Credit machine not yet fixed

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Although the rates at which banks lend to each other have eased considerably from their peaks, banks have cut back significantly on the amount of money they are actually lending.


Source: Gluskin Sheff

The fact that the money multiplier is breaking down can be seen from in the US Depository Institutions Aggregate Excess Reserves – which are zero in a normal credit environment – continuing to skyrocket far in excess of the amount that banks need to keep on deposit to meet their reserve requirements. The excess reserves now amount to a record $877 billion and reflect the uncertainty about banks’ balance sheets in view of the fact that the value of some assets is not known.

US Aggregate Depository Institutions Excess Reserves


Source: Fullermoney

A peak in the excess reserves should coincide with the global credit system returning to normal levels and liquidity starting to move freely again.

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3 comments to Credit machine not yet fixed

  • Ian Nunn

    Some comments first, on the graph. While the current recession shows the lowest lows for the period shown, it also shows the highest highs. This only tells us that volatility in lending markets is at its highest in 4 decades.

    What we want to see is the mean for the data series and the area between the curve and the mean as a rolling average – say 3 months. This is the only way we can really make a statement about quantitative bank lending that gives us a useful indication of what is happening.

    A loan is a contractual arrangement between TWO parties, a lender and a borrower. It is a symmetrical market transaction in terms of motivation: a desire to lend matched with a desire to borrow. A transaction occurs if and only if there is a mutually acceptable rate. Commentary among economists, eletter writers, and talking heads, almost uniformly focuses on bank action and motivation.

    The statement “banks have cut back significantly” has an implicit intentionality – i.e., that the amount of lending is determined solely by the banks.

    I have seen no data to support this, just as I have seen no data to support the necessarily symmetrical argument that private borrowers have cut back significantly on borrowing.

    We have this wonderful tendency (read Nicholas Taleb) to assign cause after the fact. For example, markets were down a bit yesterday. Well the only event of news was the North Korean nuclear test so that must be – which rapidly translates to “is” – the reason. Otherwise, let us take another look at the entrails.

    So we have all these reasons why the banks “are not lending”, as if they are totally transparent and we are able to analyze their balance sheets and the minutes of boards of directors meetings in fine detail.

    Don’t forget that these are the same institutions most recently infected by rapacious greed. I find it hard to believe that they are happy to sit with close to $900 billion earning “the lowest FOMC target rate in effect during the reserve maintenance period less 35 basis points”.

    Surely there is a price above what the Fed is paying them at which these banks will lend – but maybe not.

    That businesses are suffering from near record overcapacity and consumers are starting to save suggests to me that the demand for loans is down and not the supply.

    Which leads me back to “it’s the economy, stupid”.

  • Frank W

    I don’t see how it follows that banks will start lending again when excess reserves peak. As Ian has said, it is doubtful that there is all that much demand for loans. I mean deleveraging is the topic of the moment. The other thing is that we are soon to enter into another bout of mortgage resets. This period will last about two years and be about as severe as the one that we have just passed thru. Is it any wonder that the banks are hoarding money and stuffing into the vaults at the safest institution they can think of?

  • Ian,
    I’ve continued to receive solicitations for more credit cards from banks. So I agree with you that the banks are not necessarily restricting the money supply…just that people aren’t going out to get as many loans as before.

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