Banks are not lending to businesses. Banks have tightened lending standards significantly, cutting off credit from small and medium business which account for 85% of jobs. They are also reported to still have insolvency problems despite the avalanche of fiat dollars. These conditions are reflected in the chart above. In previous recessions indicated by the gray areas, bank lending did not contract but at worse remained flat. So what are the banks doing with all the near zero interest money stuffed into their pockets by Uncle Sugar? Sending it straight back to the Federal Reserve as bond purchases to shore up reserves. If money only costs 50 basis points, but you can earn 3.5% a year on government bonds, you don't have to be a rocket scientist or a "master of the universe" to know that is a return of 3% a year risk free. The spread reached 3.7% in June, the widest since 2004. Over a twenty year period the average spread is 1.46%. Bank holdings of US Treasuries and agency securities increased $287 billion or 25% since the end of 2007 to $1.4 trillion in September according to Bloomberg. It's like butter!
Thursday, October 22, 2009
Chart of the Week: Easy Money
Banks are not lending to businesses. Banks have tightened lending standards significantly, cutting off credit from small and medium business which account for 85% of jobs. They are also reported to still have insolvency problems despite the avalanche of fiat dollars. These conditions are reflected in the chart above. In previous recessions indicated by the gray areas, bank lending did not contract but at worse remained flat. So what are the banks doing with all the near zero interest money stuffed into their pockets by Uncle Sugar? Sending it straight back to the Federal Reserve as bond purchases to shore up reserves. If money only costs 50 basis points, but you can earn 3.5% a year on government bonds, you don't have to be a rocket scientist or a "master of the universe" to know that is a return of 3% a year risk free. The spread reached 3.7% in June, the widest since 2004. Over a twenty year period the average spread is 1.46%. Bank holdings of US Treasuries and agency securities increased $287 billion or 25% since the end of 2007 to $1.4 trillion in September according to Bloomberg. It's like butter!