U.S. bank lending slumps by most on record in final weeks of March
finance.yahoo.comIt's interesting that many of us here are programmers and understand that debugging becomes exponentially more difficult as you add a number of variables beyond 1 to your deductive tests.
Yet when it comes to the economy, which is the product of an unfathomable number of variables, from the same people there are consistently these confident assessments of why we see x, y, z and what will happen.
It's worth discussing those things to the best of our ability, but we should have a tone of our confidence in these types of assessments that's commensurate with reality.
I've always thought that the Fed gets too much blame for the economy going badly, when all they can control is the interest rate and QE/QT. It's like an inverted pendulum PID problem[0] but with an unfathomable number of variables and stakes.
Monetary policy has incredible sway over the economy, so they should bear the brunt of the blame. It's odd to me that everyone talks about how important democracy and elections are, but when it comes to the mighty dollar, the thing that runs this country and largely the world, all decisions affecting its value are made by a board of unelected individuals behind closed doors through opaque models. The FOMC membership itself partly consists of bankers elected by other bankers, which always seemed like a conflict of interest to me. The Fed deserves more scrutiny, if anything.
They introduce top down decisions on what is a bottom up complex emergent system. Beyond being an exercise in futility to control it that way, it introduces irrationality to the whole thing as it becomes a politically driven thing. That irrationality makes everything else behave that way and we loose any sense of "natural" trends and predictability. The bailouts are a perfect example, we are now surrounded by zombie companies and uninteted consequences which are making the whole thing more fragile and unstable.
Right, but it's still possible to understand and debug incredibly complex programs, in the end it's still deterministic.
The problem with economics is that it's a social science, and that humans are non deterministic in their behavior. Not even seasoned economists can predict an outcome, the best they can do is understand what happened after the fact.
Separate to the "(non)-deterministic" question which would detract from this discussion.
One part we also fail to consider is that there is a feedback loop between all the individuals in society and any large economic levers that get pulled. This along with all the complicated interactions that are a result of the specific imperfect set of information each individual has makes this problem next to impossible to fully model. At best we could have approximations and models that abstract that complexity away. We approach something similar to the N-body problem in physics, which on some level I'd argue is simpler even as we have specific equations government their behavior. Not so the case for humans and their "internal" decision making process.
In my opinion it's classic Dunning-Kruger effect. For some reason the people in question took some Econ 101 or read some thing somewhere, and are extremely confident in their extremely limited economics knowledge, being completely ignorant of how complex it actually is in the real world.
As an aside, if there's one thing strategy games (and in particular Paradox' Grand Strategy games and Democracy) have taught me that might actually be real world applicable, is that nothing is simple or easy, and anyone (especially politicians) that they have one easy solution that will fix all problems is either ignorant or a charlatan.
I think this is just a temporary slump caused by the SVB failure. The economy is not doing great but it is not in a complete metldown.
I do expect interest rate to continue going up: inflation seems to be quite stubborn.
When lending stops, people stop buying things[0], like cars and houses. Or all that crap on Buy Now, Pay Later plans. There's these huge credit bubbles we have[1] that are going to be deflated very quickly once debt is no longer easily and cheaply available.
Bingo, banks are realizing that they underestimated their deposit risk so are lending less to build their reserves up to levels they now think are healthy. It sucks if you need access to capital right now, but it means we'll be less likely to see another bank failure next month.
If someone wants to chicken little about anything it should be wages not rising to keep pace with inflation. If unchecked this would eventually cause a collapse in consumer demand that WOULD melt down the economy.
When the article says, “Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973,” and later also notes that banks “divested” themselves of billions of dollars in loans, where is the money going?
Are they selling the loans off their books to third parties? Or are they just refusing to make new loans that they would have otherwise consistently made?
I was listening to Jim Cramer discuss it this morning, and he said the banks are nervous about lending out money/investing, in what is usually considered safe. Things like US treasuries or real estate. They are fearing a liquidity crunch.
