$440 Billion Drop In Shadow And Conventional Banking System Liabilities In Q4 Gives Bernanke Carte Blanche For QE3

Tyler Durden's picture

When we last updated on the size of the shadow banking system, the financial "system" that is far more important to the economic prosperity of the US economy than the traditional liabilities held by conventional banks, we observed that after declining for 9 consecutive quarters, having hit a peak of $21 trillion in 2008, the shadow banking system had reached an inflection point and had posted a very modest increase at around $16 trillion in total liabilities in the third quarter of 2010. Well, following yesterday's Z.1 release, it seems the bulk of the data was revised, and it appears that not only was last quarter's upward pre-revision data a fluke, when in reality it was another decline of $191.7 billion, but the Q4 data further reinforced the negative trend, with shadow liabilities declining by an even greater $206.4 billion. The components responsible for the decline were ABS Issuers whose liabilities declined by $94 billion, securities loaned by funding corporations declining by $40 billion and lastly repos, which dropped by $79 billion. In other words, speculation that the Fed had achieved its goal of stimulating an organic reflation in the shadow banking system at which point it would be able to end QE and hand off releveraging over to the private sector were premature, and recent data confirms that the Fed has no choice now but to continue with its quantitative easing process, as it does more of the same: take capital from the public sector and proffer it to Primary Dealers in an attempt at ongoing asset reflation, which will, the theory goes, be matched by a comparable hike in liabilities.

So far this theory has been a massive disaster with 11 consecutive quarters of shadow banking liability declines. And where it gets far worse, is that after 5 consecutive increases in traditional bank liabilities which hit a record $13.1 trillion in Q3 2010, this number declined by $231 billion in Q4 to $12.8 trillion. Thus the combined move in Shadow and Traditional Banking liabilities was a whopping $438 billion in Q4!

Unfortunately, while events from Japan this morning may or may not be a catalyst for further QE, the biggest clue as to what the Fed will do is in the charts below.

Shadow banking subcomponents:

Sequential change in shadow banking liabilities:

Combined shadow and traditional bank liabilities:

Sequential change in shadow and traditional bank liabilities:

Botton line - Bernanke has once again failed to spark a "virtuous leveraging cycle" even with QE2, which after all is the fundamental goal of the Fed, far beyond even getting the Russell 2000 to 2000. Which means that the Fed will have no choice but to continue "printing" money, and monetizing bonds, as it (in conjunction with the Treasury of course) continues to be the only incremental source of leverage, and thus money, for the world's biggest economy.

Source: Z.1


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TimmyM's picture

Revenge of the liquidationists.

Bernank-demand for credit is not a toy!

bankrupt JPM buy silver's picture

QE, its the silver bullion gift that never stops giving.



bonddude's picture

In Sonoma the QE never stopped until the bank closed.

Dirty bankers gave the bank away to this guy Bijan Madjlessi

who busted out INDYMAC and several other banks for $400 Million +++

Pressdemo.com a NYTimes paper about to drop another bomb.

SIGTARP, FBI, IRS all cleaning up up after the FDIC. The latest bribery

outlined for you.


Careless Whisper's picture

why does everyone keep calling it QE whatever? most people don't know what that means. isn't it just "the printing more money plan" ? anyone who has a good name for it please post.


bonddude's picture

Who is Hower and what did he contribute to Sonoma Valley Bank and Charter Oak Bank's



B9K9's picture

It's too bad TD booted Mako - he was referencing the Z1 before most people had even clued in. That guy, along with Trav, had this whole thing figured out from the beginning.

Once again kids: when speaking of our "economy", there is simply nothing that compares to the pure heroin rush of credit money instantly being created when John & Jane Q. Sheep sign on the bottom line.

But what compels the sheep to sign such a fateful document that reduces them to a lifetime of debt peonage? Riches, dear readers, riches. Ah, the age old dream of the prospect of easy returns. Hence the great 'con'; gotta get the sheep believing it's all gravy from here on out.

That's what QE has always been about - gin the markets & hit them with the biggest propaganda campaign in living memory. Convince them to 'get in on the bottom' or be 'priced out forever'! Ben has always known there's no way the Fed or any institution can actually offset (ie print money) the credit component of the credit-money system when credit aggregates comprise around 95% of the total.

So the game has always been to get the sheep moving yet once again. The problem is, nothing has yet appeared or looks like likely to appear to get those good ole' animal spirits flowing again. Perhaps it has to do with people 50+ pretty much set in their ways? Um, that would be boomers who are done participating in the 'consumer economy'? Or, perhaps there simply isn't enough (cheap) raw material in which to fuel another mad binge (hint: oil).

The true cynics believe the insiders alway knew this to be the case, so they merely exploited both fed.gov & Fed policy to maximize their escape loot. Well, we shall see if they actually manage to get far enough away.

equity_momo's picture

Mako got booted? Why and when?  My time reading this blog ebbs and flows but i found him thought provoking. What did he say that required a boot?

jdrose1985's picture

his blog


world darkest days


also check out hypertiger


hypertiger wisdoms


google is your friend


mako definitely had it right and knew his shit about debt and lack of standing to foreclose. he was definitely getting close to the root. i doubt he knew about private copyright law and the power associated with it.....

