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The casino metaphor has been widely used as a part-description of the phenomenon of over-financialisation. It’s a handy pejorative tag but can it give us any real insights? This article pursues the metaphor to extremes so that we can file & forget/get back to the football or possibly graduate to next level thinking.
What is the Financialised Economy (FE) and how big is it?
The FE can be loosely described as ‘making money out of money’ as opposed to making money out of something; or ‘profiting without producing’ . Its primacy derives largely from two sources – the ability of the commercial banks to create credit out of thin air and then lend it and charge and retain interest; and their ability to direct the first use of capital created in this fashion to friends of the casino as opposed to investing it in real economy (RE) businesses. So the FE has the ability to create money and direct where it is used. Given those powers it is perhaps unsurprising that it chooses to feed itself before it feeds the RE. The FE’s key legitimate roles – in insurance and banking services – have morphed into a self-serving parasite. The tail is wagging the dog.
The FE’s power over the allocation of capital has been re-exposed, for those who were perhaps unaware of it, as we see the massive liquidity injected by the central banks via QE disappearing into the depths of bank balance sheets and inflated asset values leaving mid/small RE businesses gasping for liquidity.
By giving preferential access to any capital allocated to the RE to its big business buddies the FE enables those companies to take out better run smaller competitors via leveraged buy outs. By ‘investing’ in regulators and politicians via revolving doors and backhanders, it captures the legislative process and effectively writes its own rule book.
Five years after the 2008 crisis hit, as carefully catalogued by FinanceWatch , economies are more financialised than ever. If the politicians and regulators ever had any balls they have been amputated by the casino managers, under the anaesthesis of perceived self-interest. They have become the casino eunuchs. An apparent early consensus on the systemic problems of over financialisation has melted away into a misconceived search for ‘business as usual’.
Derivatives are one of the most popular games in the casino.
Over the counter derivatives, which are essentially bets on the performance of asset prices, stocks, indices or interest rates, have a nominal value (as of December 2012 ) of USD 632 trillion – 6% up from 2007 levels – and 9 times world GDP. If the world decided to stop living and buy back derivatives instead of food, energy, shelter and all the stuff we currently consume, it would take nine years to spend this amount.
OK – it’s a nominal value. Many observers believe (even hope) that its real value is a minute fraction of this, but the only way we will ever find out is if the derivative contracts unwind. That is, prompted presumably by some form of crisis, parties progressively withdraw from the contracts or fold. The regulators (and the FE itself of course) will do everything they can to prevent this from happening, including grinding the population into the dust via austerity, because while no-one knows who precisely holds the unwound risk, most will certainly belong to the FE’s top tier.
Many of these derivatives started life as sensible financial products. Businesses need to insure against an uncertain harvest, or hedge against uncertain currency movements. But only a small proportion of current holders now have an insurable risk. So whereas in the past you could say we insured against our own house burning down, now they bet on their neighbour’s house burning; whereas in the past we bet on our own life expectancy, they now bet on the deaths of others; whereas in the past we insured against currency losses we experienced in our own business transactions, now they bet on currency movements in general. What might be expected when there are incentives to burn your neighbour’s house down? Organisations have even purposely set up junk asset classes, had them AAA rated, sold them to outsiders and then bet on their failure.
Government & Politicians
Politics operates as a debating society in a rented corner of the casino. The rent is high but largely invisible to the populace. The debaters are themselves well off, at least in the U.S. they are .
Now the strange thing is that the government actually owns the casino, but they have forgotten this. For the last 40 years or so, they have asked the casino managers to issue all the chips. The government use the same chips to spend on public services, and require us all to pay taxes in those chips. Mostly they don’t have enough chips for all the services they provide, so they ask the casino managers for loans. The casino managers are happy with this, provided the government pay interest on the loan of chips. This hidden subsidy effectively funds the casino. It’s perverse because the government pays interest on money they could issue themselves debt-free.
It’s not entirely clear why the government thinks the casino managers are better at managing chips than they would be. Arguably the government is elected to carry out a programme and they should be the arbiters of the country’s strategic priorities, so there should be some strategic guidance over the way the chips are spent.
