Fed Implode-o-Meter Update

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

Federal Reserve
(TAF) Term Auction Facility.................................................................$900.0bn
Discount Window Lending
Commercial Banks.................................................................................... $99.2bn
Investment Banks.......................................................................................$56.7bn
Loans to buy ABCP.....................................................................................$76.5bn
AIG .............................................................................................................$112.5bn
Bear Stearns .................................................................................................$29.5bn
(TSLF) Term Securities Lending Facility...............................................$225.0bn
Swap Lines..................................................................................................$613.0bn
(MMIFF) Money Market Investor Funding Facility...........................$540.0bn
Commercial Paper Funding Facility.......................................................$257.0bn
(TARP) Treasury Asset Relief Program...............................................$700.0bn
Other:
Automakers.................................................................................................$25.0bn
(FHA) Federal Housing Administration 300.0bn
Fannie Mae/Freddie Mac........................................................................$350.0bn
Total.................................................................................$4,284.5bn


The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don't think anybody thinks we're going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, "What this crisis reveals is a broken financial system like no other in my lifetime," the 81 year old Volker told a conference at Lombard Street Research in London. Normal monetary policy can't restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.

Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year. However, with a new administration coming in, 2009 could be another story.

mg