The Secret to the Banking Sector's Success

In yesterday's commentary at Gluskin Sheff, David Rosenberg explains, among many other things, the secret to the banking sector's recent earnings success and the secret to Washington's ability to continue borrowing mind-boggling sums of money.

In answer to the question of what the banks have been doing with all the cash they've received from the central bank over the last year or so, Rosenberg offers:

The banks are deploying the cash in the government bond market, buying a net $27 billion in the latest week and $130 billion in the past 18 weeks. Meanwhile, cash reserves keep piling up and just reached an all-time high of $1.2 trillion — enough to finance the entire U.S. fiscal deficit. This is a nice back-of-the-door mechanism for how the Fed is monetizing the government’s endless need for money: bolster reserves at the big commercial banks and have these banks buy the bonds that Uncle Sam sells in order to raise the capital needed to fund all the government’s fiscal stimulus measures. Coming soon is the federal government’s plan to extend jobless benefits, increase social security payments, yet again, expand the first-time homebuyer tax credit, unveil a ‘cash for clunkers’ for other big ticket items (see Friday’s WSJ — page A8) and to provide public capital (!) to small businesses.

Of course, demand for U.S. debt may be put to the test this week as a record $182 billion in sales are planned, the bond market already signaling that this may not be as easy as the folks at the Treasury Department have been planning.

And, yes, it looks like there will be soon be a Cash for Clunkers: Appliance Edition and Popular Mechanics (Popular Mechanics?) has answers to all those burning questions on the minds of American consumers who, with the help of Uncle Sam, recently bought a car, then bought a house, and now need a new washer and dryer.

Where does all the money come from to subsidize these purchases?

Part of it comes directly from the nation's banks who, for good reason, are happy to sit with cash on their balance sheet rather than lend it out to those same consumers who might be looking to start a new business or finance a new house, a new car, or a frig.

In chart form, it looks like this:
That appears to be about $300 billion in recent purchases of U.S. Treasuries, about on par with what the Federal Reserve has bought with money created out of thin air, the two accounting for a good chunk of the overall $1.4 trillion budget deficit announced a week or two ago.

Back to Rosenberg:

Everyone agrees that this was not a Depression, but instead was the “Great Recession”. Everyone agrees that this “Great Recession” is over and many are in the camp that a V-shaped recovery is on its way. Many commentators like Birinyi and Ned Davis believe that a powerful new bull market has just started. Yet, the Obama team is running deficits that are double in size, relative to GDP, than anything FDR ever dared to run during the 1930s. And, the Fed is far from allowing it to shrink, it actually expanded its balance sheet by over $50 billion alone just this month to an unimaginable $2.2 trillion.

A trillion here, a trillion there... Pretty soon you're talkin' about real money...

Comments

[Roger Knights:]

"A trillion here, a trillion there... Pretty soon you're talkin' about real money..."

But eventually you're talking about Monopoly money.

Oct 27 06:40 AM

[basehitz:]

I subscribe to Rosenberg and recommend it. Were it not for the endless handouts, bailouts and backstops financed in a major way by money printing, we'd face very different economic data. But it has come at the risk of the currency. Too high a price to pay IMO for a temporary boost.

As for the banksters, Dylan Ratigan weighed in on what he calls “corporate communism”. After the 2 minute mark he gets pretty intense over GS trying to justify their egregious pay.

www.msnbc.msn.com/id/3...

Oct 27 06:59 AM

[bindlepete:]

Sell Bonds? To whom? Wellll, print the money and lend the money out at .25%, and borrow it back at 3.5%. Let the intermediary take the risk free profit, pay himself a bonus and sleep on.

Switcheroo!!! and you pay the freight Mr. and Ms. Taxpayer

And then there's the dance with the foreign banks.

This is government?

Oct 27 08:44 AM

[bindlepete:]

Sell Bonds? To whom? Wellll, print the money and lend the money out at .25%, and borrow it back at 3.5%. Let the intermediary take the risk free profit, pay himself a bonus and sleep on.

Switcheroo!!! and you pay the freight Mr. and Ms. Taxpayer

And then there's the dance with the foreign banks.

This is government?

Oct 27 08:44 AM

[Warm_Paw:]

When the greenback becomes the peso, I buy property.
By the time the greenback's on par with the yen , CEO's will be demanding their bonuses in euros.

Oct 27 09:10 AM

[The Geoffster:]

“Mistakes, scandals, and failures no longer signal catastrophe. The crucial thing is that they be made credible, and that the public be made aware of the efforts being expended in that direction. The ''marketing'' immunity of governments is similar to that of the major brands of washing powder.”

