Great Graphic: US Banks Flush with Deposits

This Great Graphic was posted on Sober Look. It shows the increase in deposits at US commercial banks.  It is based on Federal Reserve data.  These deposits are hitting a record high here in late August.  

Clearly the problem is not that US banks do not have sufficient capacity to lend.  The rise in deposits is partly a function of the increase in US savings which has risen from about 1.7% on the eve of the crisis to about 4.4% at the end of Q2 12.  

Banks are lending and have outstanding loans of about $7.1 trillion.  However, the gap between deposits and loans is approaching $1.8 trillion, about the value of all the goods and services the Canadian economy will produce this year.  The gap has increased by more than 15% over the last three months.  Prior to the crisis, the gap between deposits and loans was fairly stable around $100 bln.   

Giving banks even more liquidity through a new round of asset purchases, that many expect in a few weeks, is not going to change financial or economic conditions substantively.  During the Great Depression, the Federal Reserve largely bypassed the banks and lent directly to businesses.  Banks played little role in that recovery.  

At some point, Bernanke, one of the foremost students of that crisis, needs to break away from the bank-centric approach.  While that point is unlikely to be reached in September, efforts to address the transmission mechanism proper, which means easier accessibility to credit, may still be seen later in the year.