"The banks have no reserves other than debt."
The banks have no reserves other than debt."
The total "non-borrowed" reserves in the U.S. banking system (as an aggregate of the entire financial system is negative). Negative non-borrowed reserves indicates basically that the reserves are borrowed for the first time in U.S. economic history. The sharp drop shown here indicates the beginning of the credit crunch in late 2007:
And the amount borrowed is rising rapidly as the Federal Reserve assures financial institutions that they will have access to unlimited liquidity through the Term Auction Facility. By April 09, 2008 - U.S. banks had borrowed a total of $140 billion from the Federal reserve - just to be able to have $40 billion on hand for reserves.
This week, more banks are announcing their losses & writing down more mortgages. The amount borrowed to cover reserves will be forced to increase again.
The amount of reserves able to be re-loaned is miniscule - perhaps some $20 billion in loans could be generated for the entire non-bank economy. This is the effect of the credit crunch on individual and business borrowers. If you want a loan, you better have a good way to indicate that you'll actually pay it back. Or, you could just be a bank and then you're able to get any loan imaginable.
The reserves have collapsed - the banking system itself is bankrupt. Credit crunch is a very nice way of saying this, credit crisis is starting to sound a little more accurate. Will the Federal Reserve forgive these loans, or seize the businesses (nationalize) to recover its loan losses? Will the Congress authorize the Treasury to put more of our dollars onto the Federal Reserve's balance sheet so they can continue the infinite loans to banks?
Ah, but the Federal Reserve has saved us from a bank run! Well, they've put up $140 billion (plus whatever they're adding this week) so the economy could have $20 billion in loans - this is an amazingly ineffective & convoluted means of generating financial activity.
The reserves backing your checking or savings account are all owed to the Federal Reserve and the banks don't have the capital necessary to generate enough profit to ever reasonably pay