Why Non-Borrowed Reserves Don't Matter

Caroline Baum does everybody a favor today and explains why you shouldn't be remotely worried about a deservedly-obscure indicator known as non-borrowed reserves. She talks about the "hysterical emails" she's been getting on the subject but is too polite to name any names. But I know where I first saw this meme arise: it was Mish, whose blog entry on the subject at the beginning of last week was picked up by everybody from Yves Smith to Metafilter.

The problem was that Mish confused everybody with this statement:

Were it not for the Term Auction Facility, banks would have had to raise $40 billion in capital by selling assets or some other means.

As Baum explains, when the Fed created the Term Auction Facility, sensible banks borrowed their reserves from the TAF instead of from other places, because the rates on offer at the TAF were so attractive. But that's not how Mish's readers saw it: they thought that the Fed was bailing out banks with the TAF, which wasn't really the case at all. If the banks' reserves hadn't been available at the TAF window, they wouldn't have borrowed them there: as simple as that. If the TAF hadn't existed, would the banks have "had to raise $40 billion in capital" overnight? Of course not, they would just have kept their existing reserves where they were.

With any luck, Baum's lucid column will put an end to the emails and IMs which I, too, have been receiving on this subject. In a bearish market like this, people will see monsters behind all manner of corners. But non-borrowed reserves are simply a non-issue.