This is how Bloomberg reported one of the biggest stories of the year, “JPMorgan Leads U.S. Banks Lending Least Deposits in 5 Years“—and got it backwards:
The biggest U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. are lending the smallest portion of their deposits in five years as cash floods in from savers and a slow economy damps demand from borrowers.
The average loan-to-deposit ratio for the top eight commercial banks fell to 84 percent in the fourth quarter from 87 percent a year earlier and 101 percent in 2007, according to data compiled by Credit Suisse Group AG. Lending as a proportion of deposits dropped at five of the banks and was unchanged at two, the data show.
Consumers and companies are reluctant to take on risk until they see more signs that business is improving, even as the Federal Reserve maintains near-record low interest rates designed to fuel growth. Putting more of the unused money to work could boost profit and help turn around the U.S. economy, whose 0.1 percent annualized drop in the fourth quarter was its worst showing since 2009.
These deposits aren’t about people taking cash out of mattresses and depositing it in the banks. This story should not be about the banks not lending, because that’s not true. They are. They have been growing loans at a measured pace between 3.5% and 5% a year since 2011. That is absolutely consistent with the growth of the economy, and dare I say, the potential growth of the economy. The story is not that loan growth is not keeping up with deposit growth. It’s that deposits are growing too fast for the economy. That’s dangerous, and the Fed is directly responsible.
Bloomberg actually reported the real story it but buried it in a single line midway through the report.
At the same time, total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused.
Needless to say they left out a lot and misinformed readers that savers were flooding bank accounts. That seemed to imply that the source of deposit growth is either the nation’s mattresses or maybe thin air, when the truth is that there’s only one major source for the rapid growth: the Fed. That’s the big story. The Fed is blowing a deposit bubble. If history is any guide, that will inevitably result in more–and more dangerous– capital misallocation, in other words, more and bigger bubbles. That’s always where too much, excessively easy, money leads.
The Fed has been buying $115-$120 billion of MBS and Treasuries from the Primary Dealers each month and will continue to do that until it ends or modifies this program. It buys those securities by crediting the dealers’ accounts at the Fed. That is the absolute genesis of central bank fiat money. Abracadabra- $2 billion to the account of Goldman Sachs! The dealers almost immediately move those funds into their deposit accounts at their affiliated bank under the same corporate umbrella or they transact business and trade with counterparties, whereupon the money gets deposited in the counterparty banks. That’s how the Fed creates deposits.
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