As The Shadow Banking System Imploded In Q2, Bernanke's Choice Has Been Made For Him

Tyler Durden's picture

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the "Twist" is already guaranteed, as is an IOER cut, per Goldman's "predictions" and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman's hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of "credit money." Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama's second term goodbye.

As the two charts below demonstrate, the economy's ongoing inability to create any growth in the shadow banking system, primarily as a result of the complete shut down of the securitization machine, has been and continues to be, the biggest threat to the Fed. Specifically, after hitting an all time high of $20.9 trillion in March of 2008, this all too critical source of "credit money" has collapsed by a whopping 25%: since the peak $5.5 trillion of credit, and not just any credit, but shadow, and thus non-regulated credit, has evaporated! And as Q2 demonstrated, after almost bottoming in Q1 following a decline of just $57 billion, or the smallest Q/Q decline since Q2 2008, the drop has picked up again, with a one year high $278 billion plunge in Q2.

Among the liability components of the Shadow Banking system's credit money abstractions, we look at:

  • Money Market Mutual Funds: at $2.6 trillion, a decline of $41.6 billion Q/Q
  • GSE and Agency Paper: at $6.5 trillion, a decline of $73.8 billion Q/Q
  • ABS Issuers At $2.2 trillion, a decline of $80.4 billion Q/Q
  • Repos at $1.2 trillion, a decline of $49 billion Q/Q
  • Open Market Paper at $1.1 trillion, a decline of $50 billion Q/Q
  • and these declines were offset by a tiny increase of $17 billion to $726 billion at Funding Corporations

Altogether, added across this amounts to a massive $278 billion in the second quarter, and explains why GDP, when the manipulation from the Census Bureau is eliminated would have probably declined. What is worse is that should this decline continue without an offset, there will be no economic growth guaranteed.

So where can said offset come from? Well, just as there is a shadow banking system, so there is a traditional commercial bank system with listed liabilities. To be sure, for the duration of collapse in the shadow banking system, this has been the only offset, although granted one that is not nearly doing a good enough job. Specifically, total liabilities of Commercial Banks in Q2 were $13.4 trillion, an increase of $238 billion in the quarter. Alas, this is nowhere near enough to offset the decline in Shadow Banking, having grown by "only" $2.6 trillion since Q2 2008, even as shadow liabilities declined by double this amount. Yet there was a brief saving grace came in Q1 when the spike in Traditional liabilities more than offset the drop in Shadow, as the cumulative total rose by $337 billion, the most since 2008. Too bad, however, that adding across these two categories (second chart below), we once again witnessed a decline in Q2, amounting to $40.1 billion. This explains not only why QE2 could only do so much, but why GDP growth has rolled over and is now almost certainly negative.

What is most important to keep in mind, is that Traditional Commercial Bank assets only grow courtesy of QE. And with Shadow banking continuing to implode, Commercial Banks have to pick up the slack or else... Which in turn means Bernanke has to keep pumping reserves. Whether banks use these to lend out, or to buy shares of Netflix is irrelevant: remember - America, and the entire developed world, is a credit driven system. Take away credit growth and it is game over.

Which explains why tomorrow's decision is a formality: Bernanke has no choice but to continue offsetting the relentless contraction in shadow liabilities, which as of Q2 collapsed at an annualized rate of over $1 trillion. Incidentally this, +$1, is the very minimum that Bernanke will have to bring into reserve circulation to offset the relentless deleveraging of the once biggest contributor to American growth, which ironically is now the biggest adverse factor.

That reversion to the mean sure can be a bitch.

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SheepDog-One's picture

'The Chairsatans hands are tied'...OK when can we start beating him with the phone books?

Cliff Claven Cheers's picture

This illustrates the shrinking money supply and Ben has to keep printing to offset that, hence the 2% inflation goal.  So when do we get the Hyperinflation with so much debt destruction i.e. write offs?

nope-1004's picture

Are you still convinced of no QE3 SheepD1?

