If we take the position that the world’s central bankers have no answers on how to right what their policies has wrecked on the economic welfare on the globe, then we have a sense of what is driving the markets.
The amount of debt created from between 2008 and 2015 through various easing programs, which created trillions in electronic assets placed on banks balance sheets that cannot be used for private industry growth.
These trillions of 1s and zeros created by the Federal Reserve, the ECB and the Japanese central bank were placed on the banks balance sheets to keep the ATMs operating.
The fictitious cash was used by the banks to buy government debt and used by the banks as collateral against the toxic non-performing paper that created the Great recession in 2008.
These Potemkin bank balance sheets look good enough for stress tests run by the same people who created the false documents, but there are no assets that can be used for lending to allow the global economy to grow.
If the vast amount of treasury bonds and notes on the banks’ balance sheets were to be “sterilized” or put to work in the economy, then the runaway inflation some central bankers fear would be realized.
The false notion that the Dodd-Frank financial regulations law took away the ability for banks to lend is often cited as the devil behind the handcuffs put on banks.
Much of Dodd-Frank has not been implemented due to Washington’s stagnant political malaise. However the Federal Reserve — who again created these fictitious balance sheets — now oversee more of the banks lending activities and the stress tests.
So to say the banks are hamstrung by regulations is not factually correct. The are constrained by the quality of their balance sheets to the extent that the debt sitting there is considered an asset for all purposes except being able to be utilized for economic good.
And although no one on Wall Street will talk about this, it is apparent in their actions. While the Fed has raised the Fed funds rate from 0.25% to 0.5% the effective rate on the Street is below that range signaling that the bond mavens know much more than the public.
So going forward as the bonds that sit on the bank’s balance sheets run off and mature, the banks return that cash to the Fed, thereby deteriorating the balance sheets further. This is why the banking stock index has fallen roughly 22% so far this year.
Make no mistake there will be further easing in 2016 if for no other reason that to prop up these ailing balance sheets again with fresh government debt.