Nothing has changed on the money front. Federal Reserve policy is boring. Commercial bank lending is tepid. And, people keep moving their funds into transaction assets to buy basic goods and services.
Only one thing to say about Federal Reserve actions in September: they are doing what they said they were going to do. Over the four-week period ending September 25, the Fed added $87 billion in securities to its portfolio. Over the last 13 weeks the average monthly addition to Fed's security's portfolio has been $87 billion.
Over the past 52 weeks the Federal Reserve has added $900 billion to its securities portfolio! On August 29, 2007 the total assets of the Federal Reserve was $911 billion. The whole Federal Reserve balance sheet is now more than four times what it was back in late August of 2007!
Nothing else is happening these days at the Fed…except preparations for the departure of Mr. Bernanke…and the arrival of a new chair of the central bank.
Total reserves in the banking system rose by more than 43 percent, year-over-year, through August. Required reserves rose by only 18 percent and that was because people and businesses are still moving assets into transaction assets…more specifically demand deposits which grew by almost 13 percent, year-over-year. People are still moving funds from low-interest bearing deposits and low paying money funds to demand deposits so that they have them available to purchase necessities.
As mentioned many times before, this is not a good sign in terms of an improving economy. When an economic recovery is more robust, all components of the money stock measures increase at a relatively rapid rate…together.
In this recovery, the rise in the transaction accounts has come from the assets in which people and businesses temporarily "park" funds so as to earn an interest return. This time, there has been quite a rapid increase in demand deposits while other accounts at commercial banks, thrift institutions, and retail money funds have only experienced modest growth, at best. This type of behavior is interpreted as showing people and businesses are not doing that well and want their funds kept in assets they can readily access. This is not a sign of confidence.
Also, you do not tend to get this kind of behavior when the financial institutions are lending and the economic recovery is going along at a pretty good speed.
And, the commercial banks are not lending. All loans and leases at commercial banks are up about 2.6 percent, year-over-year through August. Household related borrowing is almost non-existent. For example, residential real estate loans are roughly flat, year-over-year, revolving equity line loans are down rather significantly, and consumer loans are only up modestly.
The only two areas where loans are increasing are on the commercial side and these gains are not necessarily going into areas in which economic growth is benefiting. For example, commercial and industrial (business) loans are rising but it seems as if a large portion of these loans are going to hedge funds, construction company subsidiaries, and wealthy individuals that are buying up homes for the purpose of renting them out in the short-run and then selling them at higher prices as households return to the housing market.
The other area experiencing more than just modest growth is commercial real estate loans. The problem here seems to be that the increases in these loans are at banks that are smaller than the twenty-five largest banks in the country. These loans did not receive payments until they matured and it seems as if these smaller banks, in order to stay "healthy" in the eyes of the regulators, have refinanced the loans as they have come due and have also increased the size of the loans to help developers "keep going" in these not-so-healthy times. I have recently been writing about this situation in recent posts.
So bank loans are only increasing in areas that add little "new" stimulus to the economy. Which means that all the money the Federal Reserve is pumping into the economy is not going to increase construction or production. Seemingly, the money is just keeping the banking system above water. And, without the lending, bank profits must come from other sources, not all of which are sustainable.
The Federal Reserve keeps on pumping the money into the banking system. This leads me to conclude that only one of the following three reasons can account for this Federal Reserve behavior. The first reason is that the Federal Reserve has misread the economic situation and believes that the economy will still recover cyclically even though it has not responded to almost four years of excessive monetary stimulus. The second reason is that the Federal Reserve believes that all the problems of the economy are liquidity problems and the only way to treat liquidity problems is to flood the economy with more and more liquidity until people are tired of all the money that is hanging around and start to go out and use it.
The third reason is that the Federal Reserve believes that the banking system is still very fragile and that pumping all these reserves into the banking system helps the banks weather the crisis until borrowers are able to pay back their existing loans.
As readers of this post know, I tend to lean toward the third reason. And, Mr. Bernanke, the world-class scholar of the Great Depression, wants, with all his heart, to avoid a repeat of the 1937-38 depression that was kicked off by the Federal Reserve's effort to "soak up" the excess reserves in the banking system. The only way he knows how to do this is to throw more "stuff" against the wall to see what sticks! If the banks absorb the additional reserves being thrown at them every month and don't use them to make loans then they must truly desire these added reserves. Hence, to him, he is not doing anything more than giving the bankers what they want.
So the plan is to continue to add $85 billion in securities to the portfolio of the Federal Reserve each month…and then to add $70 billion or $75 billion in securities to the portfolio each month…and then add $50 billion in securities to the portfolio each month…and so on and so forth.
Remember, the Fed intends to keep the effective Federal Funds rate where it is into 2015! This effort is to keep the banking system functioning through the next two years or so.
And, while the depository system is not expanding through its lending business…the shadow banking system continues to grow…and grow…and grow.