On December 21, 2007, the Federal Reserve Board introduced a new source of liquidity available to banks called the “Term Auction Facility (TAF).” The reason stated for the TAF is “pressures evident in short term borrowing markets.” The TAF is a loan auction, which allows banks to take out a 28 day loan from the Federal Reserve. The results of the TAF are starting to become evident, and problematic.
It is important to note that the discount window has always been considered a “lender of last resort,” and that banks are instructed to use it as an emergency source of liquidity, when other banks are unwilling to loan federal funds. This rule is followed because any time the Federal Reserve loans money from the discount window, it involves injecting more cash into the banking system and causes inflation.
Since TAF’s inception in late December, the Federal Reserve has been issuing $30 billion of TAF loans to banks to provide them with liquidity. This is cash created to cover current liabilities (DDA and investment withdrawals from U.S. banks) and encourage lending. The Federal Reserve has never done anything like this before. Rate cuts, which also cause inflation, have always been the Federal Reserve’s only way to encourage lending. The injection of cash into the banking system will compound the inflation. It is a way of keeping the banks liquid and confident at the expense of the value of the dollar.
I did not read this on a press release or a website; I just analyzed the Fed’s own data, which is available below. The scariest thing about this data is on the first link, which shows the non-borrowed reserves of U.S. depository institutions to be negative. This is unprecedented. Granted, the borrowed funds are from the Federal Reserve, but this is still bad news for American savings. This means, if banks do not turn a huge profit soon, and repayments are demanded by the Fed, they will not have any money left, and will be forced to start selling plant assets and cutting jobs.
The Federal Reserve is giving out more unwise loans to banks as the problem worsens, despite losses in the financial sector. These loans are likely to be forgiven, and the losses are going to be masked by creating more money out of thin air through the U.S. Treasury (printing more notes). The banks will make money, but the depository account holders will lose due to currency devaluation. Expect the dollar to drop big time, and soon. When the bag of dollars is rendered worthless, do not be one of the unfortunate ones left holding it. Get out of U.S. currency, U.S. banks, T-bills, bonds, etc. now. The dollar is not a safe store of value when the Federal Reserve is acting this irresponsibly.