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Charting The Biggest Structural Problem For US Banks, And What The Market Expects From Jackson Hole, Version N+1
Sometimes the general public can get confused in attempting to explain the complexities and the inefficiency of the banking sector when one simple chart brings the message home. A chart like that comes from the latest "Eye on the Market" from JPM's Michael Cembalest, who compares total bank deposits ($8.4 trillion), or bank liabilities, and total bank loan (about $2 trillion less) assets, or sources of cash flows that are supposed to fund bank liabilities and generate retained earnings, while the bank performs credit, maturity and risk transformation: a bank's three key functions. As the chart below shows, perhaps the primary reason why the economy is in its current deplorable state, is that instead of lending dollar for dollar to catch up with deposit growth, banks now rely on roughly $1.7 trillion in excess reserves with the Fed, an amount roughly equal to the difference between total deposits and loans, to plug the credibility gap. This also explains why according to Cembalest one of the expectations by the market from Jackson Hole is that IOER will be cut to 0% to promote bank lending, and thus the conversion of reserves into loans (something which the inflationistas out there will tell you is a big risk to a sudden surge in out of control inflation). So how does the Fed's direct intervention in bank balance sheets look like? Here it is.
What this chart demonstrates is that banks, whose liabilities (deposits) are collateralized with IOER-interest bearing reserves, will sooner or later be forced to transform these holdings into risky loan-based assets. The question is whether there is enough cashflow-worthy collateral to absorb this transformation of about $1.7 trillion in fungible money. It also means that endogenous risk in the banking system will spike if and when the Fed weans banks to pull away from the safety of the IOER window, and into the far riskier, and far better paying real world.
As for the 4 things which Cembalest believes the markets expect from the Fed, here they are:
- make long-term interest rates lower even though they’re already low (2.2% on 10 year Treasuries), perhaps through some kind of “Twist” operation that also removes shorter-term liquidity
- add liquidity through asset purchases even though there’s plenty of it in the system
- “encourage” banks to lend more money by eliminating interest on excess reserves held at the Fed, even though banks are struggling with insufficient loan demand, and surveys show a substantial relaxation of lending standards
- buy corporate bonds, even though investment grade spreads are 85% of their way back to 2007 levels
As noted earlier, we believe the logic on Twist may be inverted, as further flattening on the 2s10s will perversely further impair the banking sector due to a complete collapse in net interest income, and with BAC already trading a dollar away from a toxic death spiral, this is not something the Fed would like to risk. That said, since we do not have an Economic Ph.D., and according to Dr. Nouriel Roubini, we represent the anti-intellectual, lumpenproletariat of the far too democratic blogosphere, and should just keep our mouth shut, we could well be wrong. Surely, however, even Bernanke realizes by now that there is far too much priced into his speech: should he disappoint the market and not announce even the possibility of one of these four, then the warning from BAC that flawed policy decisionmaking could result in the biggest crisis since 2008, may be about to come true.
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Read this speech Bernanke gave to the Japanese bankers in 2003.
http://www.federalreserve.gov/boarddocs/speeches/2003/20030531/default.htm
Basically he says that a good portion of the debt we owe to ourselves and we should have tax cuts equal the amount he zeroes out with the Treasury.
Net-Net : The amount of debt decreases as well as the amount we spend on interest decreases.
Of course this will send the Chinese in a tizzy since we're openly printing, but the tea baggers will go along since there is no effect on the debt or deficit.
Exactly constantine, now will we still get an "on the books" update from NYFED.org regarding outright securities purchases detailing date, quantity and duration or will holding the short end down require monetization which is not documented apart from an implied calculation which would have a much less dramatic impact on the marketplace.
Increasing loans wont necessarily improve business conditions. This ignores a lot of the issues facing the economy today. Lack of growth prospects.
Hence, the quivering lip, twitchy beard and mass beads of sweat on the baldy noggin of The Bernank during speech making...
http://goldsilver.com/news/money-banksters-and-august-2011-the-coming-si...
some time back i was looking at a chart by Nadeem Walayat.......everytime Roubini comes out and shouts CHRASSHHHH......
stocks actually rise higher !!!!!!!
The bollinger bands are going to get stretched wide......ha ha
Awesome the battle of the tweets. I predicted this would be a heavy weight championship : ZH bears, reductionist gold bugs vs Roubini global keynesian play in regulated markets; As economics is essentially a POLITICAL game where the maths can be fudged by TPTB though money printing, lets see if the ZH thesis that deflationary maths can never be cheated by the inflationary printers will knock out those like DSK and Roubini who advocate, selective deflation and manipulative global inflation to ease macro pain and reestablish structural symmetries.
The size of the debt write off in private banks and the increase in government taxes to reduce sovereign debt these globalists advocate, and the resultant market mayhem and liquidity crunch in disorganised "every man for himself" oligarchic play, is the bitch for 'orchestrated' biflation.
What a jugglers act this is!
Excess reserves? Are you kidding me? What they have an excess of is shit, that is marked-to-myth. That's what they got.
Fire sale the pricks. Fire sale. Fire sale. Fire sale.
"Charting The Biggest Structural Problem For US Banks, And What The Market Expects From Jackson Hole."Corn - and its not popped it is inserted rather roughly.
well that's the way I'm betting.
He would not dare to do the Child -Thrice - Publicly.
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