Greenspan showed up this morning "to get a haricut", LOL.   Wonder why Greenspan is needed?  Is Bernanke stuck?  Stupid?  Unsure?  Lacking in confidence / aptitude / fortitude / all the above?

Or... could it be that they need assistance on "how to".

LOL.  QE forever.


Troll Magnet's picture

Hmm..My money supply keeps dwindling, too, but my stacks keep rising.

kito's picture

well if your stacks keep rising, and i assume they arent stacks of checkbooks, then id say your money is in fact growing. 

SheepDog-One's picture

Yea I say Bernank disappoints. 

max2205's picture

Fuck the consumer/saver and the consumer/saver fucks you back. Plus those that choose to retire thereby starving the beast of tax revenue.

Starve the beast....

equity_momo's picture

I like your spirit but ultimately MOST consumer/savers are able to retire for the simple fact of the beast existing. We've all done far better due to the system than we would like to admit but "Lord of the flies" moment is arriving and those that feel they've paid in too much will revolt bringing with it the collapse. So the question is , are you ready? Can you exist without big brother ? ZH has more than its fair share who probably can.

decon's picture

I agree with you SD1, but I also don't disagree with Tyler's case, it's just that the political mood/climate won't support it right now.  It'll come eventually and probably not that far off because it's the least painful response for the Fed's handlers.  It wouldn't surprise me if Ben gets sacked and his replacement makes the moves.  Either way I'm locked and loaded.

Hephasteus's picture

"Or... could it be that they need assistance on "how to"."


Bernanke can do it. Power to the Ponzi. Keep Big Pharma Dope Alive!!

UBIGDummy's picture

Since I am a dummy too.

Can some of you translate this for me. 

QE3 Op twist or whatever its called to be announced tommorow, UP arrow

The peeps who think its not happening DOWN ARROW

have a nice day;)

WhiteNight123129's picture

We won´t get hyperinflation unless Bernanke decides that the checks should stop clearing.

trav7777's picture

the author doesn't ever examine or ask WHY that credit picked this particular time to peak or how or why credit would come into existence.

The future is one of contraction...aggregate economic activity is CONTRACTING because the energy supply underpinning all activity is contracting.  Why in hell would credit grow?  This is not a monetary problem; the monetary effects are a symptom.

TruthInSunshine's picture

Energy supply is contracting because given a choice between liquidating any inherently valuable asset by selling it and converting it to fiatski of any denomination with a painful future (thanks to The Bernanks & Trichets - and PBOCs of the world), or keeping it in the ground (where it's as safe as can be and actually has a real extraction cost), the choice is an easy one.

The Bernank broke global markets.

The Pain Train Express cometh.

trav7777's picture

nonsense...C&C peaked prior to the onset of the credit crisis which began due to the supply/demand imbalance on world oil markets.

Energy supply is contracting because that's what energy supply DOES once a well/field/nation/earth peaks

M.B. Drapier's picture

Without getting too far into the energy question ... do you accept that after total US, and world, (public + private) debt ripped up much faster than GDP for several years, a sharp reversal and return to more normal debt-to-wealth levels was inevitable at some point, for some reason, no matter what happened to energy?

equity_momo's picture

The reason debt to GDP levels spiked was purely because of the energy conundrum we face. We print to grow but REAL growth is due to cheap energy production. We are running out of cheap energy production and ow watch the consequences unfold. A contracting economy

equity_momo's picture

And whomever doesn't like that fact is going to go through life as a misguided, ignorant and ultimately poor individual. So buckle up.

mkkby's picture

Trav, you may be right.  But to be so emphatic implies confusing correlation with causation. 

