Even Without TARP, Banks Are Still Heavily Subsidized

Fed Balance Sheet

Despite the massive repayments of TARP money coming from our biggest banks, the financial system is still very much dependent on the rescue operations of the government.

Perhaps the best illustration of this is the massive balance sheet of the Federal Reserve, which has inflated by purchases of $1.058 Trillion of mortgage backed securities.

The Atlanta Fed’s most recent financial highlights point out that in the last two months, the average weekly amount of MBS purchased has averaged $17 billion. That’s a significant slowdown from a prior average of $23.4 billion per week. And last week the Fed purchased only $16 billion.

Still, cumulative numbers matter. Prior to this year, the Federal Reserve had never purchased mortgage backed securities. Now the Fed owns more than 15 per cent of the market in agency backed mortgage securities, Fannie Mae and Freddie Mac combined own roughly 17 per cent of the market, while commercial banks own around 20 per cent.

We don’t know exactly what the Fed has been buying or the prices it has been paying, of course. We have no idea who the sellers are, either. But it is fair to say that until this program ends–if it ends on schedule, that will be in early 2010–the financial sector is still heavily subsidized by the central bank.

But here’s what we do know. Banks are still being propped up on both ends by the Fed. They have access to dirt cheap money and then they can sell the mortgage loans they make with that money right back to the Fed.

Fed Balance Sheet

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