Tuesday, November 12, 2013

The World's New Age J.P. Morgan

I showed you here, QE has not only been infective at growing outstanding (thanks Sober Look). More so, we have seen a growing disparity between the growth in Fed's balance sheet and the banking system reserve balances, a trend that appears to be accelerating.

So if the expansion of the Fed's balance sheet has not gone to reserve growth, credit growth, or as Hussman points out a lack of employment growth, where has it gone? I had postulated that a portion has ended up in the investment markets, and in a round about way it has. However, as Zero Hedge recently pointed out, the later QE programs have been a mechanism bailing out foreign banks.

What may not be quite visible in the chart above is that during QE 2, virtually all the newly created cash ended up at foreign banks. This is shown far more clearly in the chart below showing the change in cash balances at large domestic commercial banks and foreign banks between the start and end of QE 2.

So while the Fed was explicitly pumping the deposit base of foreign banks in 2011 - and thanks to JPM and the entire deposit collateral pathway we now know that this cash was used to satisfy collateral requirements needed when purchasing risk assets, even if the banks never explicitly used the Fed's cash to buy up risk - what has it been doing so far in 2013? The answer is shown below.

Surprisingly - if only to all those who claimed our assertion that the Fed was bailing out Europe's banks was bunk due to "regulatory arbitrage" - entirely unlike during QE 2, this time around, virtually every dollar newly created by the Fed has landed on an equal basis at both large domestic commercial banks, and foreign banks operating in the US. But... but... whatever happened to the regulatory arbitrage of QE2?
To those still confused, here is the best visualization of the cash change in domestic vs foreign banks under the two QE regimes:

Indeed - a pretty clear summary of what the Fed's deisgnated bailout audiences was under QE 2 (European banks) and QE 3 (everyone on an equal, pro rata basis).

I guess Bernanke fancies himself as the world's new age J.P. Morgan

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