I am good at managing my money, but I am terrible when it comes to understanding certain economic “ideas”. Why on Earth would banks be borrowing against their own assets? Aren’t the banks the ones which should be lending money in order to generate interest from those loans, etc? Why would they borrow against their own assets, unless they owe someone money that they cannot afford to pay?

Banks in the United States have been quietly borrowing “massive amounts” from the U.S. Federal Reserve in recent weeks, using a new measure the Fed introduced two months ago to help ease the credit crunch, according to a report on the web site of The Financial Times.

The newspaper said the use of the Fed’s Term Auction Facility (TAF), which allows banks to borrow at relatively attractive rates against a wide range of their assets, saw borrowing of nearly $50 billion of one-month funds from the Fed by mid-February.

I can see where analysts would get nervous when this starts to happen. If the banks cannot pay their bills, the Fed is going to have to foreclose on the bank. Right? Is that how it works? I hate all this fuzzy math, I’m not sure it’s so fuzzy though. When banks start “quietly” borrowing money from the Fed, I can’t help but wonder what is on the horizon.

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