I'm looking for a more concrete source.
edit: Found a source: https://www.federalreserve.gov/releases/h8/current/
I can't answer that concretely, but there is an active secondary market for corporate loans, so I have always understood divestment to mean selling the loans to third parties (eg, credit funds and CLOs), as you mention.
The largest nominal drop on record. Is it also the largest percentage-wise drop?
in case it wasn't clear from the terrible headline, this is about all United States banks, not U.S. Bank.
Oh wow thank you for clarifying that. I was thinking it was odd that we're getting a single bank's update here.
This wildly overstates the situation.
1. These are seasonally adjusted numbers. The unadjusted numbers are smaller.
2. The article does not account for the $60b in loan sales (unadjusted) to nonbanks the week of 3/22.
Lending definitely tightened up the week ending 3/22, but not to the extent the article suggests
The days of cheap capital are over, and not because of the Fed.
The largest generation, boomers, are now retiring. Up until now they've been pumping money into the economy and the investing with their 401k and things like that. Now that trend is reversing as they retire they are taking money out of the 401k, out of their life savings, at the same time their purchasing power is decreasing.
The end result is a lot less capital than ever before, capital is now more expensive. Tighten your belts boys a prolonged slump is coming.
> they are taking money out of the 401k, out of their life savings, at the same time their purchasing power is decreasing
Withdrawing from a 401(k) has no real effect. Spending the proceeds does. The decrease in purchasing power blunts the restrictive effects of those savings being spent with no corresponding contemporaneous production.
> a prolonged slump is coming
Careful. America is uniquely tuned to benefit from migration. The present trend is professional money managers, afraid to admit the Fed is paying more than they’ve performed, continuously forecasting an imminent recession (and presumed rate cuts).
> Withdrawing from a 401(k) has no real effect.
Highly disagree here....
First, selling stocks puts downward pressure on price and also p/e ratio. A lower p/e ratio means startups and growth companies trade at lower multiples.
Second, selling bonds increase yields, which means the price of borrowing (interest rates) goes up. When that happens, companies that borrow money (most of them) see lower profits because more money is spent on interest than on investment (machinery, people, etc).
Capital markets are complicated beasts, but withdrawing capital has very predictable effects - we just don't know if the effect will happen slowly or quickly (like in a panic).
One other effect that happens is that as people retire (or get close to retirement), their investment choices become more conservative and there tends to be a shift from smaller, more volatile growth companies to larger, more established companies with good dividends. That shift alone is worth a thesis or two.
As for your last comment, I can't tell from the wording whether you agree or disagree with the PP's comment. However, I would note that since the baby boomer generation is larger than the Gen Z now entering the workforce, that on average, experienced people are retiring at a higher rate than the rate that young inexperienced people are joining the workforce. This tends to result in higher labor cost (fewer people to fill jobs), which, when combined with higher interest rates tends to mean lower growth for a good period of time (measured in years, not months). Obviously there is variability from month to month and quarter to quarter, but the trend is clear (or will be soon to everyone). It's not the 1970's, but some of the parallels will be surprising.
> selling stocks puts downward pressure on price and also p/e ratio…selling bonds increase yields
These are financial effects. It takes extra steps to get to a real effect, unlike spending. (Financial effects are monetarily mediated, which means the Fed can do things.)
> lower growth for a good period of time
Agreed. That’s different from “a prolonged slump” [1][2].
Wouldn’t withdrawing from your 401k and transferring it to a checking account limit the pool of funds available for equity investment and move it into lower risk assets?
The money in your checking account is still available for lending. Most every dollar on deposit with a "bank" remains available for that bank to use/leverage/loan. Money isn't really parked until you stash it as cash under your mattress.
> Wouldn’t withdrawing from your 401k and transferring it to a checking account limit the pool of funds available for equity investment and move it into lower risk assets
Yes, at the margins. But these are still financial effects. When a capital project is delayed because the bank they hired to sell stock came back with a lower price after talking to the retiree’s asset manager, that’s a real effect.
