Friday, October 11, 2013

Get the Picture

I've been living so long with my pictures of you
That I almost believe that the pictures are all I can feel
--The Cure

Banks are piling up huge amounts of 'excess reserves' courtesy of the Fed. Through its various asset buying programs such as QE, the Fed has been lifting bonds and other assets off bank balance sheets in exchange for freshly minted cash.

During 'normal' times, banks would turn around and make loans on those reserves, perhaps to the tune of $10 in loans for every $1 on deposit. Multiply by 2-3 layers of banks and other intermediaries and the pyramid effect might run close to 100:1 in new credit money creation.

But these aren't normal times. Banks aren't lending much. Total loans stand where they were during Lehman in 2008. Instead, most courtesy-of-the-Fed deposits are piling up as 'excess reserves'--i.e., deposits in excess of loans. Currently, excess reserves total about $2.3 trillion.

So, are banks just keeping these reserves on standby waiting for the lending landscape to look more favorable? No, they are using these reserves as collateral for speculation.

Thus the relationship between Fed balance sheet assets and stocks. Fed creates money out of thin air...then puts it in banks in form of 'deposits' in exchange for bonds of various sorts...then banks use these deposits to buy stocks and other securities.

Rather than owning securities outright, banks are prone to use deposits as marginable collateral to buy derivatives such as futures. Why? Because derivatives provide leverage--more bang for the buck.

Looking for the next train wreck? How about vanishing excess reserves when prices moves against banks levered in equity and other markets.

Meanwhile, people working at these institutions are getting wealthier at your expense.

Be smart. Know what is going on here. As a sage type suggested to me during the housing bubble run-up: "If you have eyes, see. If you have ears, listen."

position in SPX

1 comment:

dgeorge12358 said...

It appears that Wall Street is not acting as a force for economic expansion, providing access to capital for companies that make things. Rather, it seems, Wall Street is using government bailouts to lever up.
~Maria Cantwell