It’s been nearly three months since the Federal Reserve provided a modest multi-billion-dollar bailout to a few struggling banks. Despite the ongoing process of reducing government debt and mortgage securities in its portfolio, the Fed’s balance sheet increased by $400 billion in March, to bring the total up to $8.7 trillion by March 22.
In the article titled QT or QE: What Is This? I raised the question of how this period will be characterized. Since then, we have witnessed a gradual decline of the balance sheet and it’s now nearing levels that resemble those prior to March, as illustrated below:
As for whether this can be categorized as Quantitative Tightening or a temporary Quantitative Easing, hindsight will have to be our guide. However, if we examine the Fed’s holdings of US Treasuries (UST) and Mortgage-Backed Securities (MBS), it becomes clear that they consistently reduced holdings of both during the last several months.
Since the peak on March 22, the UST balance decreased by approximately $165 billion:
During the same period, the balance of Mortgage-Backed Securities (MBS) decreased by approximately $89 billion:
Where the Fed reduced its holdings in certain areas, it increased them in others, particularly in the Bank Term Funding Program and Other Credit Extensions. Both programs were implemented to assist troubled banks.
The Bank Term Funding Program currently stands at nearly $94 billion and is expected to remain in effect for the entire year, as outlined in the program’s term sheet.
Likewise, Other Credit Extensions, with an outstanding amount of $188 billion, are also expected to be repaid in full. But the timeline for repayment remains uncertain.
Beneath the chart is the following note:
The value of loans made by Federal Reserve Banks that are not categorized elsewhere on this balance sheet. Recently, this line included emergency credit to Bear Stearns that was announced on March 16, 2008, and, before the credit extension was listed separately, the credit extended to AIG.
The granting of this specific credit extension by the Fed has rarely been seen, but somehow the Fed always manages to find a way to provide credit to troubled banks.
Despite March being just a few months ago, it already feels like a forgotten chapter in history. With discussions in various news outlets, such as the New York Times today, focusing on the S&P reaching bull market status, it’s easy to overlook the actions of the Fed. Even though there was a $400 billion mini bailout not long ago, the credit extended to these struggling banks will eventually need to be repaid; the source of this money must be identified.
And remember: the Fed continues to reduce its holdings of UST and MBS. Perhaps due to the gradual nature of this process or because the mainstream refuses to grasp the totality of the situation, the significance of these actions is hardly mentioned. It’s also important to remember that the mere contraction of credit is enough to bring about the inevitable bust, so the reduction of credit only worsens the situation. Amidst the euphoria of green days in the stock market, it’s easy to lose sight of the fact that any upward trend may only be transitory in nature.
