Tuesday, December 15, 2009

Banks Hoarding Money as Economy Staggers


Chart from the Federal Reserve Bank of Saint Louis showing bank excess reserves deposited in the Fed itself.

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The reason that the bailouts and massive government deficit spending have not yet prompted large amounts of inflation is simple. The banks are hoarding the money. They were rescued with public money bailouts, and more importantly access to the secret Fed Discount Window where they could trade their bad bet trash assets for cash. The difference in value between what the Fed gives them and what the toxic assets are really worth will ultimately be paid by the taxpayers. Note that the exchange for toxic assets amounts to the same thing as printing money and giving it to their friends.

The excuse, the sole justification for this epic thievery, was that if they did not do it the "financial system" would collapse and people and businesses could not obtain credit. My initial response was that these insulated, self-important high rollers confuse the collapse of Goldman Sachs and JP Morgan with the collapse of the country. Now we see that even though we have ripped off the next generation through debt to bail out the banksters, the banksters are not even sticking with the fig leaf of an excuse they offered for the crime. They are not providing credit to people and businesses, at least not anywhere near in proportion to what they got. Instead, they are hoarding the bailout loot on a scale that dwarfs anything the world has ever seen.

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I want to be clear that community and state banks are not a part of this scam. They are instead among the victims of it. They have to compete for capital with the big banks who are using the government to obtain it at an artificially low rate and they do not have access to the Fed Discount Window to pawn their bad bets off on the taxpayers. The money that the government gave the big banks in the hopes that they would "provide liquidity" is instead being used to buy out their smaller competition.

The government also forced the banks to make many bad loans via the so-called Community Re-investment act. That legislative idiocy is still in force, and it also means that many people who might be able to get access to credit otherwise can't. The simple reason is that the banks have to make a have number of loans in risky areas for every good loan they make. Because of that, they are being extra-careful about who they loan to. This is especially true now that we know how hot those hot-potato mortgage backed-securities are.

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