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Christmas Time on Wall Street

by MIKE WHITNEY

Remember how Quantitative Easing was going to “get the banks lending again”?

Well, it hasn’t worked that way. In fact, after 4 years of zero rates and $3 trillion in monetary pump-priming, “banks are lending less to small businesses and consumers than before the financial crisis”. (International Business Times)

But how can that be, you ask, after all, didn’t the banks just report record profits in the Third Quarter?

Yep, they sure did. $40 billion-worth. But the bulk of that dough was raked off their gaming operations, you know, all the dodgy activities that Dodd-Frank regulations were going to stop, but never did. As far as lending to households and small businesses, that’s been a non-starter from the get-go. Check this out from the IBT:

“Small business loans… decreased in 2012 from 2011. … there was $588 billion in small business loans outstanding in June 2012, 3.1 percent less than at the end of 2011.” (“Banks Have Received $2.3 Trillion In Quantitative Easing But Are Lending Less To Small Businesses And Consumers Than Before The Financial Crisis“, International Business Times )

Okay, so let’s do the math: The Fed beefs up its balance sheet by a hefty $3 trillion, and the banks issue a whopping $588 billion in new loans.

Sounds like a bargain to me! You’re doing a heckuva job, Bernanke!

And household credit is in the dumps too, in fact, loans to households haven’t budged in the last two years. And the reason they haven’t budged is because demand is weak, which is what happens when the economy is mired in a Depression. Most people are either still paying off debts left over from the big housing bust or trying to squirrel-away a few shekels for retirement. Or, maybe, they’ve sworn off credit altogether which is a phenom that took place following the Great Depression some 80 years ago. In any event, the low rates haven’t seduced people into spending money they don’t have on junk they don’t need. And that rule applies to credit cards as well as banks loans, as Jim Quinn points out in a recent post on his website, The Burning Platform. Take a look:

“Wall Street introduced the credit card in 1968…

There were 200 million Americans in 1968 and $2 billion of credit card debt outstanding, or $10 per person…

By July of 2008 credit card debt outstanding peaked at $1.022 trillion and the population was 304 million, with credit card debt per person topping out at $3,361 per person. Over the course of 40 years, the population of this country grew by 52%. Credit card debt grew by 51,000%. Credit card debt per person grew by 33,600%. ….

Since July 2008 credit card debt has declined by $175 billion… and has only grown by a miniscule $13 billion in the last 29 months.” (“The Subprime Final Solution“, The Burning Platform)

So people aren’t maxing out their credit cards anymore either, which makes perfect sense in a world where incomes are trending lower, where paychecks remain frozen in time, and where personal spending is impacted by the grim expectation that one’s financial situation will probably be worse tomorrow than it is today. The fact is, no wants to load up on debt in Obama’s Debtcropper U.S.A because they have no idea what’s in store for them in the future; whether they’re about to get a cut in pay, shorter hours, or their pink slip. They just don’t know, and that nagging uncertainty is shaping their borrowing habits.

But that creates a problem, doesn’t it? Because — as you know — most of the growth we’ve experienced in the last few decades has come from the surge in household debt. (Wages have barely grown at all.) So if people slow their borrowing and stop running up their credit cards, then where’s the growth going to come from? Housing?

Not likely. Despite the Fed’s impressive effort to reflate the bubble that burst in 2006; higher rates and rising prices have put the kibosh on sales which have dropped for 2 months straight. That’s going to send more speculators (who represent 50% of the market) racing for the exits, putting downward pressure on prices. Housing should remain relatively flat for the foreseeable future regardless of what the Fed does. The mini boom of 2013 is pretty much kaput.

What about student loans? Are lenders issuing enough loans to students to buoy GDP, lower unemployment, and fire-up the economy?

Nah. Student loans have kept credit allocation in the black, but their impact on the economy is negligible at best. It’s just another dead end.

Auto loans?

While auto sales have been red hot for more than a year, you have to wonder how much gas is left in the tank. Keep in mind, sales would be flagging already if it wasn’t for the fact that lenders have returned to shoddy underwriting, subprime loans and, extended contracts which stretch halfway to the moon and back. Check it out:

“Detroit Free Press: – A boom in auto loans continues to support a resurgence in U.S. car buying that has hit its highest sales pace since 2007. The total amount of outstanding auto loans topped $782.9 billion as of Sept. 30, up $103 billion from the same period last year, according to Experian Automotive’s quarterly report…

Detroit Free Press: – Banks have become increasingly willing to provide loans to sub-prime customers and are allowing consumers to finance over a longer period, with some loans extending as long as eight years…

The longest-term new-car loans — 73 to 84 months — have jumped 25.1 percent in the past year and now make up 19.5 percent of total new-car lending, according to Experian Automotive. All other loan-length categories, in fact, have become less popular as buyers shift to longer terms to get lower payments.”
(“Banks piling into auto loans as demand picks up”, Sober Look)

84 months to pay off a auto loan? Yowza!

