Bank Credit Grows as Banks Neglect Risk
Each of the two charts below bears the mark of a heavily manipulated banking system at the expense of the Dollar. The interventionist bailout culture ushered in by fiscal and monetary policy since 2008 has engineered an environment where banks no longer fear consequences of poor credit decisions.
Banks continue to extend credit at a time when they carry near record levels of unrealized losses. Those banks (BofA in particular), are betting on a return to zero interest rate policy rather than sell off the bad credits and put the proceeds to work (which is why I believe BAC CEO Brian Moynihan should have been fired several years ago).
Banks continue to extend credit at a time when many bank clients can’t afford to make cash interest payments. Many corporate clients only avoid credit default thanks to financially engineered default avoidance instruments such as PIKs.
Chart 1: A growing money supply (M1, the black line), means a devalued Dollar if the money supply expansion is not directly tied to productivity.
The money supply has been growing since early 2024 after Powell made his dovish comments in December 2023. So, even as the Fed continued to pare its balance sheet (red line), the banks expanded credit (blue line), thereby growing the money supply. We see the intersection inside the gold circle where bank credit and the money supply grow even as the Fed modestly pares its balance sheet.
Bank managers no longer fear risk. The Fed removed all reserve requirements in 2020 and has demonstrated that it will bail out banks should they get in deep trouble. By the way, that step function up in M1 was the COVID period when M1 grew by more than 300% in a matter of months. M1 never grew close to that level in American history. No wonder the economy has so many distortions.
Chart 2. Bank credit marches higher regardless of the credit environment as banks no longer fear consequences.
COVID? No problem. The Fed stepped in with QE, zero rates, non-recourse loans, bought Apple’s debt and purchased equity ETFs to bail out the economy, all at the Dollar’s expense (to say nothing of fiscal policy’s role in creating America’s bailout culture and fostering moral hazard).
SVB failed because its managers chose to ignore risk? No problem. The Fed and FDIC stepped in to insure ALL bank deposits system-wide. NO deposit risk. Taxpayers bailed out the entire system via the BTFP, further devaluing the Dollar.
What message does that send to CEOs and Americans if they are conditioned to believe there is no credit risk or economic risk? Of course there is risk! Look at what has happened to the Dollar and American’s standard of living since 2020. Running $2-3 Trillion fiscal deficits each year will only accelerate the Dollar’s devaluation and further erode Americans’ standard of living.
The credit system has got to be reeled in so that the money supply does not continue to explode, destroying the Dollar’s value in its wake. The problem is no bank is willing to do so. Eventually the market will reel in the credit system. No amount of Fed yield curve control will be able to tame long rates once the Dollar has been sufficiently damaged. Unfortunately, America’s standard of living may significantly deteriorate before that happens, which is why it is better to control our own fate rather than wait for the credit market to save the day.
