The negative level of non-borrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves.
Boca Raton, FL (PRWEB) February 29, 2008
Can a bank go bankrupt? What about an entire banking system? The answer to the first question is yes. Banking failures aren't common, but they still happen occasionally. Surprisingly, the answer to the second question is also yes. In fact, the U.S. banking system is on the verge of collapse right now, says James DiGeorgia, editor of the Gold and Energy Advisor (http://www.goldandenergyadvisor.com).
"The Federal Reserve tracks the health of our banking system in various ways. One of the more important numbers is the amount of monetary reserves. The lower the reserves, the closer the banks are to collapse," explains DiGeorgia. "Since December, non-borrowed reserves have fallen off a cliff. They've plunged deep into negative territory for the first time ever. In just two months, bank reserves went from $42 billion to NEGATIVE $18 billion!"
DiGeorgia points to the Federal Reserve's new Term Auction Facility (TAF) as the root of this problem. The Federal Reserve has auctioned off almost $60 billion to banks since December in an attempt to free up the frozen credit markets by flooding the banking system with liquidity.
This increased borrowing has driven many banks' balance sheets deeply into the red. However, according to the Federal Reserve this is just a "false alarm" caused by the TAF. A recent Federal Reserve report explained, "The negative level of non-borrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves."
"What the Fed report says is true, but pointless. Say I own a house worth $200,000, and I borrow $300,000 against it. I now have $100,000 in cash, and I'm feeling pretty good--but none of the cash is mine; it's owed to somebody else. Even worse, I owe a lot more than my assets are worth. Once the lender figures this out, the sheriff is going to post a foreclosure notice on my front door. I'm going to lose my house, no matter how much I protest about 'false alarms.' On a net basis, banks are now insolvent," concludes DiGeorgia.
When the sub-prime crisis started a year ago, the Federal Reserve estimated it would cause losses around $50 billion. Then it revised its estimate to $100 billion. Then $200 billion. Now, at its recent Tokyo meeting, the G7 said total losses will be a staggering $400 billion.
"So far, reported losses have 'only' been $120 billion. If we have another $280 billion to go, gold's huge leap up has been just a preview for the historic gold bull we're now entering. That's not even considering the other bullish forces pushing gold up long before the first sub-prime problem appeared. This market has already shattered previous records, and we're just getting started. I'm looking forward to gold at $2,500!" says DiGeorgia.
About Gold and Energy Advisor:
The Gold and Energy Advisor is a monthly newsletter that covers the precious metals, and energy markets with the single goal of delivering money making recommendations to its subscribers. Gold and Energy Advisor is edited by James DiGeorgia, who has extensive experience in precious metals and the energy markets, and is considered one of the world's foremost authorities in both, having been frequently quoted in The New York Times, USA Today, Financial Times, Money magazine, The Chicago Tribune, and Barron's. DiGeorgia is the author of the popular books The Global War for Oil and New Bull Market in Gold. For more information, visit GEA online at http://www.goldandenergyadvisor.com.