Thursday, March 20, 2014

The Banking System's Disappearing Money Act

Now that Janet Yellen has telegraphed what the Federal Reserve will be doing next, with the economy looking rather weak at best, one has to ask, what happened to all of that monetary stimulus that Ben Bernanke implemented that was supposed to benefit the U.S. economy?

These charts answers that question for us.

First up, the total deposits at all commercial banks:

Next, we have all loans and leases at all commercial banks, noting that the growth in loans and leases has been rather flat since the beginning of the Great Recession in late 2007:

If we put the two lines together, loans and leases in red and deposits in blue, we get this:

You'll notice that for the first time since the mid-1970s, that there is a very wide spread between commercial bank deposits and commercial bank loans and leases which, in the past, have pretty much tracked each other.

To make the new banking reality clearer, here is a graph that shows the result when we subtract loans and leases from deposits:

You'll notice right away that banks are sitting on trillions of dollars worth of deposits that they simply aren't lending to businesses or individual consumers, something that has not happened in our lifetime.

For the years between 1975 and mid-2008, bank deposits exceeded lending by an average of $205 billion.  On September 15th, 2008, the Federal Reserve began to inject massive amounts of credit into the market to stave off financial Armageddon.  As the Federal Reserve began pumping and dumping with the QE triplets and The Twist, banks began to pile up cash, hitting a very near record level of $2.469 trillion in early March 2014.  This is over 12 times the average amount of cash that banks were sitting on in the previous 35 years.  What are all of America's commercial banks doing with this money?

Here's the answer:

Here's the answer in graphical form:

Notice how similar the last graph showing excess reserves looks when you compare it to the fourth graph that shows the difference between commercial bank deposits and loans and lending?

Apparently, we live in unusual times!  Instead of earning 4 or 5 percent or more by lending the trillions of dollars that the Federal Reserve has created out of thin air and dumped into the American economy, banks would rather take no risk and deposit $2.509 trillion in excess reserves (that is $2.594 trillion in total deposits minus the required reserves of $84.86 billion) and earn a healthy 0.25 percent from the Federal Reserve.  The banking system will earn up to $6.485 billion  annually in interest payments from the Fed just for sitting on its hands and doing nothing!  

Think of it this way.  Since 2008, the Federal Reserve has seen its balance sheet bloat up from $869 billion to its current level of $4.181 trillion as shown on this graph:

All of that "paper" has entered the banking system as the Fed tried to stimulate Main Street back into its pre-Great Recession overspending mode.  Rather than lending all of that Fed-created money to those risky folks that live on Main Street, the commercial banking system deposited trillions of dollars back with the Fed who created the money in the first place.  No wonder the economic "recovery" has been so modest.  Most of the Fed's newly minted money is still resident at the Fed!

Basically, by continuing any form of QE or other unconventional monetary policy, Ms. Yellen is not feeding credit to Main Street America as might be her intention, rather, she's feeding interest income to the nation's commercial banking system.  It's great "work" if you can get it.  

See, when it comes to money, what goes around really doesn't come around, doesn't it?


  1. Interesting article, the root cause of banks not lending is not obvious to me, Is it because banks have tightened their lending rules or is it because lenders no longer qualify because they are already having too much debt?

  2. Or could it be a simple lack of demand for loans?

    1. Perhaps. Consumers have moved to lower their debt levels and are not credit wary right now. Wage stagnation is probably not helping that.

      I also think that businesses chose to refinance their debt on the lower interest rates and used the savings to finance CapEx rather than borrow more. There is also evidence to suggest that companies are not finding investment opportunities and they keep doing stock buybacks and special dividends.

      If businesses would use the excess cash and distribute it to their employees as salary increases, it would, I think, do more for the economy than anything Yellen can dream up.

    2. If businesses would use the excess cash? Oh wow, don't let the government catch you saying that. They might give you the Saddam treatment. I learned in my economics classes over and over again that the source of all economic activity is demand. It amazes me how many Americans think the problem with this country is that the minimum wage is too high. I agree with you, in all seriousness. The wealthy are hoarding the cash.

  3. The authorities are acting primarily to prop up governments as well as the economy by saving the financial system. It is important to remember these authorities are politicians and bureaucrats that want increased power and influence, and guess what, they may have hit the jackpot by joining with the banks to create the "Financial-Political Complex" that promotes the current financial policy and supports banks that are "to big to fail". These banks then support the government completing the loop. More in the article below.

  4. Great analysis. I personally work in an Indian bank and I can say when credit boom comes people gets mad with giving credit to anybody and when recession came they raise their bars... in turn good businesses/individuals don't get money when they need it.

  5. Read "The Creature From Jekyll Island"

  6. Would a part of the banks holding on to the money be to wait until they can get more interest on the loans?