Jean Baudrillard quotes

Oct 27 11:16 AM

[Fabien Hug:]

OK, the FED lends money at 0% to the banks. The banks buy Treasuries yielding 3 % from the FED. So far, so good, let's face it.
Those who didn't sell the market in a panic have almost been made whole. Others can refi on their mortgage at a great rate and, slowly but surely, banks' losses on assets are reduced by the profits made thanks to this little trick described above.
Now, why and how will this miracle end? Because it will end like the Chinese seller / lender virtuous circle ended. That's the questions we should ask ourselves.

Oct 27 12:22 PM

[Leftfield:]

Our economy and society have been levitated (increasingly badly for the majority) by magic, smoke and mirrors for decades. Going into debt before credit cards once meant, taking an advance on your salary. Clearly, a chunk of your pay was spoken for for a period of time. New, painless-sounding avenues for borrowing have been constantly invented and financially engineered since to hide the truth.
Every new or overworked euphemism for bankrupt, insolvent, broke or ruined has been to perfume, pretend and extend this farce. It's been obvious for decades that unfunded liabilities were multiples of GDP and that a private business using government accounting would be in jail. An advance is now taken out on, what, centuries of our descendants, and it is growing faster than ever. This article shows a new wrinkle ($trillions involved).
Are these lies worth it to us and our grandkids?

Oct 27 12:48 PM

[TeresaE:]

Blah, blah, blah, the Great Recession is over. Check kiting is a good thing. Banks sitting on all the cash in the world while closing down their customers is a good thing. Blah, blah, blah.

Except for the fact that the banks are bankrupting us and the government is getting ready to steal what little the middle class has left.

Yep, good times for all and a re-emergence of the Goldilocks Economy.

Everything is all lollipops and sunshine from this moment out.

Except banks ain't lending, government is over-stepping and squashing us under regulations and taxes, small business is closing, large business is off shoring - and begging for even greater cheap foreign imported workers, sales - in most industries - are still in a down slide, bankruptcies are still increasing and a shadow economy/ inventory of dead loans / commercial meltdown is still looming above us.

I getting tired of trying to enlighten ostriches who don't want to peel back the curtain. Instead, I am trying to turn myself to self-preservation and being prepared for my daughter and myself. I hope & pray that I am wrong and all the "experts" and sheeple are right.

Of course, that harkens back to an old saying of my dad's, "hope in one hand, sh*t in the other, see which fills up first."

Oct 27 02:18 PM

[GreatWhite:]

TeresaE

"The dollar "rallied" last year for a very simple reason, the Fed was flooding the WORLD with fake dollars. If the currency value went up, then the "help" flooding into foreign countries, other central banks and our local banksters was worth more for them to play with."

I have been stuck in my office chair for 2 weeks trying to digest this wisdom from you!

Are you sure there isn't a hair salon blog you wouldn't rather comment on?

GreatWhite


On Oct 27 02:18 PM TeresaE wrote:

> Blah, blah, blah, the Great Recession is over. Check kiting is a
> good thing. Banks sitting on all the cash in the world while closing
> down their customers is a good thing. Blah, blah, blah.
>
> Except for the fact that the banks are bankrupting us and the government
> is getting ready to steal what little the middle class has left.
>
>
> Yep, good times for all and a re-emergence of the Goldilocks Economy.
>
>
> Everything is all lollipops and sunshine from this moment out.<br/>
>
> Except banks ain't lending, government is over-stepping and squashing
> us under regulations and taxes, small business is closing, large
> business is off shoring - and begging for even greater cheap foreign
> imported workers, sales - in most industries - are still in a down
> slide, bankruptcies are still increasing and a shadow economy/ inventory
> of dead loans / commercial meltdown is still looming above us.<br/>
>
> I getting tired of trying to enlighten ostriches who don't want to
> peel back the curtain. Instead, I am trying to turn myself to self-preservation
> and being prepared for my daughter and myself. I hope &amp; pray
> that I am wrong and all the "experts" and sheeple are right.
>
> Of course, that harkens back to an old saying of my dad's, "hope
> in one hand, sh*t in the other, see which fills up first."

Oct 27 07:26 PM

[Andrew Butter:]

Yup...Soros pointed this out last week, plenty of others did over the past month, funny how the mainstream "free" press is so quiet?

The Fed lending at 0% so people can lend that to the Treasury at 3.5% (rather than just dealing direct), is the nastiest form of crony capitalism, it's basically racketeering.

It 's not funny and it will end badly, most likely long Term Treasuries will start to rise.

Oct 28 11:29 AM