But the government is only here for five years, and the casino managers are here permanently. So perhaps they think it’s safer just to trust the casino managers to get on with it. When asked, the casino managers explain that they allocate chips according to ‘what the market needs’ and no-one quite understands why that doesn’t seem to include much real investment. In any case the government have forgotten that they could issue the chips themselves, and although prompted (e.g. ), have failed to show any interest in reclaiming that power. Occasionally they create a whole new batch of chips themselves (QE) – if they think the tables are quiet – but give them straight back to the casino managers. Maybe it’s too complicated for politicians. Many of them haven’t had proper jobs. There are a few civil servants who understand what’s happening, but most of them don’t want to rock the boat – they are here permanently too and have good pensions. They research for the debaters and have lunch with the casino managers. That keeps them quite busy enough, thank you.
The Real Economy
The Real Economy also operates from a corner of the casino. It’s hard to put an exact figure on it, but perhaps 3-5% of the overall floor space depending how you measure.
It’s a very important corner of the casino, but not for the reasons it should be. It should be important because it’s the place where food is grown, houses are built, energy for warmth and work is created and so on. But these precious things are taken for granted by the casino managers. They have always had enough chips to buy whatever they need – they issue them for God’s sake – and they think food, shelter and energy will always be available to them. Crucially though, they have also managed to financialise this remaining RE corner, and this ‘support’ is trotted out as a continuing justification for the FE’s central importance .
The RE corner has always included important social and cultural, non-GDP activities. The enormous real value of these activities is now being properly articulated and is spawning citizen-led initiatives (e.g. sharing economy approaches, basic unconditional income) but they are often presented as beggars who annoyingly keep petitioning for their ‘entitlements’ and generally clutter up this remote corner of the casino.
On the finance side, individuals and businesses are exploring ways of funding their future activity without going cap-in-hand to the casino managers. They are exploring peer-to-peer finance, crowdfunding, prepayment instruments and so on. What these initiatives have in common is the disintermediation of the casino. They provide ways for people to invest more directly and take more control over their savings and investments. Of course a new breed of intermediary is surfacing to broker and risk-insure these new models, and these new intermediaries can also be captured.
With transparency and short-circuit communication via social media though, there is definitely scope to do things differently. We must hope for progress because the casino managers have little interest in what’s going on outside.
The Planet – outside the casino
The planet outside is used by the casino in two ways – as a source of materials and as a dumping ground for waste.
The materials are not essential to the core FE which is all about making money out of money and needs nothing but ideas, a few arcane mathematical models to give spurious gravitas, and credulous or naive investors. But RE activity performs a valuable role for the casino managers – it provides them with an endless stream of innovative ways of using chips. The shale gas bonanza for example is apparently grounded in the real world need for energy, and is presented as such. Its significance to the FE is as another bubble based partly at least on land-lease ‘flipping’ .
Without an RE-related rationale/narrative, the FE might disappear up its own waste pipe as it re-invested/sliced-and-diced/marketised its own products to itself. So materials from outside the casino are important for the managers’ big corporate proxies in the RE.
FE-favoured RE activities also create lots of waste, some of which is toxic, and may eventually prove terminal, as it builds up. This fact is of little interest to the casino managers. There is a minor interest in waste-related financialised vehicles – carbon markets for example are a relatively new casino game – and in the slight impact on some of the FE’s RE-friends like big energy companies. But mostly the casino managers are too busy with their games and their chips. Occasionally a manager will wake up to the dangers and defect to the real world where they, somewhat perversely, carry more credibility because of their casino experience. A small minority of managers stay within the casino and try to gently modify its behaviour. This is portrayed as a healthy sign of openness; the casino is secure in the knowledge that their ways cannot easily be re-engineered.
Combating the casino’s influence
Essentially there would appear to be three possible lines of response for those who believe there should be more to life than casino capitalism. Marginalise, convert or destroy……
These approaches map on to the three ‘broad strategies of emancipatory transformation’ suggested by sociologist Erik Olin Wright  – interstitial, symbiotic and ruptural. I have a fourth suggestion/ variation of which more in a moment.
The challenge for interstitial initiatives is the sheer pervasiveness of the FE. There are few spaces left where the effects of the FE can be ignored. They may not be well understood, but whenever we pursue dreams, they pop up in front of us, usually as obstacles. Developments that are most heavily attacked by the FE establishment perhaps merit the most attention – community scale renewable energy, crypto currencies, co-ops, the sharing economy, and so on. The more these alternative directions are attacked as utopian or uneconomic the more we can be sure they offer promising interstitial opportunities.
