Precipitous Reduction in Bank Reserve Requirements
In Barron’s this week, Alan Abelson discusses the gradual changes in Bank reserve requirements over the years, and the impact that has had on banking, via Crosscurrents Alan Newman.
Note that this is not the 2005 SEC change in leverage rules fro investment shops, but parallels the same radical deregulation and regulatory capture.
Excerpt:
“Alan Newman, whose CrossCurrents market commentary is unfailingly informative [is as] bearish as ever. Alan leans heavily on technical stuff to analyze the increasingly flighty investment scene, but don’t let that scare you. He admirably avoids most of the mumbo-jumbo that makes so much of the genre incomprehensible and gives voice to his opinion in clear and lucid declarative sentences.
Not least of the various and sundry concerns that trouble Alan is that a generation of economic growth leading up to the Great Recession was largely fueled by an enormous expansion of debt and we’ve yet to pay the full price of that extreme and lengthy fecklessness. That’s not exactly a secret, to be sure, but the key to assessing the future of the economy and the markets is to find out what got us into this awful jam to begin with.
And one of the prime causal agents of this massive growth in borrowing, Alan relates, was the precipitous reduction in bank reserve requirements, from 12.3% in 1968 to 10.1% in 1978 and 8.5% in 1988. What that meant, he explains, was that the banks could lend 12 times their reserves, which, we might add, most of them lost no time in doing, and ultimately lived to regret it, except for those institutions that are no longer standing.
A legacy of that barely credible rush to lend that bedevils us still, Alan laments, is that reserve requirements have become something of a meaningless statistic as banks push into more-lucrative businesses like the creation and sales of sophisticated derivative instruments “that no one truly understands” or, for that matter, has even a tenuous grasp of the attendant risks.
And he points out, too, that banks now have gone whole-hog in high-frequency trading, which accounts for over 70% of turnover on the exchanges. And, we might add, is finally drawing more intense scrutiny by the often somnolent SEC. In short, increasingly, and one might say eagerly, banks have abandoned their traditional roles in favor of speculating. Crucial in enabling the banks to indulge their wayward activities was the 1999 repeal of the Glass-Steagal Act enacted in 1933 to prevent the banks from using the savings of widows, orphans and other innocent depositors as the coin to speculate with.
One mind-boggling result cited by Alan of the banks becoming prey to the casino mentality is that dollar trading volume now weighs in at four times gross domestic product — that’s right, quadruple GDP — and up a full tenfold what it was from 1926 to 1999. We’ve become a nation of paper swappers.
According to Alan, it could be a long time before the bear market bottoms, and he’s wise enough not to give a date or a number. Among his immediate worries is that the cash holdings of mutual funds, the tinder, as it were, to ignite a real rally, at last count was a meager 3.3% of assets, an all-time low. So, he asks, “What will fuel the next bull market? Hope?”
Interesting stuff . . .
>
Source:
A Doleful Report
ALAN ABELSON
Barron’s SEPTEMBER 3, 2011
http://online.barrons.com/article/SB50001424052702303807404576540463846785874.html
Tweet
Facebook
Reddit
Digg this!
September 5th, 2011 at 4:06 pm
After years of actively lobbying to continually lower their own bank reserve requirements, the banks are doing what?…”that banks now have gone whole-hog in high-frequency trading, which accounts for over 70% of turnover on the exchanges. And, we might add, is finally drawing more intense scrutiny by the often somnolent SEC. In short, increasingly, and one might say eagerly, banks have abandoned their traditional roles in favor of speculating. Crucial in enabling the banks to indulge their wayward activities was the 1999 repeal of the Glass-Steagal Act enacted in 1933 to prevent the banks from using the savings of widows, orphans and other innocent depositors as the coin to speculate with.” Game. Set. Match. It’s like allowing a cancer to progress without any intervention or treatment…it will eventually kill the patient…
Another great find BR…
September 5th, 2011 at 4:42 pm
Yup. Fractional lending (fraudulently) is alive and well.
September 5th, 2011 at 4:57 pm
Great article. The point about mutual fund cash is dubious though…. “people must not be planning on traveling..buggy whips sales are down!”
September 5th, 2011 at 6:58 pm
Banks are never constrained by reserves or reserve ratios. In Australia, Canada, Sweden and New Zealand there are no bank reserve requirements. Banks are capital constrained. Capital is not reserves.
For more reading:
http://www.nakedcapitalism.com/2011/05/banks-are-not-reserve-constrained.html
http://www.creditwritedowns.com/2011/05/banks-are-never-reserve-constrained.html
September 5th, 2011 at 8:39 pm
“We’ve become a nation of paper swappers.”
And house flippers.
There is a PT Barnum born every minute.
September 5th, 2011 at 8:59 pm
+1 to tradeking13. Banks are not reserve constrained. Cf. http://bilbo.economicoutlook.net/blog/?p=9075
September 5th, 2011 at 10:01 pm
Not sure why these ancient-history reserve ratios are being cited, when the BIG change was the overnight sweeps quietly okayed by Greenspan in 1994.
Under this subterfuge, so-called demand deposits (with reserve requirements) are swept into savings deposits (with little or no reserve requirement) overnight — sort of like Cinderella’s beautiful coach turning into a pumpkin at midnight.
A more accurate name for the ‘overnight sweeps’ scam would be ‘institutional fraud,’ since it means that demand deposits are not properly backed by reserves.
Make no mistake, though — the de facto slashing of required reserves to ZERO via overnight sweeps was a major factor behind the monstrous 1995-1999 stock bubble. Yet another ‘achievement’ of the idiot ‘maestro,’ the worst fool ever to have headed the bankster cartel.
September 6th, 2011 at 9:20 am
Reagan was a crack president. Both crack and leverage were ushered in 1981. Heck, throw in the ATC strikers evaporated like grandma’s savings interest income today. Ronnie was the patron saint of Wall Street. He got those machines turned back on just like Duke & Duke’s dream.