My apologies for an extremely wonky post.
Rather than try to build a coherent narrative that explains how money moved through the US financial system during last fall’s credit crisis, I want to highlight a few of the points in today’s flow of funds datathat jumped out at me.
Here is what caught my eye:
1) Total foreign purchases of Treasuries in 2008 exceeded the (estimated) 2008 current account deficit.
Think a current account deficit of $672.5b for all of 08 (and less than $144.6b in q4) v Treasury purchases of $755.2b in 2008 (and $273.5b in q4). Saying such inflows financed the current account is arguably a stretch, as they could just as easily have financed private capital outflows from the US. At least in normal times. 2008 though is a bit different, as
2) Other capital flows collapsed
Foreign investors bought $32b of US corporate bonds in 2008 after buying $425b in 2007 (and $541b in 06); foreign investors bought $20.5b of US corporate equities in 2008 after buying $175.5b in 2007,* and sold $240.6 of Agencies in 2008 after buying $278.2b in 2007.
The US data suggests that almost all the 2007 purchases came from central banks while almost all the 2008 sales came from private investors. Call me skeptical. I suspect that some central banks outsourced the management of at least some of their Agency portfolio to private fund managers and told their managers to reduce their risk in 2008, and thus central banks may be behind some of the "private" sales. Just a guess though.
Large foreign sales of US Agencies were largely offset by a big fall in US demand for foreign assets. Americans only bought $3 billion of foreign equities in 2008 (with purchases in the first half of 08 turning to sales in the second half) and Americans sold $92 billion of foreign bonds. Americans bought $170b of foreign bonds in 2007 (and $228b in 2006). The swing in US demand for the world’s bonds consequently was nearly as large as the swing in foreign demand for US Agencies. US sales of foreign ares are one of the sources of the dollar’s rally ... as all the sales came in q3 and q4 2008.
* I rather suspect that China accounted for all (net) purchases in 2008, but I cannot prove this ... but SAFE clearly was a significant buyer in the first half of 08 and doesn’t look to have sold in the second half of 08.
3) Money market funds were among those buying the Agencies that foreigners were selling ...
Money market funds holdings of Agencies rose by $542.4b over the course of 2008 (buying over $300b in q4 alone). They didn’t lose confidence in the implicit guarantee of the US government. The also added nearly $400 billion to their Treasury portfolio ($150b in q4).
Conversely, money market funds "corporate and foreign bond portfolio" fell by $140b -- with most of the fall coming in q3. Their securities repos also fell by about $30b, a notable change from trend. Between the end of 2007 and the end of 2004, their security repos rose by $337b, or an average annual rise of over $100b.
To put it differently, money market funds Treasury and Agency holdings went from 13% of total assets to 35% of total assets over the course of 2008. That is a flight to quality.
And, for what it is worth, the broker dealers went from holding a negative 60b of Treasuries as a financial asset to holding a positive 191b (with most of the swing coming in q4). They too were net buyers of Treasuries as they sought, I presume, to improve their liquidity position.
4) The contraction of the balance sheets of private issuers of asset-backed securities has driven the credit crunch.
Financial assets held by private issuers of asset-backed-securities fell by $441.6b in 2008. That is a big change from the $808b rise in 2006 (or even the $318b rise in 2007). The outstanding stock of commercial paper issued by "issuers of asset backed securities" fell from a peak of 903.9b in q2 2007 to $558.6b at the end of 2008. The big fall here though came back in q3 and q4 07, back at the very beginnings of the crisis.
5) The pace of expansion in the Agencies balance sheet slowed.
From q2 2007 to q2 2008, the outstanding stock of Agency paper and Agency guaranteed mortgage bonds (with Agency MBS geld by the GSEs netted out) rose by $979.3b, as the Agencies made up for the shortfall in private mortgage credit. In the last two quarters of 2008, by contrast, the net increase in outstanding Agency paper (again netting out the GSEs holdings) was more like $282b, or an annualized $564b pace ...
6) Bank credit fell in q4. Commercial bank credit fell from $9726b in q3 to $9680b in q4. The banks overall balance sheet still expanded though, thanks to the $820b commercial banks now hold at the Fed. The sources of "funding for the banks changed" as well. Liabilities from "Federal funds and securities repo" fell from $837b at the end of q4 2007 to $484.4b at the end of q4 2008 -- with a sharp 230b fall in q4. Large time deposits also fell in q4. Liabilities to the Fed rose from $48.6b at the end of 07 to $557.5b at the end of q4 2008 .... that could be compared to say $818b in outstanding long-term bank bonds, some of which no doubt are now insured by the FDIC. The bank holdings companies have another 636b in long-term bonds outstanding.
7) I need a bit of help to understand one change in the commercial banks balance sheet, namely the swing in interbank liabilities to foreign banks.
For the system as a whole, interbank liabilities to domestic banks went from positive 21.7b to negative 293.4b; while interbank liabilities to foreign banks went from -56.9b to positive 289.5b. All the swing came in q4. It clearly is tied to the crisis in some way, and likely is tied to the global shortage of dollar liquidity.
The flow of funds also provides data for US charted banks and for foreign bank offices in the US. US charted commercial banks seem to have increased their borrowing from foreign banks in 2008 (interbank liabilities to foreign banks increased from 478.2b to 637b). If I am reading the data correctly (a real if), that implies that US banks were drawing more heavily on the global dollar market for financing, and thus leaving less for everyone else. Foreign bank offices in the US saw their net interbank liabilities to foreign banks swing from negative 425b at the end of 2007 to negative 180b at the end of 2008. I am not quite sure though how best to interpret a fall in a negative liability, though; help here would be appreciated.
Foreign banks operating in the US also saw significant pressure on their funding in q4. Large time deposits fell by $150b, and Repos fell by about $50b. That is easy to understand. Uninsured creditors to foreign banks operating in the US weren’t in the mood to take chances.
8) Shrinking broker-dealer balance sheets, expanding funding company balance sheets
The balance sheet of the the broker dealers shrank by around $875b in 2008 even as their holdings of Treasuries rose, implying a big contraction in their holdings of other assets. The balance sheet of the funding companies though rose by (gulp) $1735b. Netting out cross holdings (the funding companies investment in the broker dealers), the combined assets of the broker-dealers and funding companies rose by around $325b (if I got the math and netting right) -- down from a $580b increase in 2007 and a $660b increase in 2006.
Over the course of 2008, the broker-dealers and funding companies have drawn about $500b from the Fed ($491b, with most of the credit going to the funding companies). That financing supports a non-trivial fraction their $4450b or so combined balance sheet (if I am doing the netting right).
For what it is worth, a lot more corporate bonds (think "toxic assets") are now carried on the balance sheet of the funding companies and a lot fewer are on the balance sheet of the broker-dealers.
And no doubt the main source of funding pressure on the broker-dealers came from the fall in outstanding repos -- which fell from $1147b at the of 2007 to $586.3b at the end of 2008, a net fall of $561b.
No doubt though I am missing things here. Help tracing the impact of the crisis on the domestic flow of funds would be most appreciated .... I don’t know the US side of the flow of funds data quite as well as I know the balance of payments data.
The underlying Fed balance sheet data can be found here.