US Commercial Banks: the Turkeys Are Stuffed

by ilene - November 24th, 2009 11:37 pm

US Commercial Banks: the Turkeys Are Stuffed

The increase in the monetary base created by the Fed’s monetization of debt is striking, not seen since the early stages of the Great Depression.

[click on charts for larger views]

Banks are not lending despite the massive quantitative easing. They are fat with reserves, paying huge bonuses again, and obviously doing something with their money other than providing funds for the commercial activity of the nation.

Excess Reserves are an accounting function. The banks themselves do not reduce their reserves significantly through lending in the aggregate, but seek to minimize the opportunity cost of reserves. But it is symptomatic in the sense that the lack of reserves is most definitely NOT an issue with lending.

No one can deny with any credibility that if the Federal Reserve reduced their payment on reserves to zero, or even a negative, that lending activity would not increase. And yet they do not. Why?

Because the first priority of the Fed is the health of the banking system itself, and not the national economy and the availability of credit to non-banking institutions. They are seeking to drive commercial entities out of secure savings to risk investment again, but providing a safe harbor for the banks while they are doing it, while attempting to maintain the appearance of financial system solvency.

The critical, unspoken factor is that the US banking system is not yet healthy, is not sound, is not well capitalized despite the record expansion in the monetary base and its specific direction to the banks themselves. They have simply not taken the writedown necessary to make themselves financially sound, because they do not wish to take the hit to earnings, salaries, stock options and bonuses.

Ben Bernanke’s gambit is as much financial fraud as it is a monetarist exerperiment in cynicism with regard to the management of a nation’s money.

Tags: Banks, Ben Bernanke, Fed's monetization of debt, lending, monetary base, money suppy, reserves

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The Speculative Bubble in Equities and the Case for Deflation, Stagflation and Implosion

by ilene - October 11th, 2009 8:00 pm

The Speculative Bubble in Equities and the Case for Deflation, Stagflation and Implosion

Courtesy of Jesse’s Café Américain

As part of their program of ‘quantitative easing’ which is another name for currency devaluation through extraordinary expansion of the monetary base, the Fed has very obviously created an inflationary bubble in the US equity market.

Why has this happened? Because with a monetary expansion intended to help cure an credit bubble crisis that is not accompanied by significant financial market reform, systemic rebalancing, and government programs to cure and correct past abuses of the productive economy through financial engineering, the hot money given by the Fed and Treasury to the banking system will NOT flow into the real economy, but instead will seek high beta returns in financial assets.

Why lend to the real economy when one can achieve guaranteed returns from the Fed, and much greater returns in the speculative markets if one has the right ‘connections?’

The monetary stimulus of the Fed and the Treasury to help the economy is similar to relief aid sent to a suffering Third World country. It is intercepted and seized by a despotic regime and allocated to its local warlords, with very little going to help the people.

Deflation

By far this presents the most compelling case for a deflationary episode. As the money that is created flows into financial assets, it is ‘taxed’ by Wall Street which takes a disproportionately large share in the form of fees and bonuses, and what are likely to be extra-legal trading profits.

If the monetary stimulus is subsequently dissipated as the asset bubble collapses, except that which remains in the hands of the few, it leaves the real economy in a relatively poorer condition to produce real savings and wealth than it had been before. This is because the outsized financial sector continues to sap the vitality from the productive economy, to drag it down, to drain it of needed attention and policy focus.

At the heart of it, quantitative easing that is not part of an overall program to reform, regulate, and renew the system to change and correct the elements that caused the crisis in the first place, is nothing more than a Ponzi scheme. The optimal time to reform the system was with the collapse of…

Tags: currency devaluation, financial oligarchs, Glass-Steagall, hyperinflation, monetary base, quantitative easing, Speculative Bubble, US equity market

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Mish “Hard Money” Goes Off The Rails

by ilene - October 6th, 2009 1:26 pm

Here’s another installment in the debate between our friends Mish (Global Economic Trend Analysis) and Karl (The Market Ticker). Confession – as a big fan of both Mish and Karl, each makes good arguments, I’m currently undecided. What do you think? Don’t forget, we have a comment section. Ilene

Mish "Hard Money" Goes Off The Rails

Courtesy of Karl Denninger at The Market Ticker

off the rails I am occasionally stunned when someone who I thought had a good grasp of reality and reason goes entirely off into left field, powered by a thesis that has run out of track.

Mish, unfortunately, has succumbed to this sin in his piece "Fractional Reserve Lending Constitutes Fraud"

He alleges (after waving his arms around):

Fractional Reserve Lending constitutes fraud. The case is irrefutable.

Bluntly: Bullshit.

Let us distinguish between two separate items: Money and Credit.

We shall first define them:

Money: The product of either growing something, mining something or manufacturing something. "Money" is actual wealth, and comes into being only through creation. Ultimately, all money is traced to the only "free lunch" that exists in this solar system, that is, the power of The Sun, although in many cases (e.g. mining) the activity is in fact discovery of previously-created wealth (by the actions of The Sun) levered through human endeavor.
Credit: The granting of purchasing power predicated upon a future promise to pay with money.

