Excess Reserves

RanSquawk reports market talk that ahead of the Bernanke semi-annual testimony tomorrow before the Senate Banking Committee, the Federal Reserve may be tempted to stop paying the 25 bps interest on excess reserves (which nonetheless have been declining recently as pointed out previously on Zero Hedge) in order to stimulate lending. Certainly, the topic of lending to what little is left of America's middle class, will be the primary theme during tomorrow's faux interrogation at which idiot politicians act confused and disgruntled that their corrupt policies have destroyed the country.

Less than 24 hours after bailing out Europe for the latest time with hundreds of billlions of liquidity swaps (full terms TBD still, record short covering certainly not TBD), the Fed is pretending to be a prudent monetary power, by announcing that it will "conduct 5 small-value term deposit offers." As a reminder, in its January 2010 minutes, the Fed noted that it would "eventually" move to a less accomodative policy "using a term deposit facility (TDF) to absorb excess reserves." So the schizos at the Eccles building want the gullible public to believe that just like all those micro reverse repos that it conducted in late 2009 (which led nowhere), the TDF tests will be critical to withdrawing some of the $2.5 trillion in assets on the Fed's balance sheet. Well guess what: with about $500 billion in liquidity swaps about to hit the asset side of the ledger (that's a conservative estimate based on the last time the Fed went full bore on bailing out Europe, and sorry, that European bailout does not come cheap), Excess Reserves (fed liabilities) are about to skyrocket by a comparable amount to match the assets. And here is the double whammy: $500 billion in new excess reserves earning 0.25% for holder banks, means US banks are about to earn an additional $1.25 billion a year risk-free courtesy of US taxpayers, who already are getting the shaft by paying more for gas thanks to the privilege of having bailed out Europe and drowned the world in new and unprecedented gobs of excess liquidity! Simply stated, the Greek "bailout" is a roundabout way of funneling over another extra billion to US banks! Direct cost to US taxpayers to bailout Europe via IMF: $50 billion; Indirect cost to fund incremental bank excess reserves: $1.25 billion; The joy of being raped daily by the Fed-Wall Street complex and assuring another year of record Wall Street bonuses: priceless. Some things money can't buy. For everything else there are trillions in Federal Reserve Notes appearing each and every day out of thin air.

The Federal Reserve's balance just hit another record high, at $2.29 trillion, jumping by a whopping $54 billion sequentially (the biggest weekly increase since mid-November). Securities held outright: $1,967 billion (an increase of $60.9 billion MoM, resulting from $56 billion increase in MBS and $5 nillion in Agency Debt), or a huge $53.6 billion increase sequentially. The fed is now 95% complete with its purchases of MBS, and 96% complete with purchases of Agencies. The Fed has completed $167.2 billion of its $175 billion agency debt purchase program through February 17. The Fed's MBS total is now $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion.

The Federal Reserve's balance sheet declined by $15 billion to $2,183 billion from the prior week, after the Fed presumably offloaded $2.7 billion in MBS: this is the first time since QE started that MBS holdings have declined. If anyone can tell us just who the idiots are who bought MBS from the Fed (and at what price), and who the even greater idiots are who are supposed to believe this, please send us an email.

As we pointed out recently, excess reserves at banking institutions have hit yet another all time record over $1 trillion, courtesy not just of the Fed's burgeoning reliquification efforts via direct asset purchases, but also due to its strategy to wind down the SFP program, and keep the Federal debt level under the legal cap, thereby providing even more liquidity to banks, to the tune of$185 billion. Yet if you thought that this inability to pass liquidity over into the broader currency pool was something to be concerned about (you know, that whole lending to consumers thing), you were wrong. Or so claims Goldman Sachs in this extended expose on why central planning is in fact good for Communist America. Also, for anyone who still doesn't understand how modern Fed-subsidized cash hoarding works, this primer should explain it all.

The Fed's monetary base has exploded, and is now at precisely $1,997 billion: an all time high. Even as the Fed's balance sheet declined this week courtesy of collapsing Commercial Paper holdings by the Fed, which were at just $15.6 billion, and Fed assets "declined" to $2,147 billion. The ratio of Fed assets to Monetary Base is now down to the lowest ratio since the Lehman collapse, at 1.08x, after historically hanging around 1.0x, as the chart attached demonstrates.

Bank excess reserves increased by $71 billion over the past two weeks, and $140 billion in the past month, to $1.06 trillion. Banks adamantly refuse to lend even one cent and continue hoarding cash instead, investing in safe and risky assets alike without prejudice. After all if anything breaks, Uncle Ben will fix it, and Aunt Jemima will make even the toxicest crap taste mmm, mmm good.

Is the Fed really considering this maniacal path, or are the PD's just bullying for more QE business?