The discussion here is somewhat esoteric but the reality is that the losses
created by the banking system has been
paid for with the printing of money but that nothing has been done to
rebuild credit at all to produce the profits and assets that assist the
recovery. It is as if the banks have
simply turned into little piglets sucking at the federal government teat and
are desperately afraid to act.
The reason for that is that there is no signal that they can trust and
they are all waiting for the great shoe to drop on their folly and to be taken
to account.
And on we go.
The Biggest Banking Disconnect Since Lehman Hits A New
Record
As regular readers know, the biggest (and most
important) disconnect in the US banking
system is the divergence between commercial bank loans,
which most recently amounted to $7.32 trillion, a decrease of $9 billion for
the week, and are at the same the
same level when Lehman filed for bankruptcy having not grown at all in all of
2013 (blue line below), and their conventionally matched liability:
deposits, which increased by $60 billion in the past week to $9.63 trillion, an
all time high. The spread between these two key monetary components - at least
in a non-centrally planned world - which also happen to determine the velocity
of money in circulation (as traditionally it is private banks that create money
not the Fed as a result of loan demand) is now at a record $2.3
trillion.
Which,
of course, also happens to be the amount of reserves the
Fed has injected into the system (i.e., how much the Fed's balance sheet has
expanded) since the great experiment to bailout the US financial system started
in September 2008, in which Ben Bernanke, and soon Janet Yellen, stepped in as
the sole source of credit money. The only difference is that while the Fed is
actively pumping bank deposits courtesy of the fungibility of reserves, loan
are unchanged.
For
those who still don't understand the identity between Fed reserves and bank
deposits, here is Manmohan Singh with the simplest explanation on the topic:
When central banks buy securities, one of the
immediate effects is to increase bank deposits, which adds to M2 (in the U.S., practically the
Fed has bought from nonbanks, not banks). Whether banks maintain those added
deposits as deposits, or convert them into other liabilities (or, by calling in
loans, reducing or moderating the growth of their balance sheets), is
an open question.
Actually
it's not. As the JPM London Whale episode taught us, it is the excess deposits
on bank balance sheets courtesy of the Fed, that serve as collateral
for marginable derivatives (IG9, HY9, ES, etc) which then can and are used by
banks to chase risk higher, often with leverage that runs into the orders
of magnitude. In other words, as the chart below shows, in the past week, the
Fed injected a net $69 billion in risk-ramping power on the commercial bank
balance sheets, and, more importantly, since the failure of Lehman, this amount
is a record $2.308 trillion.
So for those confused where the money comes from to ramp equities
ever higher on a daily basis for the duration of QE, and why the S&P
correlates (and "causates") exquisitely with the Fed's balance sheet,
now you know. More impotantly: don't expect banks to lend out much if any real
new loans as long as they can generate far greater and far less riskier returns
simply by chasing risk in the capital market
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