Thursday, January 10, 2013

Huge disconnect between bank deposits and bank lending

A huge disconnect between bank deposits and bank lending has developed since the crash. A stunning graph from ZeroHedge a few days ago clearly shows how dysfunctional the U.S. financial system has become. What's happened is that the Federal Reserve has created trillions of dollars in new deposits to prop up the TBTF banks, but rather than use those new deposits to advance new loans into the economy (as the myth of fractional reserve banking posits should happen), the banksters have grabbed the money and run off to play in their speculative derivatives casino.

And, as the ZeroHedge comtributor writres, it also "proves undisputedly that the US economy is much weaker now than it is purported to be as end consumers and business have far less desire to risk becoming indebted even in a zero interest rate environment."

The ZeroHedge contributor continues:
The point of the above explanation is to demonstrate, simply and visually, that whereas deposit creation in the days before Lehman came primarily courtesy of banks, the days since Lehman have seen the Fed in the driving seat when it comes to deposit (money) creation.

At this point a tangential discussion might be required on the difference between high powered and lower powered money, or M1 and M2, but that would require a much broader dive into the mechanics of fractional reserve banking (one which will be satisfied by the Chicago Fed's booklet), but suffice to say, deposits are the fungible equivalent of money when being transacted from one low powered investment option (deposits in banks) to another (purchases of risk assets).

And, once again, like one week ago, we would have ended this conversation here because suggesting that banks abuse excess deposits for risky pursuits would be considered absolutely preposterous... if it wasn't for the stunning confirmation courtesy of that epic blunder by none other than Jamie Dimon's JP Morgan, and his Chief Investment Office (conveniently once again located in that mecca of underregulation London) implosion, just what it is that banks do with the excess between deposits over loans. 

Allow us to paraphrase what we wrote last week:
Presenting Exhibit A, which comes directly from page 24 of JP Morgan's June 13 Financial Results appendix, in which the firm laid out, for all to see, just how it is that the Firm generated over $5 billion in prop trading losses in its Chief Investment Office unit - a department which had previously been tasked with "hedging" trades but as it turned out, was nothing but a glorified, and blessed from the very top, internal hedge fund, one with $323 billion in Assets Under Management!


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