Thursday, June 5, 2008

Significant insights into the flow of fed funds - implications from the credit crisis

Borrowing/lending at state and local governments has significantly decreased in the last three quarters, since the start of the credit crisis in August of last year. According to flow of fed funds both borrowing and lending have increased at the federal level. The impact of the credit crisis has been felt more at state and local government level rather than the federal government. The crisis in the auction-rate bond market for municipalities is just one example of how the problems in subprime mortgages reverberated throughout different markets.

ABS also saw a significant reduction in the flow of fed funds with borrowing and lending net negative in the last two quarters. This is probably the result of the breakdown in the securitization market.

Borrowing/lending to households was significantly impaired in the first quarter of 2008, mainly reflecting the troubles in the residential mortgage market.

Money market mutual funds saw a three fold increase in net lending reflecting an inflow of liquidity in a flight to quality.

Form 108 (monetary authority) summarizes assets and liabilities of Federal Reserve Banks and Treasury monetary accounts that supply (green circles) or absorb (red circles) bank reserves:

Treasury securities saw significant outflows since the third quarter with a decrease of a stunning $590 billion in the first quarter of 2008. Federal Reserve loaned $194 billion and $250 billion to domestic banks in the fourth and first quarter respectively through the new non-conventional lending facilities. Fed. Res. Banks took $159 billion of not elsewhere classified bank loans on their balance sheet in the first quarter of 2008, including $29 billion of Bear Stearns paper.

Now we know: n.e.c. and not investment grade!

red circles: decrease in net borrowing/net lending
green circles: increase in net borrowing/net lending

click to enlarge

source: Flow of Funds Accounts of the United States, First Quarter 2008
FEDERAL RESERVE statistical release, Z.1

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