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?