Symbiotic opportunities may represent the triumph of hope over experience. Armed with the power of ideas, we back our ability to persuade policy makers and business leaders to change the game. The main challenges here are the arrogance of the powerful and the danger of being captured by supping with the devil. Vested interests generally feel secure enough that they don’t need to negotiate or even to spend brain power on listening and evaluating alternatives. If enough interest is manifested that symbiotic trial projects are begun, their champions can be captured by being made comfortable.
Ruptural alternatives come in a spectrum from those that would destroy business models to those that would destroy societies. They probably share the above analysis but differ in their degree of radicalism and disconnection from the main. The impact of FE-driven globalisation is beyond the scope of this article, save to note that its effects have unnecessarily radicalised whole populations making more measured responses more difficult to promote than they might have been.
The role of the internet and social media in progressing both interstitial and ruptural initiatives is significant. Most of the space to develop and assemble communities of interest and mission-partners is here, explaining why both are likely to experience increasingly determined attempts to capture.
The nature of one’s chosen response will be a matter of personal choice. We should not be judgemental of those who don’t have the will, energy or resourcefulness to play a more active role. We all suffer from our subservience to a dysfunctional system, some much more than others. The fourth response? Perhaps there’s some mileage in judo principles .
: http://rikowski.wordpress.com/2013/12/12/profiting-without-producing-how-finance-exploits-u s-all/
: “It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.” Art Berman quoted athttp://theautomaticearth.blogspot.ie/2011/07/july-8-2011-get-ready-for-north.html
Featured image: Luxor, Las Vegas. Author: David Marshall jr. Source: http://www.sxc.hu/browse.phtml?f=view&id=90604
The latest Index of Economic Freedom has just come out, and the news for the United States isn’t good. The study, a joint effort of The Heritage Foundation and The Wall Street Journal, concludes that economic freedom in the United States has declined again. This is the seventh year in a row this has happened.
For more than 200 years, the United States led the world in economic freedom. For many of those years, we were also the most prosperous Nation in the world, as we demonstrated that economic abundance was one of the happy consequences of economic freedom. Now, many other nations are confirming the same thing.
But we aren’t. Now, we’re not even in the top 10 of the 178 countries the study measured. Thanks a lot, Barack Obama! And Congress. And, yes, even the U.S. Supreme Court. All have been complicit in the unrelenting assaults on free enterprise in this country.
In an opinion piece in The Journal, Terry Miller, one of the study’s directors, had this to say: “It’s not hard to see why the U.S. is losing ground. Even marginal tax rates exceeding 43% cannot finance runaway government spending, which has caused the national debt to skyrocket.”
But out-of-control government spending is just one of the areas where the United States is in decline. As Miller wrote: “The Obama administration continues to shackle entire sectors of the economy with regulation, including health care, finance and energy. The intervention impedes both personal freedom and national prosperity.”
So if the U.S. is losing economic freedom, how is the rest of the world doing? Believe it or not, economic freedom is actually improving in most of the world. According to the study, 114 countries of the 178 in the study enjoyed an increase in economic freedom in the past year. And some 43 countries scored their highest ranking ever in the index’s 20-year history.
Leading the list once again is Hong Kong, which scored 90.1 on the 100-point scale. Following it in the “free” category are Singapore, Australia, Switzerland, New Zealand and our northern neighbor, Canada.
Rounding out the top 10 in the “mostly free” category are Chile, Mauritius, Ireland and Denmark. Then comes Estonia. The United States finally shows up next, at 12th on the list. Yes, it’s hard to believe, but even Estonia did better than the U.S. this time.
Maybe that shouldn’t be a surprise. It turns out that several countries in Eastern Europe that used to be dominated by the Soviet Union are thriving now that they have embraced free-market economies. According to the study, Estonia, Lithuania and the Czech Republic are the European countries that gained the most economic freedom in the past 20 years.
Congress, are you listening?
According to the study, 18 countries in Europe have reached new highs in economic freedom. They include Germany, Sweden, Poland and Georgia. On the other hand, five countries — Greece, Italy, France, the United Kingdom and Cyprus — scored lower than they did when the first index appeared 20 years ago.
