burn the money of all these crybabies that now cry for the state and invest into Treasuries, TBills etc. It´s not scary if they destroy the currency. Scary is what happens if they don´t succied. Then you will have a nice little currency reform as the last resort.
So folks pray that the solution will be the little inflationary losses of let´s say 20-30%. If not it´s 5:1 currency reform or 10:1 like for the Reichsmark in Germany 1949.
And for the future we have to discuss the point how a system can be structured that does not allow all the succers to flee risk in the first moment. We have a big global society of 7 billion people and the problem is if there are suddenty bigger risks than expected all these sheep run for the exits. The problem is: The exits are narrow doors and of very small houses not of barns. So there is no possibility that all or even a lot can leave. So there will have to be transactions stzructured in a way where it is forbidden to leave. All these savers, traders and crybabies and so on are a nuisance if they just at the slitest chance of risk go an pi** their pampers.
Sorry, but this is not the end. This is not Auschwitz. This is not 100000 deaths in burning Dresden in 2 days. This is not even a minor recent event like 3000 deaths on 9/11. This is just that some rabbits freeze in front of the snake and we will all have a nice chance that all these succers by their irresponsible stupidity produce the next 1929. And the only way to protect us all is hyperinflation. These 1600 billion of stupid German savers´s money have to be at least partially destroyed. the economy has to run on and then calm down not freeze in a minute.
What we are seeing now is that lots of people seeing the deflationary effects just wait because having cash and being able to buy more tomorrow is a individually winning strategy as long as there is still money. But it is a social catastrophe. If everybody suddenly starts saving like hell the system breaks down.
So pray folks that we will have reinflation, that people due to fear to loose all their saving recognizing that their notes and bonds and bills are really worth nothing start dumping them and buy something be it gold, be it oil, be it houses or whatever. The system cannot survive a situation where the whole world starts instantly saving. I hope they destroy it faster and I hope Oli you will be buying some stuff tomorrow, because if you don´t and I don´t and nobody does we are really doomed.
So please spread the news how worthless all this stupid money is. It´s the only way we can succeed. Destroying the worth of money.