Sunday, July 11, 2010

The "Stretch"

clipped from

Below is another way of visualizing the Fed's balance sheet, splitting up assets into securities purchased outright by the Fed, versus liquidity measures:

Both have essentially gone flat.

What we see is that Bernanke has indeed stopped those programs for all intents and purposes. The net printing shown above has come through a decline in bank Excess Reserves. Whereas before such declines in Excess Reserves were met by Fed sterilization through a shrinkage of the Fed's own balance sheet (for example, see May - July 2009), nothing of the sort has happened this time. That money is just being allowed to enter the system, period.

The next logical question is where the bank lending that has replaced the Excess Reserves is heading. Well, we know it is not hitting the consumer debt market
My theory is that the money has floated into the Treasury market.
Is it that much of a stretch to posit that the Fed reached an agreement with them whereby the banks would take over where the Fed left off?