Really Scary Fed Charts: Fun With Reserves

Non-Borrowed Reserves of Depository Institutions (BOGNONBR) first went negative in January 2008. Negative Non-Borrowed Reserves for the first time in history was both surprising and nerve wracking. In October 2008 Non-Borrowed Reserves hit -$332.797 billion and looked set to plunge further. However, by January 2009 Non-Borrowed Reserves were back in positive territory at $167.388 billion. The two month swing of $500.185 billion both rather large and rather sudden to put it mildly.

Non-Borrowed Reserves are a measure of banking system reserves, consisting of Total Reserves (member bank deposits in Federal Reserve Banks, plus vault cash), less funds borrowed (Borrowed Reserves) at the Federal Reserve Discount Window. With the creation of the Term Auction Facility (TAF) borrowed reserves did a moon shot and non-borrowed reserves went cliff diving because TAF loans are categorized as borrowed reserves.

For Non-Borrowed Reserves to pull out of their steep dive either Total Reserves would have to increase significantly or Borrowed Reserves would have to decrease.

Note: The Federal Reserve created a series of Non-Borrowed Reserves that adjusted for the effects of the Term Auction Facility called Non-Borrowed Reserves of Depository Institutions Plus Term Auction Credit (NONBORTAF) which now stands at $605.715 billion.

BORROWED RESERVES:

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) seem to have peeked (for now) at $698.786 billion in December 2008. As of right now, January 2009 they stand at $653.565 billion, a reduction of $45.225 billion or 6.47%. This is the first reduction in demand for loans by banks from the Federal Reserve since the crisis started.

Since these are funds borrowed by member banks from a Federal Reserve Bank for the purpose of maintaining the required reserve ratios a reduction could be a good thing. This could be the very first glimmer of hope…

Depository Institutions with insufficient reserves will borrow from the Federal Reserve to meet their legal Reserve Requirements. Normally, an increase in borrowed reserves signals tighter Federal Reserve credit policy and potentially higher interest rates for bank borrowers. When the Federal Reserve provides less credit to the banking system, banks must borrow to maintain the required reserves. These loans, in the form of an Advance or Discount by a Federal Reserve Bank, are normally collateralized by Treasury securities.

However, this time around it was NOT the Federal Reserve that “tightened credit policy” but rather Mr. Market. This is the ultimate fate of each and every credit bubble. It cannot be prevented and it can only be delayed for so long. The course adopted even now by the Federal Reserve is of course the same desperate delaying action it has always employed…

Most of the Borrowed Reserves came from the Federal Reserve Discount Window. Discount Window Borrowings of Depository Institutions (DISCBORR) have exploded from a long run average of just one or two hundred million to a peak of $403.541 billion reached in October 2008. Since then Discount Window Borrowings have dropped to $215.239 billion, a decline of 46.67%.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."–Ludwig von Mises

Clearly, Borrowed Reserves did not decrease nearly enough to allow Non-Borrowed Reserves to scream into positive territory.

TOTAL RESERVES:

Bank of Governors Total Reserves (TOTRESNS) started going exponential in August 2008 after spending years in the $40 billion dollar range. From August 2008 through to January 2009, Total Reserves increased from $44.134 billion to $821.238 billion, an increase $777.104 billion or a 1 760.78% increase in just five months. The rate of change has slowed dramatically recently from a peak month over month change of 206.98% to “only” 34.74%.

This of course is exactly what the Federal Reserve intended when they embarked on a policy of Quantitative Easing.

The single largest component of Total Reserves is now Excess Reserves of Depository Institutions (EXCRESNS). In order to protect against unexpected deposit outflows banks are required to maintain a certain level of funds in reserve. Anything beyond this required level of reserves falls under the category of Excess Reserves. The Federal Reserve is hell bent on stuffing the banks so full of money they have no choice but to turn around and start lending it out…

That is THE MASTER PLAN that is supposed to save the world! Yep. Not even kidding.

The banks of course can’t find anybody or anything with the appropriate risk reward profile to lend more money to. They also can’t lower their lending standards any further, having scraped the bottom of the barrel with such brilliant ideas as “Subprime Lending” and “NINJA loans”. So they’re doing the only thing they can: HOARDING. Parabolic Excess Reserves are the consequence. Ben “Helicopter” Bernanke is furiously pushing on a string…

CONCLUSION:

The combination of a parabolic increase in Total Reserves and the stagnation of Borrowed Reserves had the effect of catapulting Non-Borrowed reserves back into positive territory.
The jump in Total Reserves has manifested itself as giant pile of Excess Reserves at the banks.

The liquidity provided by the Federal Reserve through its policy of Quantitative Easing is stuck in the financial system. The refusal of banks to lend is the bottle neck and the only thing preventing inflation. Since there is no economic incentive to lend the financial system will continue to de-leverage and destroy bad debt. The banks have been reduced to hoarding. Therefore, despite a massive increase in money, expect DEFLATION in 2009.

NOTE: The effects of Quantitative Easing are evident in the sudden increase in the Adjusted Monetary Base (AMBNS). In August 2008 the Monetary Base was $870.99 billion. By December 2008 the Monetary Base was $1 692.63 billion, an $821.64 billion increase or 94.33% in 5 months!!!