US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.Why do they need to borrow these funds? The answer is that they have lost so much money during the credit crisis that they do not have the capitalization necessary to insure deposits. If these were small regional banks they would be in receivership. Who exactly is paying for this bailout? It is you and me, the American taxpayer. So we are asked to bail out these institutions due to their lack of regulation and the greed associated with the subprime crisis. What choice do we have? Doing nothing could mean the collapse of the banking system and the onset of yet another worldwide DEEP recession or even worse another great depression.
The use of the Fed's Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.
It is for exactly this reason that banking regulations need to be more rigid. We can no longer allow the industry to police itself. It is this lack of regulation that has led us here.
"The TAF ... allows the banks to borrow money against all sort of dodgy collateral," says Christopher Wood, analyst at CLSA. "The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America's banking system."What else do you need to see to understand how dire this situation is? The new age of the Robber Barons is here and the same devastating effects that occured in the 1920's are here again. Will we never learn?
The Fed announced the TAF tool on December 12 as part of a co-ordinated package of measures unveiled by leading western central banks to calm money markets.
The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called "discount window" for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.
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