Posted on 08/02/2008 7:20:16 AM PDT by BGHater
Banks borrowed a record amount of funds from the Federal Reserve in the latest week as the year old credit crisis took a persistent toll, while the commercial paper market continued to contract, signaling tough conditions for short term borrowers.
Banks' primary credit borrowings averaged $17.45 billion per day in the latest week, the second straight week this had hit a record and up from $16.38 billion the previous week, Fed data showed on Thursday.
"It shows there's a shortage of liquidity in the system," said Christopher Low, chief economist at FTN Financial in New York.
Secondary credit the Fed extended, which is usually taken out by banks in need of emergency cash, rose to $89 million in the latest week, from $34 million the week before. Although these numbers are still very small compared with primary credit, "What that tells you is that there's an increasing number of banks that the Fed is classifying as 'unsound' or inadequately capitalized," Low said.
Analysts may watch the trend of secondary credit closely, given the travails of U.S. regional and smaller banks and the likelihood that a continued decline in house prices and rise in foreclosures and bad loans will deepen the difficulties of the banking sector for many months or years.
Some analysts ascribed the overall rise in demand to use the Fed's short term discount window borrowing facilities to a mix of factors.
"I am sure there are troubled banks trying to tap the window," said Michael Feroli, U.S. economist with JPMorgan in New York. But he added: "more and more banks are trying to take advantage of the pure economic advantage of borrowing at a cheap rate and you are seeing a gradual fading away of the stigma of using the discount window."
(Excerpt) Read more at biz.yahoo.com ...
It shows there’s a shortage of liquidity in the system,” said Christopher Low, chief economist at FTN Financial in New York
ya think??!!
How about a shortage of solvency?
Total bank deposits = $6.84 trillion.
Actual bank cash on hand = $273 billion.
FDIC insurance fund = $53 billion.
Ninety banks were on the FDIC problem list a month ago - IndyMac wasn't one of them.
We're in shark-infested waters...
I had a conversation with one of the FDIC people a couple of weeks ago while in IndyMac to get my money out.
In think it is incumbent on banks to stay solvent and OFF the watch list. And therefore I think the consumer has a right to see the watch list.
What you don’t show is all the money that is being put to work rather than being stuffed in mattresses and buring in tomato cans.
I’m not worried, the FDIC will cover it all, right? Right?
What is the perfect ratio of cash on hand to bank deposits?
Fractional reserve lending is fine at 8 to 1 or even 12 to 1 - at 30 to 1 it poses a massive risk to the solvency of the entire system. It's not the concept that's at fault, it's that these guys pushed it way beyond the limits of safety just to keep making their quarterly numbers.
I say no more than 10 to 1. Others may have more taste for risk.
Of course you ignore all the good areas where money has been put to work that's made our country strong over the past 200+ years. That's why people like you prefer to stay here to mischaracterize our financial system and bitch rather than moving somewhere else.
what about brokerage firms?
It’s not the concept that’s at fault, it’s that these guys pushed it way beyond the limits of safety just to keep making their quarterly numbers.
Of course, in line with the above, that forces the next poor schmuck to make even DUMBER decisions to stay afloat. And so it goes.....
Mr. Jeeves,
I do believe you are confusing fractional reserve banking with the operations of the large ‘investment banks’ which are really trading houses.
The fractional reserve rate only applies to regular banks, like Bank of America or Washington Mutual. They are required to keep a certain percent of their reserve (the fraction) on hand in the form of liquid assetts: typically cash or T-bills.
The fractional reserve rate has not been anywhere near 1 in 8 (12.5%) for a while, but like most Fed stuff this fact is disguised in an avalache of weird financial footnotes and re-definitons.
Here is the Wikipedia article on Reserver Requirements:
A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. In the United States, the Board of Governors of the Federal Reserve System requires zero percent (0%) fractional reserves from depository institutions having net transactions accounts of up to $9.3 million.[1] Depository institutions having over $9.3 million, and up to $43.9 million in net transaction accounts must have fractional reserves totaling three percent (3%) of that amount.[2] Finally, depository institutions having over $43.9 million in net transaction accounts must have fractional reserves totaling ten percent (10%) of that amount.[3] However, under current policy, these numbers do not apply to time deposits from domestic corporations, or deposits from foreign corporations or governments, called “nonpersonal time deposits” and “eurocurrency liabilities,” respectively. For these account classes, the fractional reserve requirement is zero percent (0%) regardless of net account value.[4]
The “30 to 1” ratio frequently mentioned here and in the press lately is the amount of “leverage” that the “investment banks” have. Investment banks (until the Bear-Sterns bailout) have never been part of the Federal Reserve System. This is because, despite the fact that they are called “banks” they are really just giant trading houses. Their leverage is similar to the leverage you as a stock trader would have buying on margin.
I believe the SEC allows individual traders to get up to 50% margin, meaning if you invest a dollar in a stock you can get 50c of stock from the broker.
The situation of the large investment banks is that they have investments in the ratio of $30 for every real dollar of assetts they have.
It might be more akin to you having a $300,000 house with only $10,000 down. (Which come to think of it a lot of people did during this bubble).
I doubt that many more than the normalized annual failure rate will fail. Of course, if a sitting U.S. Senator declares any bank to be doomed, it will fail almost overnight. Possibly the most reckless infliction of unnecessary financial harm since the indictment of Arthur Andersen.
About paper money we used to warn of John Law's scheme, and then of the Weimar wheelbarrows, and most recently Mugabe's Billion Dollar Bills. But what, in the end, can match Bernanke's helicopter distrubutions?
So they've been diluting (printing) more than usual? How much more? Or is that just your feeling?
Yes, by taking in lost paper.
What do YOU mean by "too much money"?
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