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Thread: weekend commentary - US Bank Lending falls at fastest rate in history

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    Default weekend commentary - US Bank Lending falls at fastest rate in history

    another news item that didn't get much US media attention, but which is profoundly telling re what's really going on with the US economy



    (snip)"Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.

    David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.

    Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said. (snip)

    (snip)Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.

    "It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.

    Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues to contract" in their latest statement.

    However, regional Fed "hawks" appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of "monetizing" its deficit in a stealth default on Treasury bonds. (snip)

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    Default Re: weekend commentary - US Bank Lending falls at fastest rate in history

    with additional analysis from a Professional Investor's BBS ...

    (snip)"This is one of the items I track in the Professional Edition Fed Report. This is not about tight credit. It's about banks being unable to find willing and able borrowers. This week's decline was particularly sharp, and there's a perfectly obvious reason for it.




    (snip)"The Treasury has decided to replenish its Supplementary Financing Program account at the Fed by selling $200 billion in CMBs over the next two months, on top of the already enormous amounts of regular debt expected. The preliminary estimate for total new Treasury supply to be auctioned and issued in March is $318 billion. Money market funds have had a dead cat bounce and savings accounts have surged over the past couple of weeks. At the same time, loan balances at commercial banks have crashed. Bank reserves deposits at the Fed have skyrocketed while Treasury cash balances have collapsed"(snip)

    with many thanks to Lee Adler at

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    Default Re: weekend commentary - US Bank Lending falls at fastest rate in history

    and in case you aren't up to speed on the Treasury's rejuvinated Supplementary Financing Program ...

    (snip)"WASHINGTON (MarketWatch) -- The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit. Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over."(snip)

    from

    now comes the 'obvious reason' ...

    (snip)"The Treasury's press release says only this:

    Treasury anticipates that the balance in the Treasury's Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

    This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.

    So this is going to be implemented immediately and on a large scale. But why? If the goal were indeed to drain reserves, the Fed could do this by selling some T-bills out of its own holdings, currently some 3/4 trillion, or could do this with reverse repos or the Term Deposit Facility, not to mention selling some of its trillion dollars worth of MBS. And just two weeks ago Fed Chair Ben Bernanke seemed to be saying that such steps were still far in the future, and did not even mention the possibility of a surge in the SFP.

    You want more information? We've got this:

    "We're committed to working with the Federal Reserve to ensure they have the flexibility to manage their balance sheet," a Treasury official said on background.

    Anonymous and on background in order to say nothing at all? What's the big secret?

    An alternative hypothesis is that the Fed intends not to retire reserves but instead to expand its balance sheet without increasing reserves, that is, use the funds to make new asset purchases or loans with the SFP sterilizing the operations. But what loan is the Fed about to make or asset is it about to purchase? WSJ Real Time speculates:

    The practical effect of this move is that the Fed will be able to finish $1.25 trillion of purchases of mortgage backed securities by the end of March without printing more money. Instead, it will have the cash on hand from the Treasury deposits to fund the purchases. As of February 17, the Fed's portfolio of mortgage backed securities had reached $1.025 trillion, roughly $200 billion short of the objective. "(snip)

    from


    in other words, borrowing yet more money via staggering new record levels of new treasury bill / bond sales to fund yet more 'stealth' bailouts for Fannie Mae / Freddie Mac and the Wall St. bankers via the treasury taking another $200 billion worth of toilet paper mortgage bonds off their hands and onto the US gov'ts balance sheet ( where future US taxpayers will be responsible to make good the losses) ! And this additional $200 billion didn't even need congressional approval !

    in other words, the US gov't is now 'soaking up' an increasing share of available investment capital, making it ever more difficult for private sector businesses and individuals to borrow money at affordable interest rates since they are now in de-facto direct competition with the US gov't !

    ~
    Last edited by Melonie; 02-28-2010 at 10:43 AM.

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