July 27 (Bloomberg) — The Federal Reserve’s policy of keeping interest rates persistently low, which has helped boost bank earnings over the last six quarters, is beginning to make it harder for the biggest U.S. lenders to make money.
Oh really? Keeping interest rates low?
Aren’t you being a little backward with that, Bloomberg? I think so, and here’s why:
Notice that when “QE” started the long end of the curve went higher on rates.
That’s “NIM”, or “net interest margin.” That is, banks can borrow at near-zero (short term rates) and lend out for ten years at the longer rate, which is a higher interest point, pocketing the difference.
Now remember, Bernanke’s argument for “QE” is that it would suppress rates. He was either wrong (in which case he won’t do it again as he didn’t get what he wanted) or he was lying, in which case he intentionally screwed every borrower in America and lied to Congress in the process.
So which is it?
Does it matter?
Well, not really.
There’s no loan demand – as I have repeatedly pointed out and have posted the chart on enough times to go blue in my face, private credit capacity has been reached in the economy. People are either unwilling or unable to borrow, but which it is doesn’t matter.
The attempted “can kicking” of “reflation” requires that private credit demand re-accelerate and to in fact buy “just a few more years” we would have to roughly double credit outstanding in the system.
We keep trying to cheat reality. We did it in the 1990s and we did it after 2000. The 2000-2007 run in credit was truly impressive – we doubled, roughly, outstanding total credit in the system, while GDP expanded somewhat less than 40%.
The game’s over. The Fed has done all they can really do to stimulate further credit demand, and has failed.
“When banks can’t find yielding assets and their book is shrinking, the cash flow on their book is shrinking,” said Whalen of Institutional Risk Analytics. “Everybody’s starving to death.”
With luck it will be a slow, nasty, and painful death by starvation for those banksters and their enablers who intentionally created this mess, despite having actual knowledge that on a perpetual basis what they were doing wouldn’t work – it was mathematically impossible for it to do so.