No surprise on which countries are on the bottom of the list. In descending order, they are Iran, Eritrea, Venezuela, Zimbabwe, Cuba and North Korea. All are known for despotic governments, government-run economies and few, if any, property rights — oh, and one other thing: the abject poverty endured by most of their citizens.
The study measures economic freedom in 10 different categories under four broad areas, which it calls the pillars of economic freedom. They are,
- The Rule of Law, which includes property rights and lack of corruption;
- Limited Government, measured by fiscal freedom and controls on government spending;
- Regulatory Efficiency, such as business freedom, labor freedom and monetary freedom; and finally,
- Open Markets, as measured by freedom to trade, investment freedom and financial freedom.
Does it really matter how a country scores on economic freedom? Absolutely!
“Countries achieving higher levels of economic freedom consistently and measurably outperform others in economic growth, long-term prosperity and social progress,” Miller wrote.
It is an outrage that this country, whose freedom and prosperity made us an inspiration for the world, is now measurably on the decline. The report says that the U.S. has suffered “particularly large losses in… control of government spending.” But we already knew that, didn’t we?
The latest jobs report from the U.S. Bureau of Labor Statistics confirms just how shaky things have become in the U.S. economy. While forecasters expected new jobs in December to exceed 200,000, the BLS number came in at a lowly 74,000.
Yet even with that disappointing number, the unemployment rate in this country somehow dropped 3/10 of a point, from 7 percent to 6.7 percent. How is that possible?
It turns out that nearly five times more people stopped looking for work in December than found new jobs. An estimated 347,000 Americans left the labor force and are no longer counted among the unemployed.
Clearly, there’s the solution to make the unemployment numbers look good. If enough people who don’t have jobs simply give up looking for them, unemployment in this country would drop to zero. Wouldn’t that give the Obamaites something to crow about?
“[T]his year’s index demonstrates that the U.S. needs a drastic change in direction,” Miller wrote.
Indeed it does. But as long as Harry Reid holds the reins as Senate Majority Leader, we’re not going to get it. Happily, that could change in a big way this November, when he could receive a well-deserved demotion to Minority Leader.
I’ll have a lot more to say in coming days on the key elections that could make that happen. In the meantime, keep reminding your friends that Ronald Reagan got it right when he said: “Government is not the solution to our problem; government is the problem.”
The latest Index of Economic Freedom confirms the wisdom of the former President’s remark. The more government gets out of the way, the more a country will prosper. The results of five years of Obama prove that the opposite is true, too.
Until next time, keep some powder dry.
The Conference Board of Canada is calling the decline in the Canadian dollar the economic story of the year so far, predicting further declines as the Canadian economy underperforms.
The loonie began the day stronger on Thursday, rising to 91.48 US in early trading, up from its close of 91.37 US yesterday. It closed up 0.16 of a cent to 91.53 cents US.
The Canadian currency fell 6.6 per cent in 2013, after trading at par with the greenback in February, and is down more than three per cent since the beginning of the year.
‘Markets are betting that the Canadian economy will continue to underperform’– Glen Hodgson, Conference Board
The Conference Board, an economic and policy think tank, said the falling dollar is a sign of lack of confidence in Canadian growth prospects.
“Arguably more important than the value of the loonie is the signal it sends about the Canadian economy. Markets are betting that the Canadian economy will continue to underperform,” chief economist Glen Hodgson said in a report released today.
“This assessment is consistent with our own forecast, which calls for U.S. gross domestic product to grow by 3.1 per cent in 2014, much better than Canadian growth of 2.3 per cent,” he continued.
Hodgson is not the only economist predicting Canada’s GDP growth will underperform the U.S. Towers Watson’s annual survey of Canada’s top economists and analysts found most believe Canada will lag the U.S. in both economic activity and job creation over the next few years.
Too many plant closures
“With a lower Canadian dollar, there is hope that manufacturing businesses, and certainly the export sector of the economy, can contribute to reducing the unemployment rate in the next few years,” said Janet Rabovsky, Towers Watson director of investment consulting.
“That being said, recent announcements about industrial plant closures in Ontario would indicate that the cycle has not yet turned.”
