Sometimes a picture is worth a thousand words.
Over the last 52 weeks, foreign central banks have added $321b to their Treasury holdings at the New York Fed (and no doubt more to other accounts) and $147b to their Agency holdings -- for a total of $468b. And there clearly has been a big shift towards Treasuries recently. The rise in Treasury holdings over the last two weeks, annualized, tops $1 trillion. The fall in Agency holdings over that period (after the bailout of the Agencies), annualized, also tops $1 trillion.
Stunning? Yes. Stabilizing? Not really. There isn’t a shortage of demand for Treasuries right now. But there is a shortage of willing lenders of dollars to European banks and -- to a degree, s shortage of buyers for the debt issued by the US Agencies (Freddie, Fannie and the like). And remember that the Agencies are the main current source of credit for American households looking to buy a home -- without their lending, home prices would fall much much further.*
The Fed’s balance sheet by contrast is moving in the opposite direction -- out of Treasuries. The Fed has been selling off its Treasury holdings for a while now. But there are limits to how many loans to banks and broker dealers and European central banks the Fed can finance through the sale of its existing stock of Treasuries. The recent increase in Federal Reserve lending has been financed by both the $500b in cash raised by the Treasury and deposited at the Fed through the supplementary financing facility -- and a big rise in bank deposits at the Fed. Those two sources combined to provide the Fed with about $750b in financing.
The scale of the expansion of the Fed’s balance sheet is equally stunning. The Fed is currently provided at least $950b in dollar liquidity to the US financial system through various term facilities and its direct lending, and another $450b of dollar liquidity to European central banks -- liquidity that is then lent to European financial institutions that are facing a shortage of dollars. Let there be no doubt that this is a systemic crisis.
The falling purple line is the Fed’s total holdings of long-term Treasuries (really holdings of Treasuries that have not been lent out to the dealers); the falling red line is the Fed’s holdings of Treasury bills; the rising green line is the financing from the Treasury supplementary financing account and the rise in bank reserve balances at the Fed; the rising blue line is the financing the Fed is providing to the global financial system. Tim Geithner has been a very busy man this year.
There is though one tiny bit of good news buried in the Fed’s balance sheet: the banks had slightly less money on deposit at the Fed on Wednesday ($261.6b) than they had on deposit over the weekend. That is why the average over the last week ($271.8b) was higher than the Wednesday total. Clearly, there were a lot of worried bankers over the weekend. And they are a bit less worried now.
Thanks to Paul Swartz for help with these graphs; more of his work -- and the work of the Council’s Center for Geoeconomic Studies -- can be found on the our homepage.
* I am sometimes asked if sovereign wealth funds will participate in the rescue plan for US and European financial institutions. That strikes me as the wrong question. Sovereign funds aren’t really in the business of doing rescues. Rescues are done primarily to keep the financial system afloat; financial return isn’t the main consideration. Sovereign wealth funds have been used to help "rescue" their own banking systems: Look at the recent actions of Kuwait, Russia and even China. But they aren’t going to rescue other countries’ banks. Not when their own economies are under strain -- and not when central banks don’t seem willing to take on any risk whatsoever. A few bold funds might try to buy at the bottom -- if they think they can get a good deal. But that isn’t really a rescue ...
A more pertinent question would be "when will foreign central banks resume lending to the Agencies (Fannie, Freddie, and the like) and in the process, help the Agencies finance mortgage lending that could help to stabilize the US housing market ... "