A banker emailed me today with an insider's view of what is going. His comments about why banks may be keeping so much money out of the system and back at the Fed as excess reserves is particularly illuminating. I reproduce in-full his very insightful letter:
Mr. Wenzel,
One factor that has surprised me, given the inflationary upsurge in the economy since last summer, is that the effect of QE2 has been only moderate with respect to excess reserves. As you have noted, money growth has been around 5% per year, but has not broken into truly explosive territory, which is certainly possible given the potential level of credit inflation from the gargantuan level of excess reserves.
I have worked as an underwriter for a regional bank...(mea culpa, mea maxima culpa; When people ask what I do, I am tempted to answer "I am inflationist."). I am currently looking to get out of banking, preferably into the oil and gas field, upon which my local economy is mostly centered. Part of the reason is the low pay, partly the insufferable bureaucracy of banking. Having to deal with Loan Officers is another negative. Nassim Taleb hit it on the head when he said that "Banks hire dull people and find ways to make them even duller." At best, Loan Officers are nominally reasonable and cautious, at least within the limited worldview of a banker. The worst of them disguise their financial and economic ignorance with an unseemly hauteur. Arrogance and stupidity do not make a good combination, especially in an industry with over 10 to 1 leverage.
One thing I have noticed I that the Feds certainly still seem to be in the "whiplash" mode from the previous crisis. Basically, the regulators represent that they were "lied to" by the banks, and are simply putting things aright (a convenient face-saving excuse, considering that the Fed, with its expansive monetary policy, was the fountainhead of speculation in the last boom). Since 2009, they have been putting the banks under unprecedented scrutiny, beating them up about inadequate monitoring of loan grades, poorly maintained files, and excessive commercial real estate in their portfolios. In addition to this, there are the byzantine provisions of the Dodd/Frank bill to navigate and implement. Despite the passage of time, this elevated level of regulatory scrutiny continues.
I feel that part of the reason that excess reserves are so high is the regulatory environment. Except for Freddie and Fannie (who, despite their previous excesses, are allowed to carry on again as before), the regulators are not letting up on the pressure. If they were to relent, whether from political pressure or from having satisfied themselves with the level of chastisement they have dished out, I believe that banks would feel more free to loan up on their reserves. Given the potential profits to be had from the current loan spreads, there are a lot of Loan Officers chomping at the bit to make loans (note: banks are now putting 4-5% floors on their floating-rate loans; looking at the spread w. the Prime rate doesn't capture this). Whether the current regulatory tone is simply a case of shutting the barn door after the bull has left (the typical regulatory reaction), or is, underhandedly, another "tool" Bernanke has invented for himself, it is certainly putting the brakes on any potential credit expansion.
Keep up the good work!
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P.S. If you happen to mention this subject on the Blog, I would like to remain anonymous. My employer's management doesn't exactly have a sense of humor about us commenting about these issues.
My SIL is a commercial underwriter at a small regional bank and has said about the same thing. Her bank does so little lending these days that her dept that at one time had over 50 underwriters has only three today. She and the others spend most of their time doing compliance work for the plethora of governmental regulators that audit the bank continuously now. She says the bank is essentially scared to death to lend money. She wants out of banking so badly as does everyone she works with.
ReplyDeleteReally sad, it's the system, not the people - until you get to the upper levels. Hope the person finds work!
ReplyDeleteWhen folks speak about the banks they sometimes forget or do not know there is big difference be between the TBTF(American Bankers Association) and the smaller community and regional banks (Independent Community Bankers Association). For the most part, later are paying the price for the formers excesses.
ReplyDeleteDavos,
ReplyDeleteThe system is the people.
"The system is the people."
ReplyDeleteRespect your opinion but don't agree with it.
The morons who control the power design the system. You had people in the system trapped. Faced with devastation if they spoke up. Faced with being scorned and marked as stupid by world class college professors of economics. Most of those college professors were on the take and are morons.
Many, like "Tanta" spoke out anonymously in the blogoshpere.
Davos,
ReplyDeleteNot an opinion, a fact.
Take away the people, there is no system.
The poor outcomes of the "system" are the direct result of the psychological inhibitions of the people you mention. Their fear of being ridiculed, which greatly outweighs their fear of doing the wrong thing (failing to speak up and let a tragedy/crime take place on their watch), is the reason the system produces the outcomes it produces.
The system is the people.
You don't get to assign guilt and blame based on your own perception of who is powerful and who is powerless when they're all part of the same system and all contributing toward its ultimate outcome. If these people are not being physically forced to participate, they have chosen to be a part of the system and thus a part of the problem.