Wednesday, October 08, 2008

Banker of what resort?

Way back in the early 20th Century, a big argument for the establishment of the Federal Reserve was that it would serve as a lender of last resort. Let's check out how that's worked out with Wachovia Bank. (h/T Cold Fusion Guy)

According to a group working to get a higher price for Wachovia (than Citi will offer), Wachovia has $800 billion in assets (loans) and only $450 billion in deposits. Absent other reserves, that would be a -60% reserve ratio. Yes, that would be illegal. What does it mean?

It means that Wachovia has something around $400 billion in loans (again, perversely called assets) from other banks and the Fed. Now is the Fed the lender of last resort, or is it rather one of the dominant factors in the banking economy?

I suggest the latter.

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