Contraction in Bank Credit Worse This Time Around
And the process will result in more than just a jobless recovery.
A recent Bloomberg article was titled Pandit "Near Death" Hoard Signals Lower Bank Profits, and stated that Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) were hoarding cash as if another crisis were on the way. Also, a Wall Street Journal article entitled Jittery Companies Stash Cash showed that cash on the balance sheets of S&P 500 companies was the highest in 40 years.
The chart below, courtesy of economist David Rosenberg of Gluskin Sheff & Associates, shows that credit is still contracting as banks go through the painful process of repairing their balance sheets. As indicated, bank lending has now declined for 21 weeks in a row and over this entire time frame, a total of $216 billion (15% at an annual rate) of loans and leases have vanished.
The contraction in bank credit is broad based across all lines of business -- consumer, real estate and companies -- and seems to be motivated by both the bank and the borrower. This is a dead-weight drag on aggregate demand and it goes to show that the real story in Q3 was not that it was so wonderful that real GDP expanded at a 3.5% annual rate but that the number was so low in view of the massive dose of government stimulus and that the contraction in credit is ongoing and acting as a tourniquet on private sector spending activity.
Meanwhile, the US Depository Institutions Aggregate Excess Reserves continue their ascent at levels far in excess of the amount banks need to keep on deposit to meet their reserve requirements (see chart below). The level indicates that the balance sheets of banks remain under pressure, especially in view of the fact that the value of some assets isn't known. A definite peak in the Excess Reserves graph should coincide with a turning point for banks getting back into the business of making loans.
This is 1992-93 all over again when the commercial banks used the steep yield curve as an opportunity to reliquify their balance sheets, and the flip side of that process was a listless and jobless recovery. The only difference is that the credit contraction process this time around will prove to be even more pernicious and enduring than it was back then, and inevitably drag Treasury note yields back down towards the lows we saw almost a year ago.
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