WCW has this chart, and says of it:
Any time that a properly normalized series starts rivaling the freaking Depression, you have to worry.
Worry? Yes, I’m worried. But not so much because banks are borrowing from the Fed again after a long Great Moderation in which they didn’t. Historically, the Fed has been happy to act as a counterparty for banks; the fact that it didn’t for a while is no reason why it shouldn’t right now, when it’s needed.
When fears of counterparty risk roil the markets, it’s great that the Fed can step in with its zero counterparty risk and act as the counterparty of last resort. I am slightly worried about this weekend’s announcements, which seem to make the Fed the counterpart of first resort: that spike might yet grow significantly larger.
The Fed has been reasonably imaginative in its response to this crisis. Think of what would have happened if it had stuck to its standard Fed funds instrument: it would have cut interest rates, but the discount rate would still be 100bp north of Funds, and investment banks would have no access to it in any event. The result would have been chaos in the markets: everybody refusing to trade with everybody else.
Instead, the Fed stepped in and said, in effect, we’re here to trade with, we have liquidity, come and get it. Once the money starts flowing around the financial system again, it might be able to take a few quiet steps out of the game. But for the time being, anything which encourages banks to trade with each other and trust each other is a good thing. If it’s really lucky, the Fed might not even have to take any losses on that $30 billion of non-recourse financing that it gave to Bear Stearns yesterday.