Controversial opinion: The US's buying power has led to global negative externalities directly tied to the cost-cutting measures needed to drive perpetually increasing profits and population growth, most of which was fueled by a strong growing economy. A long-term slump might lead to a net reduction in negative externalities, assuming there is a refocus on more efficient resource allocation in order to safeguard the health, education, safety, and employment of citizenry and environment.
That's an interesting thought.
I prefer to use the word "de-globalization", which covers some of the same effects.
I would agree, with the caveat that even pre-globalized societies tend toward exploiting resources and people when there's a strong economy supporting a demand. It's hard to find a case of an increased demand leading to increased resource utilization that doesn't end in negative externality.
It’s not all of the Fed’s fault, but they did keep printing. The main culprit though is the multiple administrations who didn’t fully weigh the long term consequences of weaponizing the dollar.
But where will that money go? It's not going to get put into the caskets of deceased boomers. It will be inherited by Gen-X and Millennials who will do something with that money.
Once that money has been dumped into the economy, it's going to slush around for a long time. Maybe there will be some massive capital destruction event but I can't think of anything potentially imminent.
The problem is that when you put a dollar in savings or a dollar in the stock market you are actually "creating" an extra dollar from an economic standpoint.
If I put a dollar in the bank the bank can then use that dollar to loan to someone else, but I still have "my" dollar. So where there was 1 dollar there are now 2. Once we start pulling money out of investment vehicles we aren't only removing that money but also the backing the loans that depended on that money had.
Thus the boomers pulling out for retirement result are the capital destruction event.
> I put a dollar in the bank the bank can then use that dollar to loan to someone else
This isn’t how banks work. When “a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money” [1]. Loans create deposits, not vice versa.
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Fractional reserve requirements limit the amount of loans a bank can make relative to its deposits.
> reserve requirements limit the amount of loans a bank can make relative to its deposits
Reserve requirements haven’t restricted lending for decades. It’s why they’re zero in most of the world, replaced by finer-tuned capital and liquidity requirements. (And deposits != reserves.)
That only works if the requirement is above zero. Which it isn’t.
Are there still fractional reserve requirements in the U.S.?
Not with the stock market. When you put a dollar in the stock market someone else is taking a dollar out. For every buyer there is a seller and vice versa.
It doesn't just disappear though, the money goes into annuities/bonds or into bank accounts as cash. The funds that get taken out to spend then move through the economy into other bank accounts they don't just disappear into thin air.
> Thus the boomers pulling out for retirement result are the capital destruction event.
No that’s just an asset swap. There’s no aggregate balance sheet contraction. Now bankruptcies on the other hand are very much debt deflation as is loan repayment.
Seems like a temporary problem. Boomers convert savings into spending. One man's spending is another man's income. That person now has money to spend or save, and then we're back to where we started.
> It will be inherited by Gen-X and Millennials who will do something with that money.
The boomer ethos is “have the check for the funeral bounce” so that spending will be shifted forward.
I don't dispute the economic importance of boomers retiring. However, millennials are the largest generation.
https://www.pewresearch.org/fact-tank/2020/04/28/millennials...
Key word living though, right? This is because folk have, well, died?
I don't fully understand how the millenial population can go up between 2019 and 2033 on that chart.
FTA: "The Millennial generation continues to grow as young immigrants expand its ranks"
Ah, that makes sense.
American baby boomers are worth, on average, something like $1.2M depending on your source. That's a lot of retirement capital that will be leaving various markets and chasing goods and services over the next few decades.
> The largest generation, boomers, are now retiring.
I know bunch of family who've done this. All ski/mountain towns have now turned into de-facto retirement communities with younger workers often commuting 2-3hrs to their job.
Quite possibly.
Another way to look at this is from the resource, instead of financial, perspective - the boomers will stop producing but will carry on consuming, this will put a burden on the rest of us (modulo automation and immigration from / offshoring to places with different demographic characteristics - crudely, robots and immigrants would be cleaning up after them). Financial engineering (i.e. pensions) ensures that they (mostly) will be looked after, instead of tossed on the scrap heap.