Rick64's picture

Have to agree that Mako knew what was going on before most and really educated me on the bigger picture. I don't think he got booted, probably just grew tired of people not understanding.

equity_momo's picture

People are prepared to believe in the Afterlife , heaven and hell , religious stuff , Aliens , Britney Spears.  But they arent prepared to believe in cold , hard math.  I find that incredibly depressing.

Ive given up talking to friends , family and colleagues about it. I have managed to open the eyes of 2 people fully. Maybe 1 , as 1 is my wife and i think she just trusts my judgement but doesnt really comprehend why.  Even friends and colleagues i know who are relatively intelligent dont want to go the whole way and get to grips with our future governed by the law thermodynamics.


Rick64's picture

 I think many people especially on ZH can relate to that, I know I can.

tarsubil's picture

Holy uber doomer batman. Man, wow.

centerline's picture

LOL.  Hypertiger is quite a read for sure.  Mako was too - until he "got frustrated."  I do miss reading his posts.

What really stinks is that these guys are most likely right regarding the bigger picture.  I'm talking the picture beyond the details of the current fiat circle jerks, asset bubbles, daylight bank robberies (by the bankers of course), etc.  So I suppose it is with some degree of irony we here are glued to watching the train wreck in such detail, considering that we are passengers on said train.


Double down's picture

Read his blog, Mako is insightful, but he was also a shrill whiner who always knew best.  Smart but disagreeable.  Everybody has a past and intentions are always suspect.  No shit people here come from somewhere and may have motives. 



Cash_is_Trash's picture

Blew my mind away. Really good stuff.

Muir's picture



I've said it before here.

In this economy credit = money.

Destruction of credit = destruction of money.

Therefore, destruction of credit = deflation.



Arthor Bearing's picture

Yeah the bugs seem to forget about those hundreds of billions of dollars in derivatives exposure, literally an off switch for the economy which would send the value of paper dollars through the roof- bank runs, massive deleveraging, people scrambling every way for cash. This is a better outcome for banks which are net creditors. Watch yourselves

clymer's picture

Doesn't matter - PM's protect in inflation, and hold their value in deflation (in nominal terms); in a deflationary collapse you would get less dollars for your gold, but you would get more fuel, clothes, food for your dollars.


Either way, you're likely wrong on this, as a deflationary even of any real magnitude would prove even more damaging to the FED's already failed credibility; at least most of the lib's are supportive of the FED currently, as long as they believe the spigot will remain open. Once it stops, Ron Paul gets more bi-partisan ammo to shed light on the temple, because congress cannot ignore constituents shivering in the dark (as much as they would like to)

impending doom's picture

Bravo on all except the RP BS. He is a distraction. Notice how he berates Bernanke on CSPAN, yet no perp walk or better yet guillotine walk...

clymer's picture


What can he do? He is one against 434

impending doom's picture

Sad that we leave the fate of the free world on the shoulders of a 70 year old man. I can only shout this so loudly at my office mates w/o attracting attention. I thought it might go over better here.

clymer's picture


76 years old.. He'll make a great president.

impending doom's picture

Why, because they'll kick his cane to the side and give him a boot party? No offense, i agree with his tenets, just think it's more kabuki for the faithful...

clymer's picture



We're short on options. For example, I don't think the likes of a Scott Brown in my home state of the peoples republic of MA has the sack to stand up to the machine (not that I hold his sluttines against him, as i'm kind of a slut myself). Who else do we have? we're freaking doomed

impending doom's picture

How about you? Or me? Or any of us? Get out of the lazy American mentality! The means are in front of us right now. I'm trying in my community, what are you doing? If you're waiting for a savior, only Mussolini will come.

pyite's picture

Double Eagles have a $20 face value too, in case you are really desperate for a couple of cases of Busch Lite or something.


cosmictrainwreck's picture

thanks for posting....I've missed yer jugs

tarsubil's picture

I don't care what you say. You're awesome.

Double down's picture

With respect I disagree.  Paying for something with credit does not confer ownership even if the credit risk is assumed by a third party.  Currently, FRNs are the only things net of default that can extinguish debts.  Their value lie (among other things) in the anxiety of the payment plan of the encumbered.  This is why cash is valuable and always in short supply.  As long as the level of debt of all the encumbered appear to be manageable there will be value to cash.


My 5 cents    

A Man without Qualities's picture

"The true cynics believe the insiders alway knew this to be the case, so they merely exploited both fed.gov & Fed policy to maximize their escape loot."

I had this conversation in March 09 with a senior exec at one of the TBTFs.  He was more candid than ever before or since, and said he thought they would try to reflate the bubble one more time, but it wouldn't work and the next bursting would be the point at which they'd recognize they need to change the system.  He said the problem was nobody was able to lend, I said the problem was nobody who could pay back wanted to borrow - we were probably both right.

