4/18/2013 Banking notes

The Fed's balance sheet is generally small compared to the size of the real economy.
On the asset side, except for golds, most of the stuff is government securities. It is supposed to be self-financing.

By convention the Fed is extraordinarily leveraged. Capital ratio and reserve ratio. The capital ratio is pretty low, and the reserve ratio is also low. Considering that there are trillions of immediately redeemable hard asset, the amount of reserve of the Fed is too low.

Looking at the US government securities, we see that all the securities are long term.

The government tried to sell the short term bond and buy the long term bond in order to flat out the yield curve,.

Discount window loans. The only mechanism through which the Fed can be allowed to make loans and inject liquidity to member banks when they are in trouble.

Remember what the Fed is meant to? Stabilize the payment system.

Very few commercial banks saw themselves in trouble in 2008 crisis.

The discount window is supposed to make temporary emergency loans to banks that are in the liquidity shock. (short-term liquidity purpose)

Term Asset-Backed Securities Loan Facility (TABSLF) and TALF
The Fed's own special vehicle to make loans to the market. They got back the assets that were collateralized by the other lending facilities that the Fed had set up. Meant to help the non-commerical banks that are in liquidity shock. 

Fannie-Freddie debt goes down over time. Reasons?
(1) the debt pays out. 
Analagy: I have mortgage debt of 10000, and I pay for it. Each time I pay a part of it, the bank will write down the mortgage debt because I pay back a part of it.
(2) If it doesn't pay and turns into crap, it got written down and hits the equity

"Trashy" MBS
the assets of other banks that are in liquidity shock
The reason why the Fed do this?
In crisis, the individual banks have to recapitalize their debts if they do not want to go bankruptcy. But sometimes it is hard for banks to trace the securities and renegotiate the contracts, so one way is to let the Fed buy the assets and let Fed lend deposits to banks for recapitalization. 

Reverse repos:

In 2008 crisis, small banks still had low cost sources of funds than big banks do. 

The government spending identity:
government expenditure= tax revenue + change in government debt held by the public (new borrowing) + the change in monetary base (new money)