MAYBE we had peak oil in 05.  Maybe we just had peak debt, or peak loose credit criteria.  Combined with very high oil prices.  There's really no way to prove peak productio was hit, because you can't separate out the effect of demand destruction from recession and the price of the commodity itself.

equity_momo's picture

Empirically , population , oil production and credit have all had near identical parabolas. The necessity for each to grow exponentially relies on the other two to also grow exponentially. It's really that simple.And that's without the soil/agri issue to feed us all. But those first 3 are linked like triplets with superglue.
Oil production has stopped growing exponentially. Watch credit and then population plateau and ultimately decline next.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

No, demand for energy contracts in a deflationary environment.

trav7777's picture

JFC...contracting energy supply IS a deflationary environment!

Mashuri's picture

Priced in a stable currency, like gold, crude is really cheap. Your argument doesn't hold up: Click to see chart

mick_richfield's picture

when can we start beating him with the phone books?


With the what?

LongBallsShortBrains's picture

'The Chairsatans hands are tied'...OK when can we start beating him with the phone books?

I was thinking golf clubs!

AustriAnnie's picture

Can we beat him with .999 pure gold bars instead?  Phone books are just paper.  Bernanke likes paper.

Panafrican Funktron Robot's picture

In a fractional reserve system, growth of debt is the only way to grow.  This has been true since the concept was invented.  Real growth is impossible in a credit contraction, hence, the only way to "hide the bleeding" is nominal growth (achieved through currency devaluation).  This is why physical gold is so strongly advocated here, because it's the only investment that is guaranteed not to lose real value relative to real growth.

I know this information is obvious and basically a reiteration of this post, but I think the concept still gets lost if you're not focused and paying attention (and/or are relatively new to this).  

Blank Reg's picture

OOO! We could feed Benny to Komodo dragons! Could we? Please?

Ancona's picture

Bring it on Berspanky, I need my silver to be at 150.

SheepDog-One's picture

Just more speculation based upon thing about the article is right that is Bernank's hands are tied, but not like the article describes...the dollar, oil, PM's, bonds, public disaproval against 'bailouts' in an election year, all those are whats really tying Bernanks hands. Its not 2009 with plenty of wiggle room anymore.

JW n FL's picture



Funding Job Creation (more hand outs to Wall Street) is the most important thing to be talked about in Heavy Rotation on Cable News! "We the Sheepish Consumers) need to let the good news wash over us 4 times an hour.. it makes us feel good, no matter what the realities are!

SheepDog-One's picture

Got to FUND job creation in the USSA! Where even their lowball attempt at how much EACH 'job created' shows it will cost around $350K per job! Whatever the jobs are, we dont know! Walkin around in a circle?

WOW I cant wait for my Gooberment created job that pays me 350K per year! Hooray!

JW n FL's picture


It is just a way to hand more Trillion to Wall Street.. in a way the "We the Sheepish Consumers" will approve of!

Washington DC is giving MORE Trillions to Wall Street to Creat Jobs!!

Becuase the $30 +++ Trillion Dollars sitting on Wall Street is not enough to create jobs.

Becuase the Lobby.. Oops! I mean Job Creators need the Money for Jobs which is God's Work!

and MORE!! Tax Breaks!

and MORE!! Tax Credits!

and MORE!! Tax credits Monetized with Tax Dollars!

and MORE!! Subsidies!

and of course! anyone NOT on Wall Street needs to tighten their belt! Austerity is needed by you worker bees.

No need to get buzzing mad! cause this Hand Out to Wall Street is for Job Creation!!

Be a Good, God Loving American and respect the amount of God's Work going on in Wall Street Offices!

Cliff Claven Cheers's picture

At 350k per job, it would be better to cut out the middle man and just give transfer payments.

Chaffinch's picture

Better still at $35k per job - 10 times as many 'jobs'

Oh but - doh! At only $35k there wouldn't be enough for all those middle men!

depression's picture

$50,000 for the worker

$300,000 for the "job creators"

In Obama terms Labor Union is synonymous with Job Creator

mkkby's picture

You're all looking at it wrong.  $350k is the net present value of maybe $17k per year.  Not a bad deal.  Let's stop all this red/blue fighting nonsense.  That's all it is.

