Here's a simple graph that goes a
long way to explaining why the recovery has been so modest despite Mr.
Bernanke's (and presumably Ms. Yellen's) Grand Experiment with interest rates:
The red line shows deposits with all commercial
banks and the blue line shows loans and leases with all
commercial banks in billions of dollars. Notice that until the Great
Recession, the growth level in both deposits and loans and leases rose in
tandem. It is quite apparent that the tight relationship between deposits
and loans broke down in the early part of 2009.
Here is a graph showing the
loan-to-deposit ratio and how it has dropped to levels not seen since the early
1980s:
Right now, banks are only lending 76 percent of their deposits, a level last seen in June 1983. Also note that the drop in lending-to-deposits is showing no sign of abating.
Let's flip loans and deposits around
so that we end up with the ratio of deposits-to-loans as shown here:
Right now, banks are taking in $1.31
in deposits for every $1 that they loan to consumers and businesses. This
is up quite markedly from $0.98 in deposits for every dollar that they loaned
in May 2008.
Here is a graph showing the excess
of commercial bank deposits over the amount banks have loaned:
Between 1973 and 2009, the excess of
deposits over loans never rose above $433 billion and was generally below $400
billion. In contrast, in October 2012, deposits exceeded loans by $2.307
trillion, a new record amount. As you can see from the graph, the growth in
deposits over loans is showing no signs of slowing down, a situation that looks
very unhealthy.
So, what is it that banks are doing with the $2.3 trillion in deposits that they are not lending to consumers? Here is a look at the same
loans and leases curve (in blue) with the reserve balances held by the Federal
Reserve Banks (in red):
More than 6000 depository
institutions maintain balances at the Federal Reserve Banks in reserve
accounts. In October 2013, banks had just over $2.311 trillion on deposit
with the Federal Reserve. This is money that is not loaned out and, in
fact, after 2008, the Federal Reserve paid interest on these reserves. By
paying interest on reserves, the Fed could both increase the level of reserves
and maintain control of the federal funds rate by permitting the Fed to expand
its balance sheet to provide the necessary liquidity to support financial
stability.
Just before the Great Recession, the
required reserves (in red) averaged about $43 billion
as shown here:
As you can see, that level changed
once the Fed started paying interest on banks' reserves which have grown to a
level in excess of $2.3 trillion, a 5350 percent increase in five years!
As you can see on the black line which shows excess reserves, banks are
using the Fed as their own bank largely because, since 2008, the interest paid
on both required and excess reserves has stood at 0.25 percent, a completely risk
free return particularly when compared to loaning to consumers and businesses. Prior to 2008, the Fed was not
obligated to pay any interest on bank reserves, providing the commercial banks
with absolutely no motivation to deposit excess monies with America's central
bankers as shown here (in purple):
From the data presented here, it
certainly appears that the Federal Reserve's policies are working against
economic growth. When banks stop lending, the economy stops growing and the Fed appears to have made it way too easy for the commercial banks to invest in lower risk activities.
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