The One-Chart Summary Of All That Is Wrong With The US Financial System: JPM Deposits Over Loans

Banks make money when the loan out their money and receive interest over the loans when people pay them back right? And to make things cushier for the banks they can loan out $ 9 against every $ 1 they have on their books right? WRONG!

The chart below may be the best one-chart summary of all that is wrong with the US financial system. It is a very simple chart – it shows total JPMorgan deposits, loans and the excess difference of deposits over loans.

Why is it a good summary? Because as the blue bar shows, total loans issued by the biggest US bank were $723 billion in Q1 2013: about $30 billion less than in the quarter Lehman blew up. Four years later, and the US commerical bank lending apparatus is still in a state of depression. Or so it would appear on the books.

But why doesn’t JPM lend out more: after all that is the main pathway to stimulate the economy as all pundits will tell us. Simple: it doesn’t need to. As the red bars show, total consumer deposits held by the bank just rose once more, this time to a record $1202.5 billion, up $9 billion in the quarter, pushing the deposit-over-loan difference to a new record $480 billion. This is happening exclusively due to the Fed, which when banks do not “create” money from loans (as they obviously don’t), has to step in with QE and create money on its own.

It also means that JPM has to allocate this excess capital somehow and until a year ago, was simply funding its prop trading desk with this deposit cash as “dry powder” to manipulate and corner various derivative markets courtesy of the London Whale traders. Another result of course is that risk assets are bid up to record highs even as the actual flow through of the Fed’s “wealth effect” is halted precisely due to the complete collapse in new loan creation – the primary “transmission mechanism” of economic growth.

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