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Under
Bernanke's direction, the Federal Reserve has completely rewritten its
mission. Many articles in the International Speculator and The Casey Report have reported
the strange growth in the loans they have made and explained that Bernanke
has, for a long time, espoused unconventional actions to avert deflation and
to expand the economy. So the charts below tell that story, and it is truly
amazing.
The
Federal Reserve was never envisioned to be lender of last resort to a whole
slew of investment banks, money market mutual funds, and commercial paper
issuers.
The
situation is not easy to sort out, for the simple reason that the extent of
their actions is not presented by the Fed via clear and concise data.
Instead, the data is complex and hard to analyze, partly because of the
piecemeal way the actions were taken, but also probably due to a desire by
the Fed to avoid public scrutiny and criticism.
Digging
into the details of the Fed's balance sheet reveals, however, the complete
change of composition and direction of the Fed. The most obvious change is
that they have doubled the size of their assets and liabilities. A year ago,
the Fed's assets consisted almost entirely of government Treasuries and a
little gold.
That
is a clean, safe balance sheet.
The
only important liability was the currency they issued (our paper dollars).
They also had a small reserve of deposits from all the banks. When Greenspan
wanted to give the economy a boost by lowering short-term interest rates, he
would create some money and buy Treasuries. He could also do the reverse.
Bernanke
has turned this upside down. Initially he made focused loans to big banks.
But then the loans became bigger than the reserve deposits, leaving the banks
in total as net borrowers. The concept of a fractional reserve no longer
applies when the reserve is net negative.
To
fund yet more loans, Bernanke then sold off half of the Fed's Treasuries. And
he traded Treasuries for toxic waste of poor-quality mortgage-backed
securities. And he encumbered half of the remaining Treasuries with "off
balance sheet" swaps of about $220 billion. (Does this sound like Enron
accounting?) The balance sheet started with $800 billion of mostly reliable
assets and now has about $250 billion of unencumbered Treasuries.
The
biggest source of funding is from the Treasury. Banks are leaving deposits in
the Fed now that the Fed is paying interest.
The
important conclusion is that the paper dollars are now issued by a far less
soundly structured Fed, an organization that is more interested in bailing
out the financial community than defending the dollar.
This
chart below compares last year's assets, which were mostly Treasuries, to
this year's twice-as-large and far more questionable mix:
The
other side of the balance sheet shows that the Fed has borrowed and taken in
deposits to fund the loans that are as big as the issuance of currency. In
effect, the Fed has doubled its footprint and doubled its responsibilities.
Mostly under the covers, they added almost $1 trillion new credit to the
financial world in about two months.
There
are additional important Fed actions not included in their balance sheet. For
example, they invented a Money Market Investor Funding Facility (MMIF) to
guarantee up to 90% of $600 billion of loans to that sector. They do this
through special-purpose vehicles established by the private sector (PSPVs).
The latest Commercial Paper Funding Facility (CPFF) started October 27 and
has issued $143 billion so far. These are both in addition to the
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
initiated September 19. The programs are beyond keeping up with.
Nothing
like this has ever been done before by the Federal Reserve. In time, the
consequences in terms of confidence in the dollar will be bad.
Bud
Conrad
www.caseyresearch.com
Also
by Bud Conrad
Bud Conrad is the chief
economist of Casey Research, LLC. and a contributor to the Casey Energy Speculator (CES), a monthly newsletter dedicated to uncovering deeply
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