So auto sales have less to do with real organic demand than they do with shell-game, seat-of-your-pants, Ponzi financing the likes of which blew up the system just 5 years ago. The big lenders are back for a second bite of the apple already. It’s shocking.

Anyway, from the looks of things, it’s going to be hard to inflate much of a credit bubble in any of the usual sectors: Housing, autos, credit cards or student loans. In fact, I would expect to see less money poring into these areas rather than more.

But if credit doesn’t expand, then the only way the economy is going to grow is if wages go up, the government increases its deficits, or businesses boost capital investment. So, what’s it going to be?

Well, we know wages aren’t going up, so we can scratch that baby off the scorecard right away. We also know that budget-slasher, Obama, is not going to do an about-face and launch another round of fiscal stimulus anytime soon. He’s going to keep hacking away government spending and safetynet programs until his sorry term is up and they ship him back to Chicago to work on his memoirs.

That leaves business investment, right?

Oddly enough, there is some good news on that front, although the details may come as something of a surprise. You see, corporations have been borrowing more but NOT to invest in their businesses. Oh, no. In fact, according to Westpac’s Elliot Clarke:

“…business investment has decelerated from over 9% in June 2012 to little more than 2% in June 2013 ….. From the Fed’s flow of funds data, it is evident that nonfinancial firms have been adjusting their financial structure, funding stock buy backs and acquisitions with borrowed funds. This is not only a recent phenomenon; it has been seen throughout the recovery…

This recovery’s business investment narrative then looks to have been all about US corporates maximizing reported profits (both by making the financial structure more efficient and through acquisitions) as opposed to expanding capacity….” (“How effective has QE been at stimulating credit creation?, Elliot Clarke, Westpac)

How weird is that? So, the Fed’s goofy monetary policies have turned the corporations into hedge funds. They’re no longer building factories, piling up inventory, or buying tools and equipment. They’re simply taking advantage of the surge of liquidity the Fed is pumping into the financial markets to buy back their own stocks and juice the price. Or course, none of this leads to more demand for funds, a stronger credit expansion, more hiring, or a sustainable recovery. All it does is goose equities prices paving the way to bigger end-of-year bonuses, which seems to be the objective.

Anyway, there’s your credit expansion in a nutshell; “stock buy backs and acquisitions with borrowed funds”. In other words, more leverage plowed into already-overvalued stocks. Didn’t we try this before?

Now check this out from the Wall Street Journal:

“Small banks saw annualized loan growth of more than 6% in the second quarter, compared with less than 2% at the 25 largest banks, according to research by Keefe, Bruyette & Woods Inc….The loan-growth figures reflect everything from mortgages to auto loans, credit cards and business loans.

At the end of the second quarter, loans at small banks had grown 4.7% annually compared with growth of less than 1% for big banks, according to Federal Reserve data…..The nations four largest banks … saw average loan growth of 1.6% in the second quarter from a year earlier, according to Charlottesville, Va., data provider SNL Financial.” (“Smaller Banks’ Loans Growing Faster Than Larger Rivals”, Wall Street Journal)

This is really mindboggling. I mean, think about it; all the benefits of QE have gone to the big banks, right? But these behemoth zombies are not even lending as much as the small banks, in fact, the loan growth of the nation’s four biggest banks has shrunk to “less than 1%”. Amazing.

And QE was going to get these guys “lending again”?!?

Righto.

QE was never going to boost lending. It was doomed from Day 1.

How do we know?

Because we’ve been through this drill before during the last Great Depression. Here’s a little background from economist James K. Galbraith who predicted our current credit troubles back in 2009 in an article titled “No Return to Normal”:

“Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936… The New Deal rebuilt America physically, providing a foundation … from which the mobilization of World War II could be launched…..

“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended….. the relaunching of private finance took twenty years, and the war besides.

“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.”(“No Return to Normal: Why the economic crisis, and its solution, are bigger than you think” James K. Galbraith, Washington Monthly)

Did you catch that part about “the full restoration of private credit will take a long time”? That means don’t hold your breath for the next big credit expansion, because it ain’t going to happen anytime soon.

And, here’s something else to chew on: “Great Depression expert” Bernanke KNOWS that lending is going to stay soft for quite a while, in fact, he’s counting on it. Because if lending suddenly picked up, activity would increase, unemployment would drop, the economy would grow, and inflation would head higher. Which is precisely what Bernanke DOES NOT WANT. Because if inflation rises, then the Fed will have to slam on the brakes, raise rates and stop pumping trillions into the financial markets. That would make it more expensive for the banks to roll over their massive debts (aka–toxic assets and backlog homes) And, it would also send stocks off a cliff, which is a headache that Bernanke can live without.

So, what does Bernanke really want?

More of the same. You see, he needs the cover of a sluggish, underperforming economy, with high unemployment and low inflation, to keep doing what he’s doing now, which is filling the coffers of the big banks and brokerages with freshly-minted Bennie bucks.

Did I mention that profits on Wall Street have never been better and that the Dow Jones and S&P 500 soared to record-highs again last week?

It’s Christmas time on Wall Street thanks to Santa Claus Bernanke.

Cha-ching!

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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