February 5, 2008 (LPAC)--Last week we published a chart from the Federal Reserve (See Banking Collapse), which showed a breathtaking level of borrowing by banks in December in order to meet their minimum reserve requirements. The drop was so precipitous it appeared the bottom had fallen out of the banking system. It was pretty scary, but we can all now relax, because thanks to some impressive statistical trickery, that precipitous drop has now disappeared.

This is the original chart published by the St. Louis Fed:

and this is the revised version, now appearing on the Fed's website:

See, everything is better now!

The data series here, called Net Free or Borrowed Reserves of Depository Institutions, is published by the Federal Reserve Bank of St. Louis, and it shows the surplus or shortage of funds the banks need to meet their reserve requirements. When the number is above zero, the banks have a surplus ("free") of funds, and when it is below zero, the banks have a shortage ("borrowed") of funds and must borrow from other institutions or the Fed to cover their shortfall. Whereas the original chart showed a net shortfall of $13.7 billion for December, the revised version reduces the shortfall to just $2.1 billion.

It appears that the Fed has removed lending from its Term Auction Facility (TAF) from the equation, masking the problem. That's understandable, since the TAF is part of the new bank-bailout mechanism, and the Fed doesn't want the public to know how bankrupt the banking system really is, and how much of your money is being thrown down the rathole. Such cheap tricks may not bring the system back to life, but when all you've got left is the perception of solvency, every illusion is important.