Here is an odd development; US commercial banks are again accumulating deposits at the Federal Reserve. These deposits shot up around the time of the Lehman crisis. At the same time, the Federal Reserve started to offer interest rates on deposits. As the Lehman liquidity crisis subsided, banks ran down their deposits at the Fed. More recently, Banks have again started to stash their cash back with Bernanke.
I have no idea why.
4 comments:
The system is now set up so that the banks can make operating profits. I think they are depositing those with the Fed at the end of the quarter for accounting reasons, so that their books look good.
Eventually some of this money will , I suppose, have to be dripped into the ocean of their toxic balance sheets.
They ought, though, to be lending this money out.
They most certainly should not be lending this money out. They should be acting in the best interests of their shareholders and taking what appears to be the most profitable course of action. Their books are in a terrible state. Many of the big banks are not close to solvency and the assets that they are marking to myth are worth much less than they claim. They are levered up to ridiculous levels and need to gear down. They need to keep cash against which they can take further write downs. And they need to keep cash to bolster capital cushions which are at this point quite meagre.
And, as far as the loans are concerned, it takes two to tango. Consumers are cutting back borrowing as well. People are building up their own personal balance sheets by paying down debt. At least fiscally prudent people are doing that as the employment market is looking just a little grim.
Only the reckless and feckless are trying to increase their borrowing now and rightly the banks are not terribly excited about extending loans to this group.
Can't fault your arguments, but if the objective is to reflate then the money given to the banks ought to be lent out. As the President says a dollar given to the banks is 8 or ten dollars they can loan. If they are insolvent without the money they should go bankrupt and the system can be cleansed.
The banks objective, though, is not and should not be to reflate. The banks objective is to make a profit for the banks' owners: the shareholders. To ask them to act in any other way is to ask them to ignore their fiduciary responsibility to their shareholders which is in fact illegal. Banks do not exist for their customers any more than I exist for my employer. They exist for their owners as I exist for myself.
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