The U.S. Economy Remains As Frozen As Ever
(Mark Moran/The Citizens' Voice via AP)
The U.S. Economy Remains As Frozen As Ever
(Mark Moran/The Citizens' Voice via AP)
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It would be remembered as Snowmageddon. On February 5 and 6, 2010, the DC beltway area was blanketed with almost 18 inches of the freezing white stuff, the fourth-worst blizzard to strike the area since anyone had been keeping track. At Dulles, it would end up being the snowiest, that airport recording an impressive 32.4 inches. Needless to say, much of the federal government came to a screeching halt.

The government, at least, would quickly recover.

This was a metaphor, of sorts, not one lost on millions upon millions of the nation’s working peoples; or, formerly working. They had just completed a year, the worst for them since the Great Depression, when it seemed, for reasons no one could adequately identify, the entire US and global economy simply iced; the entire global system frozen to a complete stop.

Then-Federal Reserve Chairman Ben Bernanke had been scheduled to appear before the House of Representative’s Financial Services Committee on February 9, but continued bad weather forced a one-day postponement. It had been the same body which previously rubber stamped their approval on a second term for the guy despite what was supposed to have been substantial opposition.

Anyone remember Audit the Fed? A joke today, in late 2009 this was seen as something of a real threat. People were rightly angry, and Bernanke hadn’t really told them much aside from selling politicians, in particular, on the idea he’d saved the world. Many were, incredibly, willing to go along with this, yet even his supporters had to reluctantly acknowledge someone eventually should have answered for why there had been a Global Financial Crisis in the first place.

After all, it was none other than Governor Ben Bernanke standing before Milton Friedman several years earlier, in 2002, promising “we won’t do it again” (stating the Fed had made critical errors of monetary mis-judgement before and during the Great Collapse beginning in 1929 which then became the Great Depression). More than a few, if not enough, began to wonder if the Federal Reserve System actually had done it again.

The November prior to all that DC snow(job), in November 2009, Vincent Reinhart uneasily speculated if the situation had finally caught up to the institution. A former director of the “central bank’s” Division of Monetary Affairs, Reinhardt could easily sense the growing backlash which included broad support for Audit the Fed.

“At least on the Federal Reserve part, Congress is going to converge on something that's tougher on the Fed. It's a way to vent anger. And fundamentally people are angry.”

The people – both right and left – were enraged about the costs, the symptoms. More than anything, the fact that it was the global workforce which bore the brunt of the disaster, without any answers coming from anyone.

Subprime mortgages? Yeah, no.

What Ben Bernanke told the House Committee, the same one which cleared the way for his second term, after that term had already been confirmed by full vote not even two weeks before, was an astounding if fleeting bit of honesty. Yes, honesty. Safely ensconced in another four years, and not yet bothered by having to undertake a second QE in as many years, the Chairman maybe felt some space to speak a tiny bit more candidly.

Hardly anyone picked up on it (maybe because it was such a rare occasion). Of the few who might have, no one appears to have understood what they were hearing at this later hearing. While buried under such heavy snow outdoors, the coldest shudder was saved for the concealed confession taking place inside the Capitol.

“Liquidity pressures in financial markets were not limited to the United States, and intense strains in the global dollar funding markets began to spill over to U.S. markets. In response, the Federal Reserve entered into temporary currency swap agreements with major foreign central banks.”

Notice what he’s saying, prefacing it with a little of “not my fault.” These “liquidity pressures” were worldwide, so, if the Fed screwed up it was hardly alone. Safety in numbers, presumably.

But that’s not the key part, this is: “intense strains in the global dollar funding markets began to spill over to U.S. markets.” In other words, the entire affair began overseas and then struck the mighty United States safeguarded by its exemplary Fed “somehow” rendering it completely vulnerable to such massive damage.

Overseas in dollars.

Immediately after, Bernanke runs to his post-crisis playbook; yes, it was bad but the Fed’s actions after it happened limited the downside consequences (even though those consequences were the worst since the thirties). These overseas dollar swaps, the Chairman told Reps, had been effective – in his judgement.

“The swaps helped reduce stresses in global dollar funding markets, which in turn helped to stabilize U.S. markets.”

And yet, just two sentences later, he goes on to describe, “As the financial crisis spread, the continuing pullback of private funding contributed to the illiquid and even chaotic conditions in financial markets and prompted runs on various types of financial institutions, including primary dealers and money market mutual funds.” From “helped to stabilize” to “as financial crisis spread” without anyone calling him on this obvious coverup.

Just how effective were these swaps if what he said ended up the result anyway? This is, of course, a rhetorical question. And it is the only question for us today.

Yes, as Reinhardt said, people were fundamentally angry. They remain angry to this day, though, like then, they have no idea why. The world seems to be broken and nothing Chairman Bernanke did fixed it; not later in 2010 with a second QE, nor in 2012 with a third and a fourth (yes, there were four by December 2012).

What happened was as simple as it was misunderstood; and it never should have been so badly misconstrued. Aided by a compliant world media, these QE’s were characterized, as they had been from the beginning years earlier in Japan, as “pouring trillions of dollars into the real economy.” This wasn’t even appropriate as a euphemism for QE.

No part of that description is factually true; QE’s create bank reserves. Full stop. Those are neither dollars nor do they get poured anywhere except on a commercial bank’s balance sheet. It does not matter how many times someone says they are “base money” or that QE is “money printing”, the issue with bank reserves had been settled years and years before this global dollar mess ever showed up.

And I’m not just talking about the Japanese failure with “quantitative easing” from the start of the 2000’s.

This is one reason why it is so frustrating while also so tragic; Bernanke supposedly knew most (at least according to what “everyone” in Economics said) about the fractures and weaknesses which had once led to the Great Depression, yet in our own moment of need which, as Bernanke told Congress in February 2010, he turned monetary policy over to bank reserves which had zero role in either lessening that prior Great Collapse or fostering any recovery from it.

The reason for much of the suffering during the Great Depression wasn’t just in the near-total implosion, rather it was how that breakdown changed the very nature of the monetary environment from then onward (until Bretton Woods redrew the monetary landscape a long time and a world war later). As the planet would see again in Japan six decades later, it is banks not bank reserves which determine the outcome – during the collapse and then following.

In late 1936, despite the fact recovery was then not yet in sight (see below), Federal Reserve policymakers at the time began to consider inflation their biggest threat (sounds familiar). The reason again was a huge buildup of excess bank reserves (as gold flowed into the US after dollar devaluation). The FOMC’s minutes of the November ’36 meeting aptly summarizes both sides, actually, in theory vs. reality.

First up, bank reserves:

“Consideration was given particularly to the question whether it would be preferable for the Board of Governors to use its power to further increase reserve requirements, inasmuch as it was understood that excess reserves are fairly generally distributed among member banks and an increase in reserve requirements probably would work no hardship on any substantial number of member banks, or for the Federal Open Market Committee to reduce the total holdings of Government securities in the System Open Market Account, which might be interpreted as a reversal of the present easy money policy.”

Many were concerned how so many reserves would inevitably unleash a tidal wave of inflationary credit, therefore policymakers – newly empowered by the Bank Act of 1935 – needed to get in front of it. Right out of the mouths of current day “experts”, too much liquidity, they surmised.

The very next sentence of those same meeting minutes, however, should have ended the discussion right then:

“In this connection reference was made, as indicating that the time had not yet arrived for a reversal of policy, to the continuing large amount of unemployment, to the fact that there is still unused productive capacity, and to the relatively low aggregate of national income in the United States, together with the fact that there is no general indication of unhealthy growth in the use of bank credit.”

In short: the economy hadn’t recovered at all, was still grossly and dangerously impaired, and much if not the vast majority (despite the New Deal) had been due to “the fact that there is no general indication of unhealthy growth in the use of bank credit.” On the contrary, there was every reason to believe, and unambiguous data to show, the monetary/banking system was still every bit depressionary even seven years after the prior peak.

The Federal Reserve’s very own contemporary data display the unbroken ugliness of it all: at the peak in Q4 1929, Federal Reserve member banks (commercial banks) reported $35.9 billion in total assets, of which $26.2 billion were loans. By the fourth quarter of 1936, banks had rebuilt their portfolios back to $33.0 billion (from an obscene low of $24.8 billion) but only $13.4 billion had been loans!

Rather than lend – which is the whole point – the banking system instead couldn’t get nearly enough US Treasuries. In fact, the more the government went into deficit to fund the New Deal, the more UST’s they offered which the banking system bought up at higher and higher prices. In Q4 1929, member banks held less than $4 billion of government bonds and the like; by the end of ’36, a better than threefold increase to $13.5 billion.