JW n FL's picture




I understand that many of you are in fact jealous of the EBT types of people.. its ok, it is what you are capable of grasping.. but know this.. you are talking about 1% of a Problem that is 100% wide.. so by you spending all you time rolling around in this trash. so? who made this video? whos the money behind it? who wrote the song? and you give it air time why? becuase it is as imprtant as the 99% of the other welfare money spent on Wall Street? Job Creators are doing God's Work! now pay attention to the bottom feeder BullShit! Fuck you go playin the kiddie pool over at huffington post with your fellow kiddie pool friends!
malikai's picture

Dude calm down. That video is hilarious. And the comments are as well. Don't be upset that glorification of pillage is occurring. Friedman described it perfectly in the 70s. We're just seeing the logical conclusion and if we can't laugh at our own folly, well, then we're all fucked.

JW n FL's picture



its not you Bro.. Sorry for the War Path!

People give that kind of shit more air play than the fact that Wall Street is spending 10 times more money of "We the People" than the U.S. Military!

and that dirves me insane..

my bad,,

I beg your forgiveness!

Scottj88's picture

Full Article:

Thomas Jefferson's warning the coming generations of the hidden dangers that faced America: (Source Here)

I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.  The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

--  Thomas Jefferson  (Attributed)

How the Federal Reserved Robbed the American Public, Per Jefferson's Warning: (Inflation Statistics Here)

Central Bank Established:

December 23rd, 1913.  While many congressman were at home with their families for the holidays.

First by inflation:

January 1914-September 1929, Government Reported Inflation: +74%

Then by deflation:

October 1929-December 1939, Government Reported Inflation: -19.08%

Then by new policy:

1933: US Government makes US Dollar no longer redeemable for gold bullion by American citizens, effectively removing the population off of the gold standard.

Then by Inflation again:

January 1940-August 1971, Government Reported Inflation: +193.53%

Then by more new policy: (Federal Reserve note adopts full issuing power of nation's currency)

August 1971: The Bretton Woods Agreement; Termination of the gold standard and the creation of the dollar as the world reserve currency, backed only by the trust that the Federal Government would be able to repay its accumulated debt (Wikipedia Source Here)

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments.

On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, "[t]he Bretton Woods system officially ended and the dollar became fully 'fiat currency,' backed by nothing but the promise of the federal government."[1] This action, referred to as the Nixon shock, created the situation in which the United States dollar became the sole backing of currencies and a reserve currency for the member states.

And since, much more inflation:

September 1971-July 2011 Government Reported Inflation: +453.73%

And the grand finale, unfolding in front of our very eyes:

Corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

IH10's picture

I tried to verify that quote from Jefferson long ago and according to there is no proof Jefferson said it...regardless, whoever said it the message is spot on.  If Jefferson didn't say it, whoever did deserves some credit.  These pshycopaths are trying to shove us all into the cattle chute for slaughter...if it's us or them and they have all the power right now then we all know what the outcome is going to be.

Scottj88's picture is not what I would call a credible source.

But I get your point.

Bob Paulson's picture

Same with pretty much every quote that was in 'The Money Masters'.

madbomber's picture


im waiting for the collateral fire max damage guy to ream my untrained american psyche into a vague, dark, hopeless world.

and rather efficiently.    whats the medicine this week, sir?











Sathington Willougby's picture

IH10 need to contact offline, please advise.

chunga's picture

Thomas Jefferson neglects to take into consideration the "little" things they do that too often go unnoticed. Like this heart-warming story.

Must See Video | Paralyzed Oregon Man, Living on $22,000 a Month and Able to Pay, Fights Bank of America Foreclosure

"Galanida, 41, stopped payment in 2009, insisting a discrepancy arose in his loan after Bank of America took it over from troubled Countrywide Home Loans. Bank representatives told him to continue withholding payments while they investigated, his mother said."

"But then, without offering Galanida a workaround plan, the bank foreclosed on his home, sold it to another lender and tried to evict him. Galanida's pleas for help from federal authorities and Oregon Attorney General John Kroger haven't resolved matters."