More Fear Factors

As I have pointed out, M1 continues to show exceptional growth. I have taken this growth as a signal that sgnificant fear remains within the financial system.

Brad Setser looks at Treasuries versus Agencies, and sees the same situation:

The general flight out of risk by central banks is one reason why the Treasury’s bailout of the Agencies has failed to halt the central bank run on Agencies. The flight out of Agencies — and flight into Treasuries — over the past two months has been stunning. Last week continued the trend: central banks added close to $20b to their Treasury portfolio at the New York Fed while cutting their Agency holdings by $7 billion. That helps support the Treasury market amid all the new supply, but hasn’t done wonders for the market for Agencies.

Setser then takes a look at the Fed's balance sheet:

The changes in the Fed’s own balance sheet this week were driven by the growth in its new commercial paper facility — and rising bank deposits at the Fed. Right now the Fed has raised over a trillion dollars from the new supplementary financing facility and the rise bank deposits at the Fed. Those new funding sources — rather than the sale of the Fed’s holdings of Treasuries — have financed its huge lending to the US financial system and its large swap lines with the world’s central banks...

I increasingly suspect that one indicator that the financial crisis has truly turned a corner will come when the Fed’s balance sheet starts to shrink …