Banks Are Not Optimistic About The Economy

in LeoFinance4 days ago

What is going on at the Federal Reserve? It seems they are very bi-polar these days. Or are they?

Recently the Central Bank has entered the Repo market and engaged in the selling of securities. They are doing this with the intention of trying to pull liquidity out of the market. This is a problem since the banks are sitting on a lot of cash.

All the checks that were sent out over the last year have filled the banking system. Each time someone gets a check, they deposit in the bank (or it is direct deposit). Either way, it is now part of the banking system, a move that allows the banks to put it to work.

There is one problem: the banks do not need the money. In fact, they are sitting on so much, they are looking for places to put it. The reason being that banks cannot just sit on cash. To pay interest to depositors, they need to generate some type of income.

For banks that means either lending or buying interest bearing securities.

The Repo market is an ideal setting for banks to put some of their excess reserves. They can enter the overnight market and earn a bit of interest off their assets. This is why the interest on a saving account is so awful. The banks are not getting a great rate of return but it is something.

Here we come to the bigger question: why would the banks not engage in the more profitable practice of lending? After all, that pays a much better return. You would think when the banking system has plenty of money, it would go on a lending spree.

IF we look at what took place the last year, we see what the banks were doing.

fredgraph.png

As we can see here, the commercial lending went from 2.04 Trillion in May of last year to $2.56 Trillion, a decrease of 15.5%.

This doesn't make a lot of sense in light of the rhetoric we keep hearing about the economy reopening and the growth that we are going to see. If that is truly the case, why is business lending contracting?

To me, this says that the banking industry is not real optimistic about the business environment. This has put the Fed on notice. They are scared of a market collapse which then can shift to a downfall (further?) in the economy. Do not forget, the Fed operates on the principle of the Wealth Effect, the idea that a rising market will make people feel richer, hence enabling them to engage in spending patterns they would normally resist.

If this is the case, the reverse is also true. The Fed fears that a falling market will cause people concern, leading them to tighten their spending.

So we have a situation where the banks have their excess reserves going to the Repo market. The excess reserve is any amount over the base reserve requirements the bank has to abide by. With so much money in the system, the banks are swimming in cash. The Fed is trying to sop it up as quickly as they can to aid the banks in their dilemma. Yet we have a situation where business lending, in spite of all the money in the banking system, is contracting.

What could be the cause of this? Perhaps consumer sentiment is leading some banks thinking.

consumersent.pngSource

As we can see, the sentiment index fell of a cliff last year which is no great surprise. Since its bottom, it improved somewhat. The problem is that it is far below where it was before the pandemic hit. We also see a fairly decent drop in May.

Not exactly an indicator that the future will be better.

Another things we can see from the chart is the trend was a bit downward before the shutdown last year. This might also be figuring into the banks uncertainty with business lending.

Finally, it might be simply a situation whereby banks are well aware there are a number of industries still in trouble. Small businesses were crushed likely leading a decline in lending in that sector of the economy. While there are improvements in some areas, another slowdown would cause defaults to rise.

It will be interesting to see how the second half of the year unfolds. It is evident, at this point, that the banks are taking a cautious view when it comes to businesses. The lending in that area is contracting which tells me they are not overly confident in the business prospects going forward.

Banks being afraid to lend is not a positive referendum on the prospects of the economy.

This is something to watch.


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Just out of curiosity, where do the PPP loans fit into this mix? I would think it would be hard for banks to lend to businesses if the government is giving away all that money to businesses first. Maybe that is part of these numbers since they DO get issued to companies FROM banks. Just wondering what your thoughts are on this. Also, it would be hard for banks to compete with the PPP as far as lending to these businesses....

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Well that doesn't surprise me seeing that the prediction of the economy over the next 10 years by most economist is a bad one. Like when is the last time you heard anyone positive about the economy.

Unfortunately this is not a good thing for crypto either. I think people in crypto have the tendency to believe a suffering economy will lead to a convincing of the world to use crypto. I don't think thats necessarily the case of what will happen.

I think more than likely what will happen is crypto will follow this collapsing economy down the tubes. Crypto still hasn't presented the best use case and for the most part is still quite impractical. I can't even conduct commerce well with crypto because one can't do chargebacks.

As far as lending the data more than likely is going to point to a large number of defaults. However this over optimism in crypto is not a solution because at best crypto should be focused around anchoring down for a collapsing economy. Solutions on how to survive a job market reduction of over 47% of jobs.

A focus on what type of systems will be necessary. Forget the get rich driving lambos ideas. How are we going to survive a collapsing economy thats coming? Forget can we create a business that may or may not need to exist on the chain. What are we going to do about this storm that can't be stopped and what should we be doing?

So i just think people living in a fantasy world about all this. Unfortunately they aren't going to stop until they are neck deep in it like the great depression. This magic money printing the fed is doing. That's not a solution thats going to solve the issue. Things have to make sense to a problem. We aren't addressing any problems here. We still doing this shellgame the money is here no its over there crap in crypto and in our standard economy. Until we get serious nothing is going to change.

In crypto people so worried about these few bucks they can make. Listen those few bucks aren't going to do anything to the totality of this situation. It's like focusing on a grenade when someone has a nuclear bomb. Again unfortunately when we figure out what we we need to do we will be underneath the water in this drowning.

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The narrative keeps flipping that I can't make sense of anything. One day its low interest rates spur more loans then the next day its higher interest rates will come so people will take loans now before it increases. What do you think is the more likely scenario?

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While sitting on all of that cash now is a bad thing, will it become a good thing should the economy go down the tubes like the FED is afraid of? It seems like it might be good for them to have the cash on hand for when people finally start panicking.

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I think countries that have a large percentage of vaccinated people will have a stronger economy long term because they won't have lockdowns and restrictions.

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I learn so freaking much every time I read your articles. I'm so happy you share this wealth of knowledge with us all, I look at your articles like I would if I was taking college courses on the SIE certification.

Banks being afraid to lend....its like an economic downward spiral, that twists faster and faster around in a circle until its flushed away.

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Obviously here you can see that they are trying to cover a serious wound with a band-aid, in the long run this bad make-up will do nothing to stop the coming catastrophe.

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Banks are definitely looking a bit shaky right now and earning from what they were doing is drying up slowly. How many banks will be around in 20 years from now as their options are changing rather rapidly. Foreign exchange was a decent earner yet how many people went away on holiday in the last 18 months? Lending of money is not working out to well either so they need to find another revenue source. The economy form what I have been reading is on a knife edge and it is not just in the US but all over.

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