One of the defining characteristics of the current recovery has been a widespread risk-aversion; in fact this has been the most risk-averse recovery ever.
This in turn has led to significant deleveraging and increases the money demand. Households, investors, Wall Street and Main Street are all stockpiling massive amounts of reserves (cash). The asset-to-liabilities (cash-to-loan) ratios of many financial institutions are approaching record levels. This has translated into a tight credit market… has anyone tried to get a loan recently?
On the residential front, the leverage of the household sector, as a % of assets has fallen by almost 25% in just over four years. This takes us back to the mid-1990s. There has never been such a dramatic deleveraging of household balance sheets in the past 70 years.
Households have the lowest financial burdens in the past 30 years. Alongside this the average delinquency rate on credit cards and other consumer loans have declined through Q3/13. Both of these measures are at a 20-year low and this is good news for consumers and banks alike.
Not surprising, banks’ profit margins are up, and households’ financial health is greatly improving. All of this is due to a dramatic increase in risk aversion.
Since the 2008 downturn, the Fed has injected bank reserves by $2.7 trillion and more than 97% of these funds are being held by banks as “excess reserves.” These are not needed or required to back up new loans or deposits which have soared by over $3 trillion since 2008. In this environment, banks should be aggressively lending.
In this same time period after-tax corporate profits have hit all-time highs, doubling since the end of 2008 and tripling since the end of 2000.
So the question is: Where have all the lenders gone and where are the jobs, higher wages and economic expansion?