Banks Don't Lend Money and They Shoot Horses, Don't They?
A reader on SA made this comment: "with what I think is an obligation to get this added liquidity loaned out into the economy. The banks are still not lending, and the economy is floundering. The rates will increase only after we see some decent growth, and some signs of inflation which is needed."
We Natter: Astute observation, however CB's are no longer in that business and the NB's lending abilities have been turfed. Regarding the latter part of your statement, aside from inflation being understated, and the side effects thereof...
Unfortunately, the banks will not lend because of the perverted gravitational force of capital in QEZIRP. This is where the logical disconnect, how can you fear what is tame? leads to a big part of the problem, that being in order to firmly anchor expectations, inflation has been understated.
Thus creating a gross misperception and miscalculation in markets, leading to massive zirp and negative rate debt, and a huge conundrum for those charged with navigating out of the sargasso sea they have led us into: in order for lending to be profitable, and a reversal of the gravitational force of capital, and any hope for a meaningful economic recovery, rates must rise. If rates rise, then servicing the massive debt will become overbearing.
Until rates are raised and/or excess reserves are no longer remunerated and mopped up completely, the banks have no reason to engage in that business model. Leaving the central banks in a gravitational liquidity vortex and conundrum of their own creation which they plan to clean up with IOER and RR. We are about to witness a tight rope walk or balancing act of Houdini-esque proportion.
More to come in... Houdini Has Cornered Himself or The Balancing Act.
For further details, read Salmo Trutta's comments regarding the banking system, here are some relevant excerpts:
1. It is an incontrovertible fact: the commercial banks are never financial intermediaries (conduits between savers and borrowers), in the savings-investment process. The commercial banks (as a system of banks), never loan out existing demand deposits, or time (savings) deposits, or the owner's equity or any liability item.
The NBs are the CB’s customers, and all the NB’s demand drafts clear thru the CB’s (payment and settlement system). Every time a CB makes a loan to, or buys securities from, the non-bank public, it creates new money: transaction deposits - somewhere in the commercial banking system....
(THAT WOULD MAKE IT INFLATIONARY)
2. The ABA is entitled to such ignorance (that commercial banks loan out existing funds, that they are financial intermediaries in competition with MMMFs, that funds flowing to the non-banks change the size of the CB system, that “tight” money results in high interest rates, etc.), but professional economists should know how the system operates, i.e., it is a Keynesian conceptual illusion that the money stock can be controlled through the manipulation (pegging), of interest rates.
3. Lending by the commercial banks is inflationary. But lending by the non-banks is non-inflationary, ceteris paribus (depending upon the allocation of available credit). Bankrupt U Bernanke destroyed non-bank lending (pre Great-Recession, 83 percent of the lending market), and then de-incentivized lending by the commercial banks. (IOER, Repo, QE, ZIRP)
See: CB vs. NB lending.
Lester V. Chandler at the 1961 Conference on Savings and Residential Financing in Chicago, Illinois
Since the recession, money stock growth rates would have to more than double to compensate for the decline in non-bank lending, i.e., to get reflation.
We Natter: Astute observation, however CB's are no longer in that business and the NB's lending abilities have been turfed. Regarding the latter part of your statement, aside from inflation being understated, and the side effects thereof...
Unfortunately, the banks will not lend because of the perverted gravitational force of capital in QEZIRP. This is where the logical disconnect, how can you fear what is tame? leads to a big part of the problem, that being in order to firmly anchor expectations, inflation has been understated.
Thus creating a gross misperception and miscalculation in markets, leading to massive zirp and negative rate debt, and a huge conundrum for those charged with navigating out of the sargasso sea they have led us into: in order for lending to be profitable, and a reversal of the gravitational force of capital, and any hope for a meaningful economic recovery, rates must rise. If rates rise, then servicing the massive debt will become overbearing.
Until rates are raised and/or excess reserves are no longer remunerated and mopped up completely, the banks have no reason to engage in that business model. Leaving the central banks in a gravitational liquidity vortex and conundrum of their own creation which they plan to clean up with IOER and RR. We are about to witness a tight rope walk or balancing act of Houdini-esque proportion.
More to come in... Houdini Has Cornered Himself or The Balancing Act.
For further details, read Salmo Trutta's comments regarding the banking system, here are some relevant excerpts:
1. It is an incontrovertible fact: the commercial banks are never financial intermediaries (conduits between savers and borrowers), in the savings-investment process. The commercial banks (as a system of banks), never loan out existing demand deposits, or time (savings) deposits, or the owner's equity or any liability item.
The NBs are the CB’s customers, and all the NB’s demand drafts clear thru the CB’s (payment and settlement system). Every time a CB makes a loan to, or buys securities from, the non-bank public, it creates new money: transaction deposits - somewhere in the commercial banking system....
(THAT WOULD MAKE IT INFLATIONARY)
2. The ABA is entitled to such ignorance (that commercial banks loan out existing funds, that they are financial intermediaries in competition with MMMFs, that funds flowing to the non-banks change the size of the CB system, that “tight” money results in high interest rates, etc.), but professional economists should know how the system operates, i.e., it is a Keynesian conceptual illusion that the money stock can be controlled through the manipulation (pegging), of interest rates.
3. Lending by the commercial banks is inflationary. But lending by the non-banks is non-inflationary, ceteris paribus (depending upon the allocation of available credit). Bankrupt U Bernanke destroyed non-bank lending (pre Great-Recession, 83 percent of the lending market), and then de-incentivized lending by the commercial banks. (IOER, Repo, QE, ZIRP)
See: CB vs. NB lending.
Lester V. Chandler at the 1961 Conference on Savings and Residential Financing in Chicago, Illinois
Since the recession, money stock growth rates would have to more than double to compensate for the decline in non-bank lending, i.e., to get reflation.
Comments