Industry Figure Bill Standley sends a graph, sourced from no less than the Federal Reserve itself, showing (as the blue line) the amount of lending from the Fed to bank-like institutions over the last century or so. The grey bars indicate recessions.
Note the incredible L-shaped finale:
Snapshot above is through May, 2008. Click here for updated, even scarier Scary Graph.
Whoa, that’s pretty awesome. Observe the relatively small amount of Fed lending associated with, say, the aftermath of 9/11, or the Federal Savings and Loan Fiasco or the Stock Market Crash of the 1980’s.
And then look at what’s happened in the last month.
What’s going on? The Fed has agreed to a debt swap with banks. The Fed gives the banks highly-liquid T-bills, and in return, the banks give the Fed “collateral”:
…the Federal Open Market Committee authorized an expansion of the collateral that can be pledged in the Federal Reserve’s Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations, beginning with the Schedule 2 TSLF auction to be announced on May 7, 2008, and to settle on May 9, 2008. The wider pool of collateral should promote improved financing conditions in a broader range of financial markets.
Translation: The banks can use their crappy non-performing real-estate CDOs for collateral, and in return, the Fed gives them delicious, highly-liquid T-bills at a cost of 2%/year. So naturally banks are rushing to take advantage of this in droves, to the tune of several hundred billion dollars.
Now, whether you think that this a good action by the Fed or not, consider that the Fed believes it to be necessary. They’re not eediots; the fact that they have made a move this large indicates how large they think the problem is.
Seriously, hold on to your hats; it’s going to be a bumpy ride.