The Fed, Inc. as pawn shop?

Yeah, pretty much. Since banks are so wary of lending to one another, as evidenced by the increasing-daily spread between LIBOR and the FFT, they’d rather pawn off their marked-to-model junk securities to the fed than go back to their own short term lending. [Mish at gloabaleconomicanalysis]

“Regardless of what the Fed is thinking, a rational person would conclude that banks and broker dealers will pawn off as much garbage on the Fed as the Fed is willing to take. And so the Fed’s own balance sheet is ballooning with garbage.

“The latest H.4.1 Report, Factors Affecting Reserve Balances shows that of the $867 billion in reserve bank credit that is normally treasury bills and notes, approximately $319 billion has been swapped out.

“Today, another $75 billion will be added to the swap-o-rama total. That will make the Fed’s balance sheet look something like this: $394 Billion Garbage to $473 Billion Treasuries. One additional swap will make the Fed’s balance sheet more than 50% garbage.

“Is this supposed to restore confidence in the Fed? In the banking system? In the US dollar? Is this supposed to make institutions want to lend? Is the fact that the Fed is holding garbage instead of the banks supposed to make the securities more valuable?

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