Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Central Banks Won’t See Our Sympathy

Interest-Rates / Central Banks Dec 05, 2017 - 03:35 PM GMT

By: Rodney_Johnson

Interest-Rates It’s official. Lending institutions are having a tough time making loans.

Don’t get me wrong, they still make money the old fashioned way: by borrowing from us through deposits on which they pay almost no interest, and then lending it long term to anyone that qualifies. But they’ve had to jack up their other fees because the traditional business plan just isn’t cutting it.


You and I are still keeping tidy sums at the bank, even though they pay us about half the rate of inflation, guaranteeing a loss of purchasing power. But few people, and even fewer businesses, want to take out loans.

Compounding the issue, the Federal Reserve keeps bumping up short-term interest rates, forcing banks to begrudgingly increase the pennies they throw at depositors, while long-term interest rates remain steady or even drop a bit.

As short rates rise and long rates fall, there’s not much in the middle left for lenders.

Excuse me, I think I’m getting choked up. I might even cry crocodile tears.

After the financial crisis, the Federal Reserve guaranteed bank profits by first lending them enough of our money to ensure their survival, and then pushing short-term rates to zero. Depositors were lucky to earn 0.10% on their money, while loans still cost 3.5% to 4.0%.

To make matters worse, the Fed printed gobs of money and paid the banks interest to hold the extra funds on their books in the form of Interest on Excess Reserves, or IOER. This allowed banks to earn extra cash without doing business with other banks that might make questionable loans.

Essentially, banks made something for nothing, while you and I got nothing (no interest) for something (our deposits).

This went on for years as banks in the U.S. cleaned up their balance sheets. Eventually, the Fed started raising rates ever so slightly. Over three years, rates have inched up to a mere 1.50%. You won’t get that on your deposit account, of course, but you might eek out 1% or so.

On the flip side, long-term rates remain stuck, with the 10-year bond paying 2.34% and the 30-year bond hovering around 2.77%.

The shrinking difference between short-term and long-term rates leaves little net interest margin, or profit, for banks. That’s not ideal, of course, but hey, if they can make it up on volume, things will still be all right. Only, there is no volume. Or at least, not as much as bankers expected, and that’s a problem.

Bank lending to businesses recently registered its lowest growth since the first quarter of 2011. Overall, the annual growth rate for U.S. bank loans just touched the lowest level since the end of 2013, as the growth rate fell for the sixth consecutive quarter.

Bank loans are still expanding, but at an ever-slower pace. This wasn’t supposed to happen.

With the economy growing, however slowly, and a pro-business administration in the White House, bankers expected strong loan growth. For the life of them, they can’t figure out why people and businesses don’t want bank loans.

I have a possible answer. Because we hate them.

As business owners, Harry and I ran millions of dollars’ worth of credit card transactions through a bank in the 2000s. That bank took bailout money to survive.

In 2010, my banker called me and said he had to verify my financials so the bank would keep doing business with me. I pointed out this was quite ironic since I remained in business and profitable when he and his firm needed my tax dollars to stay afloat.

That phone call sticks with me, as does the zero interest I earned for years on my deposits, and the lower-than-inflation rate of interest I earn today. I’m in no hurry to give banks more money.

On the business side, companies have options. With interest rates so low, it makes more sense to sell bonds where possible and essentially become your own bank. And many other institutions, such as hedge funds and insurance companies, are lending directly to firms, cutting into bank business.

It’s hard to feel sorry for companies that helped bring the country to its financial knees, needed bailout bucks, were guaranteed profits through the use of taxpayer funds and on the backs of depositors, and now wonder where all the business has gone.

Maybe they’ll get a break in the months ahead as the Fed shrinks its balance sheet. Perhaps, as the Fed buys fewer bonds, long rates will tick up a bit, giving bankers a break. But if it doesn’t happen, I don’t think any of us will shed any real tears.

In the meantime, I’m avoiding the financial sector, unless I’m going to use the Treasury Profits Accelerator service run by Lance Gaitan. He does a great job exploiting small interest rate changes to generate significant returns, and I have no problem giving him a shameless plug. Click here to learn more. As for the banks, they’re business is stagnating, and they can’t figure out why nobody likes them. If they’d only ask, I’m sure we could all give them several good reasons.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2017 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules