CM + IT = Disaster

A note of comparison might come in handy when thinking in big numbers.

The top 25 hedge fund managers made a record $25.3 billion dollars in 2009. And despite all those dramatic congressional hearings, average compensation of Wall Street bankers rose by 27 percent in 2009. Meanwhile, banks are hiding their debt with the same old balance sheet magic they’ve been deploying for years and posting record new trading revenues—

On the other side of humanity, more sobering numbers include a record 2.8 million properties in foreclosure for 2009, a 21 percent increase over 2008’s astonishingly high figure, with another 4.5 million foreclosures projected for 2010.

Banks are incentivized not to lend. When the Emergency Economic Stabilization Act (which included TARP) was passed in October 2008, it included some fine print allowing the Fed to pay banks interest on reserves (money, or capital, banks are obligated to park with the Fed to back their businesses), and on extra reserves (money they aren’t obligated to park). In September 2008, the top banks were required to keep $43 billion dollars in reserve at the Fed, and placed $59 billion in extra reserves. Today, banks are required to keep $63 billion in reserves, but parked an extra $1.2 trillion at the Fed.
(bolding mine)

Lifted from an e-mail, our Ken Houghton opines:

What that $1.1T isn’t doing is being invested internally in new equipment or processes.

Take that pile of cash, and then look at the cash on hand (excess reserves) at the banks. Ignoring my natural tendency to rant about the idiocy of paying interest on reserves–LET ALONE EXCESS RESERVES–that’s breaking the accounting identity (S=I) and the money multiplier.

As a ballpark, you should see that in GDP trending annually about $200-300B below the previous trend. ($1T in reserves => ca. $5T in relatively safe lending; ballpark a 5% return = $250B.)