All your banks are belong to us

The concept of nationalization is getting traction in Washington, D.C., where even prominent Republicans like Sen. Lindsay Graham (R-S.C.) are openly talking about taking over some of the country’s largest banks.

A year ago, I wrote about the apparent insolvency of the American banking system. Figures available from the Federal Reserve’s website showed that the reserves in the vaults of its member banks were 100% borrowed money.

The situation has completely changed since the first emergency bailout in the fall — but that’s not necessarily good news.

Here is a summary of American bank reserves over the last 13 months (all figures in millions of dollars):

                                                                     Borrowed
      Date       Total     Nonborrowed   Required     Monetary       from the
                                                      base           Fed                                                                                    --------------------------------------------------------------------------------------
  2008-Jan.      42150       -3510        40509       820174          45660
       Feb.      42826      -17331        41100       821355          60157
       Mar.      44299      -50224        41321       825910          94523

       Apr.      43561      -91848        41716       824631         135410
       May       44128     -111652        42115       827170         155780
       June      43364     -127914        41089       832490         171278

       July      43330     -122334        41353       838062         165664
       Aug.      44559     -123520        42568       842815         168078
       Sep.     102784     -187321        42733       905174         290105

       Oct.     315516     -332803        47612      1130304         648319
       Nov.     609937      -88849        50883      1433490         698786
       Dec.     820942      167376        53530      1651175         653565

  2009-Jan. p   858419      294922        60172      1700800         563496

For the two weeks ending
   Feb. 11p     673859      112527        62466      1522791         561332

So what’s going on here? At first glance, it looks like good news: reserves began flowing back into banks after October, when Congress made the Secretary of the Treasury the most powerful government official on the planet, and the vaults now appear to be flush with cash. About twenty times the cash they held a year ago.

What a turnaround! Thanks to a 12-fold increase in money loaned to banks by the Fed, reserves have gone from a $332 billion deficit to an excess of $295 billion in only 90 days, better than a half TRILLION dollar swing. (It’s still not clear to me where all the “non-borrowed” money in bank vaults came from.)

It’s worth noting that the previous high in “non-borrowed reserves” since the Fed starting recording these numbers in 1959 was only $62.8 billion in December of 1993. Current reserves are twice that.

The other number that jumps out is the monetary base, which doubled last year and is now about $1.5 trillion. “Monetary base” is the volume of money in the economy–currency and commercial banks’ reserves with the Fed. Read that again: the volume of money in the economy doubled between August and January.

Now, I’m no expert, but this is what it looks like to my barely educated eyes: the Fed dumped boatloads of money into banks that have hoarded the money instead of putting it back into circulation.

Some forecasters believe that the growth in money supply means the recovery has already begun. My reading suggests that this is too simplistic an analysis.

During the 1930s in the U.S., and more recently in Japan, banks accumulated huge cash reserves and sat on them because they were afraid of getting stuck with (even more) bad assets. The result was deflation–i.e., depression. The numbers above seem to indicate that the same thing is happening here now.

The banks have more money in their reserves than at any time in history. And the economic crisis was supposed to be a crisis of unavailable credit. It’s unavailable, all right, but not because the banks don’t have money on hand.

And that leads to the second shock to the economy: the shoe yet to drop is a sudden increase of money in circulation if the government somehow compels banks to lend all that cash in the vaults (to people already carrying too much debt and with no appetite for risk in a lousy job market–but I digress). A rapid increase in the money supply makes each individual dollar less valuable relative to goods and services, just as a baseball card is more valuable when it’s harder to find.

It’s a simple concept based on supply and demand. The dollar has no intrinsic value. Like a baseball card, it’s worth only as much as someone is willing to trade you for it. Print a whole bunch more of this year’s hot rookie card and the value drops; flood the economy with dollars, and you have to trade more of those pieces of green paper for a gallon of milk.

On the other hand, devaluing the dollar means the national debt, much of it held by foreign investors in the form of Treasury bills, is much smaller.

Depression now, inflation later. Maybe that’s the intended end game and the true, unspoken reason for the drive to nationalize. The biggest question in my mind is whether the government controls the bankers or vice versa.

Or maybe the question should be put this way: are we all socialists now, as Newsweek contends, or fascists?

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