Mish’s (and others) claim that "all fractional lending is fraudulent" implies that one cannot pledge money to secure credit.

That’s obvious BS; let’s put forward a concrete example.

I walk into the forest (grow) and cut down trees (mine) which I then process into lumber (manufacture.) I dig up some iron ore (mine) and turn it into steel nails (manufacture.) With these two items I now construct a house (manufacture.)

That house (and all the products that I used to make it) are in fact money. They were the product of mining, growing, and/or manufacturing. Each of these acts is in fact the creation of money.

That house, has a representation of money in its utility value. That is, the shelter value that it has for a group of humans – it provides a place to eat, sleep, take a dump and

…

Tags: credit-based monetary systems, debate, fiat money, Fractional Reserve Lending, Karl Denninger, Mish Shedlock, monetary base

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Money Markets are the New Suspenders

by ilene - September 29th, 2009 3:04 am

Money Markets are the New Suspenders

By EB, courtesy of Zero Hedge

The Financial Times recently reported on the Fed’s latest exit strategy to eventually contain the inflation zombie:

During the crisis, the Fed created roughly $800bn of additional bank reserves to finance asset purchases and loans. This total is likely to rise in the coming months as the central bank completes its asset purchases and the Treasury unwinds financing it provided to the Fed. Fed officials think they could raise interest rates even with this excess supply of reserves by offering to pay banks to deposit their surplus funds with it rather than lend them out. However, they also want to use reverse repos in tandem to soak up some of the excess reserves. Policymakers call this a “belt and braces approach”. [The latter, clearly a nod to the great Gekko.]

nice suspenders, zero hedge TD touched on this last Thursday, and we will expand upon it here as it is particularly relevant to our ongoing theory that it is the proceeds from permanent open market operations (POMOs) and their close cousins that are driving equities. Though this may be received wisdom to ZH readers, the Fed has done us the favor of providing additional evidence through the FT story. A bit of background, as we are new contributors to this forum:

Money Supply: Based on our previous research on the effects of swings in M2 non-seasonally adjusted money supply (M2) on the stock market, we were a bit surprised in July 09 by the resiliency of the rally, which continued in the face of such a dramatic contraction in M2. The dismal Durable Goods report from last Friday confirms that the capital goods sector is still under significant pressure as a result of a lack of money in the general economy. With banks not lending to normal businesses and consumer credit contracting equally as violently, what is the basis for this rally and from where does the never-ending flow of equities juice flow?

Bank Non-Borrowed Excess Reserves: The Fed statistic that most closely correlates with the 2009 equities run-up appears to be bank non-borrowed excess reserves (bank NBER), which

…

Tags: Bank Non-Borrowed Excess Reserves, Banks, bubble, consumer, credit, Equities, Excess Reserves, FED Federal Reserve System, hedge fund, Housing, inflation, Interest Rates, Investing, M0, M2, MBS, monetary base, Money, money market, Money Supply, mortgage backed securities, Open Market Operations, Permanent Open Market Operations, POMO, primary dealers, Reverse Repo, stocks, Wall Street

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Dow Jones vs. the Monetary Base Chart

by Chart School - September 28th, 2009 5:44 pm

Dow Jones vs. the Monetary Base Chart

Courtesy of Andy Kessler

This chart ran along with The Bernanke Market piece that ran in the Wall Street Journal back in July. I thought it was worth updating. The market seems to be following the Fed’s money creation. I suspect the market will give out well before the Fed stops printing money.

The monetary base data is from this page at the St. Louis Fed. WSBASE is defined as the "Sum of currency in circulation, reserve balances with Federal Reserve Banks, and service-related adjustments to compensate for float."

Tags: Equities, monetary base, Stock Market

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Dow Jones vs. the Monetary Base Chart

by ilene - September 28th, 2009 2:02 pm

Dow Jones vs. the Monetary Base Chart

Courtesy of Andy Kessler

This chart ran along with The Bernanke Market piece that ran in the Wall Street Journal back in July. I thought it was worth updating. The market seems to be following the Fed’s money creation. I suspect the market will give out well before the Fed stops printing money.

The monetary base data is from this page at the St. Louis Fed. WSBASE is defined as the "Sum of currency in circulation, reserve balances with Federal Reserve Banks, and service-related adjustments to compensate for float."

Tags: Andy Kessler, monetary base, Stock Market

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WSJ: The Bernanke Market

by ilene - July 15th, 2009 12:02 pm

Andy Kessler may have the answer to why the market keeps going up, even in the face of enduring economic pain (if you look beyond the ever rising indexes).

WSJ: The Bernanke Market

Courtesy of Andy Kessler

http://online.wsj.com/article/SB124762005061042587.html

I remember once buying the stock of a small company and I couldn’t believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

[Commentary] the dow tracks the money supply

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn’t translated into growth.

At the end of the day, only one thing has worked — flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup,

…

Tags: Andy Kessler, Ben Bernanke, Economy, flooding the market with dollars, mark-to-market accounting, monetary base, Mortgages, toxic mortgage assets, U.S. treasuries

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