Hodgson agreed that it is not clear if Canadian exporters will be able to fully capitalize on a weaker dollar because of the loss of capacity in the manufacturing sector since 2008.
There have been deep slashes in export-dependent industries — such as autos and parts — and a shift of much U.S. production to the southern states, so Canadian suppliers may not benefit as quickly as in the past from the U.S. recovery, he said.
He also points to the hit consumers may take from higher prices.
TD chief economist Craig Alexander said the U.S. Fed’s “decision to taper asset purchases has greased the skids under an already depreciating loonie.”
Traders rush back to U.S. dollar
The Fed decided in December to taper its U.S. bond-buying program to $75 billion US a month and as good economic news out of the U.S. continues to roll in, it is expected to continue tapering.
But that has encouraged traders to buy the U.S. dollar, leading to a rush away from the Canadian dollar.
“However, the fundamentals are not Canadian-dollar positive either, and the loonie likely has further to fall,” Alexander said in a research note.
BMO chief economist Doug Porter predicts a falling dollar will actually help boost Canadian GDP in the long-term – as much as 1.5 percentage points over the next two years if the loonie falls to 90 cents or lower.
“There are definitely losers, such as consumers, travellers, utilities, broadcasters, sports teams. But there are also lots of winners. The beleaguered manufacturing and domestic tourism sectors will find the biggest relief from the weaker currency. Even some retailers will be breathing a tad easier, as the loud siren call of cross-border shopping fades for consumers with each tick down in the currency,” he said.
In his final public appearance as chairman of the Federal Reserve, Ben Bernanke took a moment to reflect on the 2008 financial crisis and compared it to surviving a bad car crash.
During an interview Thursday at the Brookings Institution, Bernanke recalled some “very intense periods” during the crisis, similar to trying to keep a car from going over a bridge after a collision.
The government had just taken over mortgage giants Fannie Mae and Freddie Mac. Lehman Brothers had collapsed. He recalled some sleepless nights working with others to try and contain the damage.
“If you’re in a car wreck or something, you’re mostly involved in trying to avoid going off the bridge. And then, later on, you say, ‘Oh my God!”‘ Bernanke said.
Term ends January 31
Bernanke will leave the Fed on Jan. 31 after eight years as chairman. His successor, Janet Yellen, will take over on Feb. 1.
In his appearance, Bernanke defended the Fed’s efforts during the crisis, which included massive purchases of Treasury bonds to push long-term interest rates lower and forward guidance to investors about how long the Fed plans to keep short-term interest rates near zero.
Critics have warned that those efforts pose great risks for higher inflation or future financial market turmoil.
But Bernanke says there has not been a problem with inflation, which is still running well below the Fed’s 2 per cent target.
Should inflation start to be a problem as the economy starts growing at faster rates, the Fed “has all the tools we need to manage interest rates” to keep inflation from getting out of hand, he said.
“Inflation is just not really a significant risk” from the bond purchases, Bernanke said.
Bernanke said the central bank was aware of potential threats to financial market stability from its massive bond holdings and is monitoring markets very closely to spot any signs of trouble. He said this threat was the one “we have spent the most time thinking about and trying to make sure that we can address” should the need arise.
But he said any concerns about financial stability did not outweigh the need to keep providing support to the economy.
The Fed announced last month that it would slightly reduce the size of its bond purchases in January from $85 billion per month down to $75 billion. And it said it would likely make further reductions at upcoming meetings, if the economy keeps improving.
While manufacturing and services PMIs disappointed, the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC’s liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of “troubled shadow banking products” had assumed that ‘someone’ would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the “Credit Equals Gold #1 Collective Trust Product”, due to mature Jan 31st with $492 million outstanding. The anxiety from contagion concerns of the first shadow-banking default has pushed the Shanghai Composite back near 2,000 for the first time since July – and to its narrowest spread to the S&P 500 in almost 8 years.
The Shanghai Composite is tumbling… to six month lows (and back near 2,000 for the firs time since July)…
and its closest (nominally) to the S&P 500 in almost 8 years…
…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).
Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.
Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC’s efforts are merely exacerbating the situation for the worst companies… for example… Zhenfu Energy…
Industrial and Commercial Bank of China, the world’s largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.
