Here is an update for my article from last week.
This is the same chart on the Fed’s holdings of US
Treasury Assets I presented last week, only now the latest data point dropped from -20 to -25. No doubt this 25% reduction from December had something to do huge change in the banking system’s “Borrowed Reserves” in the past two weeks.
Again Total Fed Credit has not changed much, but the quality of these reserves must have been much compromised in the past few months. If the Fed sold 25% of their US bonds they had to replace it with something.
Here is a table. It seems that banks’ gains are fairly close to the Fed’s Loses if not exact. One week the Banks borrowed 80 billion and the next week this 80 billion in borrowed reserves just goes away but note the 3 billion dollar kicker in the Free Reserves for new loans since 24 March.
Something else just went away too: 87 billion from the Fed’s holdings of US Bonds since 24 March.
Well this seems to confirm what happened to Bear Sterns’ assets: The Federal Reserve took the toxic waste at face value and JP Morgan took the skyscraper.
Mark J. Lundeen
07 April 2008