Would you like to see some very sad graphs that illustrate why our financial system is in such dire straits? Of course you do. (HT: Lisa X)
What the blue line above shows is how much banks have borrowed from the Fed (the Fed’s BORROW index). You’ll notice (or maybe you won’t because of the small font size) that this graph goes back to 1910, with the gray bars reflecting when recessions occurred. You’ll also notice how that line basically doesn’t go anywhere through pretty much all of the 20th century, including even during the Great Depression, the economic crises of the 1970s and the early 1980s or the tech collapse in the early 2000s. Then, notice what happens at the right end of that graph – aka today. Yup, banks have so little capital left that they are now borrowing money from the Fed by the truckload.
But, wait. Borrowing from the Fed isn’t necessarily a bad thing. Maybe they’re borrowing it so they can lend it back out! Alas, this next chart shows that the borrowing is exactly what I just suggested – cash to cover the fact that the banks can barely cover what they owe:
Here, the blue line represents how much of a bank’s reserves are non-borrowed – or in other words, how much of its original deposits is a particular bank holding so as to make sure money comes out when you use an ATM – the Fed’s BOGNONBR index (no I’m not kidding on that acronym).
You usually expect this to be a certain percentage of what each bank is obligated to be able to cover (because the bank re-loans out most of the money that it has so that it can make money on interest). What you don’t expect, and never want to see, is when that number becomes negative – because what that means is that the bank’s own holdings can no longer cover its obligations – it has to borrow money just to make sure that money comes out of the ATM.
The combination of the two charts tells something quite horrifying – our banking system has no capacity to cover its own debts, and it is borrowing money like there’s no tomorrow to try to patch this up. If we want to fix the financial crisis, we need some way of helping to patch this horrible horrible gap. And how to do that is the $700 billion (or more) question.