ICBC’s shares have fallen this week amid speculation that the bank would be forced to help repay investors in a 3 billion yuan ($496.20 million) high-yield investment product issued by China Credit Trust Co Ltd but marketed through ICBC branches. The product is due to mature on Jan. 31.
“Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product),” an ICBC spokesman told Reuters by phone on Tuesday.
The trust product, called “2010 China Credit / Credit Equals Gold #1 Collective Trust Product”, used the funds it raised from wealthy investors in 2010 to make a loan to unlistedcoal company Shanxi Zhenfu Energy Group Ltd.
But in May 2012, Zhenfu Energy’s vice chairman, Wang Ping Yan, was arrested for accepting deposits without a banking licence.
Which Barclays warns:
In our view, despite the trust issuer, distributor bank and local government perhaps trying to bail out the mining company, the regulators and central government could probably allow the trust product default to happen as:
- government appears fairly determined to reform the financial system and cut off the implicit guarantee of financial institutions;
- the State Council is reportedly streamlining regulation of shadow banking including trust business; and
- the default of trust products could have less social impact than the default of WMPs, bonds and other products sold to the general public or have problematic practices, such as asset-pool investments.
In our view, the default of trust products could trigger some short-term negative impacts on China’s financial sector and the reputation of financial institutions. However, we believe it is positive for the healthy development of financial system in the long run because the default could do the following:
- Be a step to reduce the implicit guarantee of financial institutions for investment products. Banks could shift their financial liabilities back to the investors.
- Increase the risk awareness of both investors and financial institutions, which could correct the pricing of investment products to more risk-oriented.
Its conclusion is dire: “If the trust product goes into default, we believe it would be the first default to test the financial system.”
Here is the product…
And the growth of such products has been enormous as we have explained in great detail previously: at RMB10.1 trillion as of Q3 should the first domino fall, watch out below.
Finally for those who have forgotten, below is a quick schematic of what a WMP looks like:
“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”
The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.
Bernanke’s Legacy: A Record $1.3 Trillion In Excess Deposits Over Loans At The “Big 4” Banks | Zero Hedge
The history books on Bernanke’s legacy have not even been started, and while the euphoria over the Fed’s balance sheet expansion to a ridiculous $4 trillion or about 25% of the US GDP has been well-telegraphed and manifests itself in a record high stock market and a matching record disparity between the haves and the have nots, there is never such a thing as a free lunch… or else the Fed should be crucified for not monetizing all debt since its inception over 100 years ago – just think of all the foregone “wealth effect.” Sarcasm aside, one thing that can be quantified and that few are talking about is the unprecedented, and record, amount of “deposits” held at US commercial banks over loans.
Naturally, these are not deposits in the conventional sense, but merely the balance sheet liability manifestation of the Fed’s excess reserves parked at banks. And as our readers know well by now (hereand here) it is these “excess deposits” that the Banks have used to run up risk in various permutations, most notably as the JPM CIO demonstrated, by attempting to corner various markets and other still unknown pathways, using the Fed’s excess liquidity as a source of initial and maintenance margin on synthetic positions.
So how does the record mismatch between deposits and loans look like? Well, for the Big 4 US banks, JPM, Wells, BofA and Citi it looks as follows.
What the above chart simply shows is the breakdown in the Excess Deposit over Loan series, which is shown in the chart below, which tracks the historical change in commercial bank loans and deposits. What is immediately obvious is that while loans and deposits moved hand in hand for most of history, starting with the collapse of Lehman loan creation has been virtually non-existent (total loans are now at levels seen at the time of Lehman’s collapse) while deposits have risen to just about $10 trillion. It is here that the Fed’s excess reserves have gone – the delta between the two is almost precisely the total amount of reserves injected by the Fed since the Lehman crisis.
As for the location of the remainder of the Fed-created excess reserves? Why it is held by none other than foreign banks operating in the US.
So what does all of this mean? In a nutshell, with the Fed now tapering QE and deposit formation slowing, banks will have no choice but to issue loans to offset the lack of outside money injection by the Fed. In other words, while bank “deposits” have already experienced the benefit of “future inflation”, and have manifested it in the stock market, it is now the turn of the matching asset to catch up. Which also means that while “deposit” growth (i.e., parked reserves) in the future will slow to a trickle, banks will have no choice but to flood the country with $2.5 trillion in loans, or a third of the currently outstanding loans, just to catch up to the head start provided by the Fed!
