The Fed & Bank Borrowing
I’m currently doing some research on the (likely) Treasury bubble, and the charts I’m coming across are nothing but scary – one more so than the other. Check out the following which shows the $$$ amount borrowed by US banks from the Fed through Dec 2007; the spike marks the Savings & Loan Crisis at the end of the 1980s with borrowing maxing out at $8b.
Now take a look at the following chart. It is the same graph as above, but updated through the beginning of November ’08.
This might be less scary if the Fed wasn’t creating money out of thin air and at the same time accepting assets of questionable – and deliberately undisclosed – quality as collateral from banks. As it stands, I am not surprised that 10 year CDS on US Treasuries are above 60bps (high of 72bps at the beginning of December vs. a pre-08 historical average of 2bps).
[The charts above are publicly available from the St Louis Fed; I first came across the idea of presenting the two graphs in progression in a letter by DK Matai.]