This is not just the interest rate fallacy identified and illuminated, it speaks to the more fundamental monetary issue behind depressionary economics (small “e”) which seems to have escaped Ben Bernanke’s worldview (along with every other late 20th/early 21st century Economist).

Lending isn’t just trying to rebuild busted mortgages after popped bubbles, it is the very essence of monetary redistribution. This is, after all, what banks are supposed to be, and what their central role is in any healthy economy.


The banking system should take in money (or create it) and then reallocate throughout the economy as needed. It is the presumed expertise of the banking system which leads to necessary efficiency so as to create and maintain sustainable economic growth. Loans, unlike liquid assets such as bonds, are how money flows to what would otherwise be underserved, therefore illiquid and depressive parts of the economic whole.

Without lending – as during the aftermath of the Great Collapse – at best partial recovery which isn’t nearly good enough. Absent redistribution via bank intermediation, too much of the economy is left without monetary resources which then congregate in too narrow spaces; such as the bond market for government issues financing wasteful, inefficient government spending that would be better directed elsewhere but can’t be without lending.

This crystal-clear preference for the safest and most liquid assets over lending, and not just government bonds, any kind of liquid debt security, is likewise a clear indication of exactly what’s wrong – safety and liquidity. The banking system of the thirties didn’t just prioritize those characteristics, they lived them to the point that the system reinvented itself to operate under these conditions.

The Fed’s bank reserves didn’t matter, and so the recovery never happened. Some members of the ’36 FOMC got that much right before they were overruled by Economic Theory.

In the fourth quarter of 2008, the domestic US banking system totaled $14.4 trillion in assets; of which, $8.5 trillion were loans. On hand were only $102 billion in UST’s along with $1.4 trillion of GSE debt securities (a Treasury equivalent).

As of the latest data for Q2 2021, bank assets total up to $24.4 trillion comprised of just $12.0 trillion in lending while $1.3 trillion in UST’s along with an astounding $3.7 trillion of GSE’s. Loans which had made up about 60% of bank assets when Bernanke was “saving” the world, are now, for the first time since 1955, less than 50%.

And these totals don’t take any account for rates of growth which have declined substantially since 2007, a complete regime shift in the aftermath of “intense strains in the global dollar funding markets began to spill over to U.S. markets.” Like the thirties (if not to the same degree), the banking system has abandoned too much of its redistribution function in favor of the safest and most liquid.

During the first half of this year, the same six months when claims of out-of-control inflation were at their highest and most hysterical yet, the US banking system “somehow” added another $146 billion of UST’s to go along with an additional $354 billion of safe, liquid GSE bonds. Those together with a $516 billion increase in bank reserves account for more than the net increase in total assets.

One reason why, lending declined by $25 billion at the same time.

Just like the thirties, again in Japan in the nineties forward, and Europe concurrent to everything I’ve written here, it’s not bank reserves but banks which determine whether recovery or not. Ben Bernanke claimed to have saved the banking system, yet by its own actions and behavior this cannothave been true.

Because it was a global dollar system which broke first, the banking system globally merely responded in kind; and did so in a way which should have been familiar to especially Mr. Ben Bernanke more than anyone else on the planet. Alas, he’d been too busy trying to cram his global savings glut nonsense into where the actual global reserve money (eurodollar) came from.  

Pondering the potential actions of his successor’s successor, Mr. Jay Powell, it really does not matter what he does; taper, rate hikes, more QE’s, even another QT. People ask me all the time what it would take for me to change positions, to climb aboard the inflation view that somehow only gains adherents the longer we go without any; or any answers for why this is.

My answer remains the same and incredibly simple: banking and redistribution. Without these, nothing has changed and therefore nothing will. There may be bouts of consumer price deviations along the way (see: 2008; 2010), without the intermediation they’ll never be more than transitory.

The blizzard which struck the monetary world first all those years ago never thawed, the deep snows of safety and liquidity preferences piled as high as ever on a frigid real economy unable to dig itself out from under the disaster. The promised fires and heat of inflation nowhere to be found, not in any real sense outside of overbaked rhetoric, the economy remains as frozen, its workers frozen out, as ever. 


Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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