A look at how the composition of assets on the balance sheet of the federal reserve bank has changed over the past year:
December 6th 2007 Release:
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As can be seen above most holdings were in safe Treasury securities. A simplified view juxtaposes risky vs safe assets in December 2007:
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December 4th 2008 Release:
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As can be seen above a hole array of new asset types have been introduced by the Federal Reserve in response to the correction that started to accelerate in October of last year. Most notably the following facilities have been introduced or extended by the Federal Reserve in order to inject money into the economy:
– Other Federal Reserve Assets (most likely currency swaps but no additional data is provided)
– Term Auction Credit (a facility that allows the Federal Reserve to purchase troubled assets from banks)
– Commercial Paper Funding Facility (purchases of commercial paper to make money available to businesses directly)
– AIG Credit Line, Maiden Lane, Maiden Lane III (programs to simply lend money directly to AIG and JP Morgan)
– Asset-backed commercial paper money market mutual fund liquidity facility (some other facility to inject money by acquiring unconventional assets)
Most notably, the relative composition of risky vs safe assets has changed substantially. It is reasonable to classify all loans to virtually bankrupt businesses and purchases of troubled assets risky, for the simple fact that no private investor demanded them at the prices the federal reserve paid:
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The general trend has been for the FED to get rid of Treasury Bills and Notes while purchasing more risky assets. It can be assumed that the FED pursued this strategy in order to avoid, at least temporarily, an outright hyperinflation with a surging money supply. But the FED is slowly running out of Treasury securities to swap against. It will be interesting to see how the balance sheet continues to develop over the next months. The Federal Reserve, the supposed safe lender of last resort, is turning into the shakiest bank in the country. So far it has swallowed up bad loans from other banks. But who will come to its aid once its assets have to be written down due to non-performance? The IMF ?