Coincidentally, I just saw two separate job ads on the subway looking for caregivers. Maybe the next booming sector would be taking care of retired boomers.
Retiree wealth mining is the next great gold rush!
One interesting scheme I recently came across is an assisted living home that doesn't take regular payments. Instead, they have their residents sign over their entire net worth at the event of their death, leaving nothing for their inheritors. The tradeoff is that they get to stay for as long as they live. Of course, this scheme has some obvious perverse incentives for the operators of the home.
Those are some terrifying perverse incentives, jeez
As long as they don't name the home Tontine
Is there a minimum net worth to get accepted?
This massive labor shift toward service work has been well underway across the US. See, eg, this excellent case study of how Pittsburgh's aging, shrinking cohort of unionized steel workers (with good health insurance) has been demographically offset by a growing (precarious, non-unionized) medical and care industry. Now the largest employer in Pittsburgh is the university medical center, and the largest sector is care workers.
https://shop.nplusonemag.com/products/the-next-shift-by-gabr...
This pattern isn't unique to Pittsburgh, of course, and has played out broadly across the US.
Lets just hope it's done by the government and not by private corps gouging people who just need care.
I think that's a pretty unrealistic hope. I don't think the government is going to spin up up millions of workers to be in home caregivers and start building government funded nursing homes. That's not to mention the budget implications is such care.
Some states are looking at or implementing new mandatory Insurance programs nursing home care, but these are far too late for Boomers to pay into them in a meaningful way
> Some states are looking at or implementing new mandatory Insurance programs nursing home care, but these are far too late for Boomers to pay into them in a meaningful way
This has not stopped Washington state, for example, from allowing Boomers to benefit from these programs without paying into them in a meaningful way.
If you have medical necessity, Medicaid pays for long term nursing homes once you meet their financial requirements (spend down assets and have low enough income).
Some nursing homes specialize in medicaid patients, which isn't much different than a government funded nursing homes IMHO.
I fully agree that's the case. I was more addressing the idea of the government providing the services directly and cutting the private providers out of the loop
Even government homes (in Canada) are often income/wealth-adjusted.
The government will be gouging the young to pay for it.
From the generation that brought you Ronald Reagan, boomers will have no trouble bankrupting the youth to pay for their entitlements
> From the generation that brought you Ronald Reagan,
The age groups that Reagan won were the ones that are (predominantly composed of, because the categories don't perfectly match generation boubdaries) Silents and older. The Boomer age groups were tied (22-29 went 44 Carter, 44 Reagan, 11 Anderson) or for Carter (18-21 went 45 Carter, 44 Reagan, 11 Anderson.)
The generation(s) that brought you Reagan are, for the most part, dead.
Washington state recently added a new youth to elderly wealth transfer program under this guise (LTC).
The boomer playbook has always been voting themselves benefits to be paid for by their children and grandchildren. This seems to be universal: liberal, moderate, or conservative. See the national debt.
And I say this as a boomer myself.
> The boomer playbook has always been voting themselves benefits to be paid for by their children and grandchildren
The Boomers were in their prime working years when the Silents under Reagan did the US’s biggest tax burden shift onto them, and cut their expected benefits along with it.
What are you referring to, specifically?
This is an interesting theory, but couldn't the opposite happen? As boomers aged, many will have gradually reduced their stock holdings to own less risky assets in preparation for retirement. As boomers die, Millennials will invest the inherited capital back in to the market because they have a higher risk tolerance.
> The largest generation, boomers, are now retiring.
Aren't the majority of Boomers already retired?
The usual definition of Boomers is those born in [1946, 1964]. That's people currently 59-77 years old.
Some people do now divide Boomers into two groups, Boomers born in [1946, 1954] and Boomers II born in [1955, 1964], so Boomers II are now just moving into retirement.
I like to blame boomers for stuff too, but this seems like a big stretch.