It is this loan creation that will jump start inside money and the flow through to the economy, resulting in the long-overdue growth. It is also this loan creation that means banks will no longer speculate as prop traders with the excess liquidity but go back to their roots as lenders. Most importantly, once banks launch this wholesale lending effort, it is then and only then that the true pernicious inflation from what the Fed has done in the past 5 years will finally rear its ugly head.
Finally, it is then that Bernanke’s legendary statement that he can “contain inflation in 15 minutes” will truly be tested. Which perhaps explains why he can’t wait to be as far away from the Marriner Eccles building as possible when the long-overdue reaction to his actions finally hits. Which is smart: now it is all Yellen responsibility.
Bailed-out euro-area countries are facing “painful” challenges with worse-than-anticipated consequences of economic adjustment, including high unemployment and slow growth, central banks and finance ministries said.
Officials and ministers from Greece, Ireland, Portugal and Cyprus, in responses to European Union lawmaker questions published yesterday, described how their countries’ emergency aid had been followed by social hardship and continuing economic difficulties.
The bailout program had a “worse-than-expected impact on both output and employment,” Portugal’s finance ministry said. The program in Cyprus was “rigorous and painful,” according to the island’s central bank. Adjustment in Greece, after four years of cuts and efforts to make the economy more competitive, has come at “an extremely high socioeconomic cost,” Greek Finance Minister Yannis Stournaras said.
The testimonies come three-and-a-half years after Greece became the first euro-area country to be bailed out, using EU and International Monetary Fund loans. Since then the German-led path of aid in return for reforms and debt cuts has seen 396 billion euros ($538 billion) committed to the region’s four most fragile economies, with an additional 100 billion euros pledged for Spain’s banking sector. The bloc has endured the longest recession in its history and unemployment has reached record levels.
Government bonds in the euro-area’s most indebted nations have rallied this year, pushing Portugal and Ireland’s 10-year yields to the lowest since 2010 and 2006 respectively, as recovery sign’s in the region have boosted demand for higher-yielding debt.
Portugal expects to restart bond auctions in the first half of 2014, its debt agency said yesterday, after selling one-year bills at the lowest yield since November 2009. Greece’s Stournaras said last week that the government may sell five-year notes in the second half of the year, for the first time since being shut out of the bond markets in 2010. It would follow Ireland, which sold bonds last week for the first time since completing its bailout program.
Greek 10-year yields have dropped 68 basis points this year to 7.74 percent, after touching 7.53 percent on Jan. 13, the lowest since May 2010. The yield on similar-maturity Portuguese securities reached the lowest since August 2010 at 5.07 percent yesterday.
EU lawmakers questioned whether the so-called troika, comprising the European Commission,European Central Bank and IMF, which sets conditions for the countries receiving bailouts and monitors their progress, should have been more accountable and could have prevented the most painful effects of austerity. The European Parliament’s economic and monetary affairs committee is today discussing the responses received about the troika’s work.
European lawmakers will continue to work to make the troika more accountable, EU Parliament President Martin Schulz said on Twitter yesterday. Schulz is a member of Germany’s Social Democrats, the junior partner in the country’s coalition government.
While finance ministries and central bankers said that the hardships associated with the bailout conditions could not be ignored, they said they backed the process.
“The program, although rigorous and painful, is the only way that will enable the country’s exit from the crisis,” Cyprus’s central bank said in its letter to the 28-nation European Parliament.
Portugal’s finance ministry said that it “remained convinced” a bailout program had been inevitable and that “on the whole it remains a suitable and rational response to the crisis of credibility threatening our country.”
Ireland’s bailout-program exit last month and its return to financial markets “confirms that our strategy of providing assistance to euro-area countries that requested it in return for strict conditionality is working,” Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of his 17 euro-area counterparts, said in his letter to EU lawmakers.
He said that while growth is returning to the euro area and the economic outlook is improving “a number of important challenges remain, most importantly unacceptably high levels of unemployment.”
Ireland’s bailout program can be considered a success, Michael Noonan, Ireland’s finance minister, said in his response to the parliament. Even so, unemployment is still high, economic growth has returned more slowly than predicted and the country’s overall level of debt remains elevated, with a peak of slightly over 120 percent of gross domestic product expected this year.