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.]
East Coast Economics 
As you may be aware, your charts are one of the most popular posts on Seeking Alpha right now. However, the person who linked to them seems to have completely misunderstood what they are about (or, more accurately, picked them because they looked dramatic).
Question for you: These are bank borrowings from the Fed, so they are Fed assets. I take it your worry is that the banks will go bust and the collateral is bad, so the Fed won’t get its money back. But the Fed as a unique advantage no other lender has: it can prevent its borrowers from going bust, and not just by forgiving loans – for example by getting Treasury to recapitalize them. So I’m not worried about the Fed getting paid back or not. I do see that some of the ways the Fed would make sure it gets paid back could lead to inflation (like guaranteeing bank assets, which does create potential taxpayer liabilities), so that’s mildly worrying. But if I were going to point to scary parts of the government balance sheet, I don’t think this would be the scariest.
James Kwak
January 22, 2009 at 10:33 am
Hi James, thanks for pointing out the misrepresentation of the charts at Seeking Alpha. You are correct, the above graphs are bank borrowings from the Fed; my main concern is that the level of bank borrowing is unprecedented and correlates with a massive expansion of the Fed’s balance sheet. As you point out, though, the Fed has the advantage of being in a position to keep its borrowers alive – so none of this is spelling “impending doom” (even though I do have some pessimistic thoughts on the transfer of trust from US banks to the US govt on as large a scale as we’ve been seeing). What are some of the scariest parts of the government balance sheet in your opinion?
eastcoasteconomics
January 22, 2009 at 11:21 am
Indeed, James, then what are the scariest parts, IYHO ?
You might trigger people in their understanding.
Cheers
DirkJanszn
January 23, 2009 at 2:11 pm
These graphs would more accurately (if somewhat less dramatically) reflect the extent of government borrowing if the numbers were mapped against the GDP or Federal Budget. Raw numbers are usually intended to evoke a reaction rather than to inform.
Make no mistake these numbers are outrageous, inflationary, and ultimately destructive to our economy, but measured against our GDP they would be more informative.
Will Malven
January 23, 2009 at 5:30 pm
as an economic and numbers layperson/newbie, i appreciate the comments here. i guess it is the old saw, and E. Tufte’s refrain: “compared to _what_?”
Raoul Duke
January 29, 2009 at 12:02 pm
I think that the us cannot stop from borrowing . The economist in the government have certainly noticed this but in this recession its like die now or die tomorow . What would you choose?
Investors times
January 29, 2009 at 8:29 pm
I have referenced these charts many times now. If you’re able, please do an updated chart.
Hannah
December 12, 2010 at 11:04 pm