My take for the last decade is the US economy is actually the biggest disaster in the global economy, for all the issues with Europe, Japan or China.  I don't believe much of the official data, especially GDP and inflation and the only thing staving off collapse was the exponential growth in credit or M3.  

As for personal wealth, the people in charge aren't willing to pay people decent wages, as they need all the money themselves, so a housing bubble and equity bubble are the best way of distracting the middle classes away from noticing how badly they are being screwed.  The only problem with bubbles is they keep on popping.  We continue to mistake a solvency crisis for a liquidity crisis and the banking system is too leveraged to be able to withstand realistic write downs, so we continue pumping air in to the tire without trying to mend the puncture...

prophet_banker's picture

OR maYBE the banks and consumers who make and take the loans[new money creation] share this in common "don't really think it could be paid back in this economy"; confidence is everything in the con game, we agree on that




-thus money supply shrinks

DaveyJones's picture

a "carte" is what we'll need

masterinchancery's picture

There is no such thing as a "virtuous leveraging cycle." Just bubble-blowing.

covert's picture

why does the federal reserve have any ties to the federal govt? isn't it just another banknote printing company?



The Axe's picture

Political situation will not allow Q3, as the growing number of voting and non-voting members of FED..against Q3...not going to happen...

unwashedmass's picture


i sincerely doubt that. the last year, if nothing else, should have showed you that we are peasants -- no one gives a damn about how you feel about this, or how exploited you are....

come on, the Congress is in the pocket, the CTFC....well, all you have to do is look at what's happening at the Comex today to get a drift of where they stand.

we're a banana republic with an unelected dictatorate -- the big banks and Ben.

MachoMan's picture

We will desire austerity up until the time it actually affects us...  It's going to be the same merry-go-round we always have...  key vote coming up, support withdrawn to spook the herd, money gets appropriated.  Are you suggesting that the debt ceiling will not be raised and we'll be budget neutral/surplus in perpetuity?

There will be much jaw-boning and posturing before the debt ceiling is raised.  There will be some austere conditions imposed, but they will be a far cry from anything reasonably necessary to make a fruitful dent in our obligations.  Once we are fearful of falling off the cliff again, we will capitulate on additional QE.  Further, this approach presupposes that QE will be announced and in the public eye...  successive QEs will be more and more steathily crafted...  but, will be stimulus/hand-outs/theft none the less.

I agree that the political situation presents constraints to further printing, at least in form...  and, prospective QE may be successively smaller in size...  but, that does not mean QE will be eliminated.  In the end, there has been no organic recovery and, as a result, we have to be willing to accept the full pains of deleveraging should QE be removed.  I have sincere doubts about our resolve in this regard.  I suspect we will end up borrowing til bust and then repudiating.

Lord Koos's picture

Rest assured that the austerity will be imposed on those who can afford it the least.  That's how the IMF fucked the third world & that's how it will happen here too.

Rogerwilco's picture

I agree, they can't continue QE in this climate. If the Fed allows the USD to fall any further, all will be lost. The ball is now with the politicians and they need to find/beg/borrow/steal enough to fund the circus. Extend and pretend options yet untried are:
1) a new war (annex "failed" Mexico?)
2) forced repatriation of corporate profits via punitive taxes on cash "hoards"
3) a raid on private retirement accounts
4) nationalization of the banks

nathan1234's picture

All is already lost.

Only those who recogonize this can survive.

Rogerwilco's picture

The Fed deals in dollars. It makes no sense for them to allow the complete decimation of their only line of business. Bernanke will permit a certain range of movement in the DX as he balances the various demands, foreign and domestic. He will not allow dollars to become worthless.

GoinFawr's picture

They already are worthless.

What you mean is 'they', along with all the other central banks 'they've' infiltrated worldwide, will do whatever 'they' can to maintain the illusion of comparative value of the USD amongst all (fiat) currencies, because that is all they can really do. The perceived value of any fiat relies solely on the issuers ability to force people to accept it and use it; guess what is waning when it comes to the USD.

But all fiat currencies are falling in perceived value compared to counter-party-risk-free assets; which always happens eventually. Unless you think it's different this time?

You seem to be operating under the misapprehension that the USD operates in a sort of hegemonial vacuum. It doesn't, at least not anymore.


BigJim's picture

I like your thinking viz previous suggestions for US options. After all, Mexico is 'failing' to end the paramilitary violence on the border, killing our law enforcement agents and endangering our children with evil ganja!

But ultimately, the Fed is less concerned about the US government's finances than it is with the profitability of its owners - the big commercial banks. So I can see the US government pulling all those stunts, and the FED indulging in further QEings.

I understand your concern with the USDX, but the Euro is the main alternative at the moment and look what kind of shape that's in.

The politicians will do what they're told by the money power. They'll posture and wheeze but eventually enough of them will fall in line. That is, after all, what they're there for.

impending doom's picture

Maybe we should stop supplying them with automatic weapons...