Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Periodic bank failures remind depositors of the connection between risk and reward. What is not widely appreciated is that the ensuing government bailouts allowed an underlying shadow banking system to not only survive but grow even larger. To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books. So most of the money manufactured today is actually being created by the shadow banks. But shadow banks do not generally make commercial loans. Rather, they use the money they manufacture to fund proprietary trading operations in repos and derivatives. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.
"Markets Under The Spell Of Monetary Easing" Bank Of International Settlements Finds... Same As "Then"Submitted by Tyler Durden on 06/02/2013 21:17 -0400
The Chairman is about to take the lectern to discuss bank structure and competition at the SIFI conference at the Chicago Fed. His prepared remarks are likely to be a little less exciting than the Q&A where the world will be watching for the words "buy, buy, buy", "mission accomplished", or "taper". Charles Evans will be his lead out man. Finally, since Bernanke will be discussing shadow banking, or the source of some $30 trillion in shadow money always ignored by Keynesians, Monetarists and Magic Money Tree (MMT) growers, a topic we have discussed over the past three years, here is the TBAC's own summary on how Modern Money really works.
As is well known, Goldman's Mark Carney is leaving the Bank of Canada on June 1 to take over the UK money printer in a few months, at which point he will proceed to create about GBP25 billion per month out of thin air, pushing the total monthly G-7 liquidity injection to a healthy $200 billion (an annualized rate of $2.5 trillion). Which meant that a successor had to be found. Moments ago we learned just who that is, and surprisingly it does not appear to be yet another Goldman Sachs Partner, MD or even Vice President. Carney's replacement is Stephen Poloz, the former head of Export Development Canada. Promptly upon the announcement Poloz noted that flexible inflation targeting no threat to credibility, and Canada's monetary policy has helped through crisis, and that experience at EDC gives him a feel for Canada's economy. If nothing else, at least he has held a real job. Unlike those mandarins in the Marriner Eccles building. Either way, his monetary stance is largely unknown, although it will hardly be a hurdle to the other lunatics who have taken over the money printing asylum.
Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.
When it comes to popular finance myths, cash hoarding by corporates may be one of the most perpetuated. It's not that the data is wrong; US companies are holding more cash on their balance sheets than at any time in the past, as a report by Moody's this week notes. What's misguided is the narrative, in Citi's view, in particular among equity investors. What they most take issue with is the implication that corporates have lots of cash to return to shareholders. Indeed, there's plenty of data to the contrary that challenges the prevailing notion that corporates are the picture of good health.
How many trillions of Dollars are we going to let the Fed spend? The Fed balance sheet is now over $3 trillion… making it larger than the GDP of France, the UK, or Brazil. Indeed, if the Fed’s balance sheet were a country, it’d be the FIFTH LARGEST COUNTRY IN THE WORLD.
Just over two years ago, we reported that "The Farce Is Complete: S&P Downgrades Moody's To BBB+ From A-2", or in other words, one rating agency downgraded another rating agency, with the following rationale: "While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody's and therefore poses an element of risk, whether the new pleading standard may increase the likelihood of successful litigation against Moody's will be determined in the future by the courts.... Moody's management has stated that it plans to adapt its business practices in an effort to offset any potential new litigation-related costs associated with the legislation. Nevertheless, we believe that Moody's will likely face higher operating costs, lower margins, and increases in litigation-related event risk that we believe may present risks to the company's reputation." Well talk about irony, and of course role-reversal, now that it is not Warren Buffett's pet company Moody's (which is just as guilty as US-downgrading S&P was in rating financial toxic garbage as AAA), but S&P that was just sued by the DOJ and the kitchen sinks. And the last laugh - the piece de resistance as it were - sure enough, belongs to Moody's, which just downgraded S&P parent McGraw Hill.
Collectively, the world’s Central Banks have pumped over $10 trillion into the financial system since 2007. This money printing has resulted in a massive expansion of Central Bank balance sheets, spread inflation into the system, and done nothing to address the key solvency issues that lead up to the great crisis.
I used to like DealBreaker, I really did. Alas that was in my younger years before I made a (very) small name for myself and before I took the red pill offered to me by ZeroHedge's Tyler Durden. Now I realize that sarcastically apologizing for the nefarious character of the financial world is pretty much the same as just plain-old apologizing for it... except funnier. Case in point, here is an excerpt from an article published on DealBreaker a few hours ago entitled "Regulators Close Aquarium Door Behind Escaped Whale":
Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...
A Potentially Nasty Snapshot Of Risk Resulting In Another Trillion Of Taxpayer Funded Bank Bailouts - A WalkthroughSubmitted by Reggie Middleton on 12/21/2012 12:55 -0400
Bigger Tax Payer Bank Bailouts Cometh? If You Think Taxes Are Gonna Be Higher You Ain't Seen Nothing Yet! I welcome one and all to show me how it will not be so.
In what is the first formal speech of Simon "Harry" Potter since taking over the magic ALL-LIFTvander wand from one Brian Sack, and who is best known for launching the Levitatus spell just when the market is about to plunge and end the insolvent S&P500-supported status quo as we know it, as well as hiring such sturdy understudies as Kevin Henry, the former UCLA economist in charge of the S&P discuss the "role of central bank interactions with financial markets." He describes the fed "Desk" of which he is in charge of as follows: "The Markets Group interacts with financial markets in several important capacities... As most of you probably know, in an OMO the central bank purchases or sells securities in the market in order to influence the level of central bank reserves available to the banking system... The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions." In other words: if the SPX plunging, send trade ticket to Citadel to buy tons of SPOOSs, levered ETFs and ES outright. That the Fed manipulates all markets: equities most certainly included, is well-known, and largely priced in by most, especially by the shorts, who have been all but annihilated by the Fed. But where it gets hilarious, is the section titled "Lessons Learned on Market Interactions through Prism of an Economist" and in which he explains why the Efficient Market Hypothesis is applicable to the market. If anyone wanted to know why the US equity, and overall capital markets, are doomed, now that they have a central planning economist in charge of trading, read only that and weep...
On October 21st, 2012, Ambrose Evans-Pritchard wrote a note titled “IMF’s epic plan to conjure away debt and dethrone bankers”, on UK’s The Telegraph. The article presented the International Monetary Fund’s working paper 12/202, also titled “The Chicago Plan revisited“. I will begin the discussion on this working paper with two disclosures: a) my personal portfolio would profit immensely if the Chicago Plan, as presented by the IMF’s working paper 12/202, was effectively carried out in the US. The reason I write today, however, is that to me, it is more important to ensure that my children live and grow in a free and prosperous world, and b) I have not read the so called Chicago Plan, as originally proposed by H. Simmons and supported by I. Fisher. My comments are on what the IMF working paper tells us that the Chicago Plan proposed, without making any claim on the original plan.
So with world central banks printing paper money day and night it is no surprise that Gold is now emerging as the ultimate currency: one that cannot be printed. Indeed, Gold has broken out against ALL major world currencies in the last ten years. The below chart prices Gold in Dollars (Gold), Euros (Blue), Japanese Yen (Red) and Swiss Francs (Purple):