This from the Financial Times on the morning of Friday, November 20, 2009: "Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year." (See:
http://www.ft.com/cms/s/0/52e0f72c-d575-11de-81ee-00144feabdc0.html.)
"The development highlighted the continuing distortions in the financial system more than a year after Lehman Brothers' failure triggered a global crisis."
"With the Federal Reserve maintaining an overnight target rate of zero to 0.25 per cent, investors are demonstrating a willingness to completely forgo interest income—or even to take a small loss—to own securities that are seen as safe."
Just how "safe" do these banks have to appear?
The way they are acting indicate that they are not very "safe" at all.
Total reserves at depository institutions for the two weeks ending November 18 averaged $1,106 billion of which $1,068 were reserve balances with Federal Reserve Banks and $38 billion was vault cash used to satisfy required reserves.
The Fed has pumped roughly $350 billion into the banking system over the past 13-weeks primarily through the purchase of open market securities.
The effective Federal Funds rate has fallen steadily through the fall from August and averaged 11 basis points toward the end of the latest banking week.
Putting this information together indicates, to me, a banking system that is still seriously threatened and desirous of all the spare cash that it can attain. This is not a situation of quantitative easing but of bankers that are overly concerned with their solvency. The Federal Reserve is supplying reserves "on demand." They are not, at this time, initiating the supply.
And, why might this be so?
Well, take a look at some of the headlines of the past week: United States mortgage delinquencies reach a record high; bankruptcies continue to remain near record levels; commercial real estate to remain major problem for years; commercial real estate too complex for government to bail out; unemployment at 25-year high; credit card delinquencies remain at record levels; and bank failures will continue to average about 3 a week for the next 12 to 18 months.
President Obama is even talking about the possibility of a "double-dip" recession.
The distortions in the financial system continue to be enormous. Even given these attitudes within the banking system, as the Financial Times reports, "many" of the leading US banks are "sitting on big trading profits."
And, why not? When they can borrow for less than 35 basis points and lend out at 350 basis points who cannot make profits.
