Banks insolvent
It’s hard to imagine the scale of the losses that the credit market and the overall market in general have seen over the past year. Certainly this credit crisis is larger than most of us have seen even in the duration of our lifetimes. Looking back at the past year we’ve seen plenty of negative news but very little to actually compare the size and scale of our current credit crunch to anything in history.
Looking at the graph attached to this post its easy to see why things have gone so wrong. Banks have borrowed more in the past year than they have in history, mind you this money is not intended for future loans but actually to maintain a reserve to back up the money in people’s bank accounts. That is what seems so scary, our banking system would have collapsed without the free money printing presses that are the Federal Reserve.
Going back to 1959, the first M2 money supply data available, we currently have 24 times more M2 money supply than just 49 years ago. Even after adjusting the graph for this data, the facts remain the same, the banks are borrowing from the central bank faster than they ever have and this will continue. I’d be willing to bet that the amount borrowed today is even higher (when adjusted for inflation) than in the period from 1929-1931 when the banking system was in absolute shambles.
With this second chart we’re able to see how the housing debacle has affected bank accounts. Quite simply, the banks don’t have enough money even with a reserve requirement of just 10%. Today, $50 Billion had to be borrowed to cover just the reserve requirement, 10 years ago it was the opposite where banks had $50 Billion in reserves that weren’t borrowed.
