Lambert Strether writes at Corrente.
It’s with some trepidation that I post something on actual finance, but the $114 billion withdrawal story struck me as strange at the time, and then… it vanished, as mysteriously as it had appeared. I don’t like patterns like that, or loose ends like that. So I’m putting the the mystery before the NC commentariat, in the hopes that they’ve got better answers, not than I do (that would not be hard), but than the business press did in their coverage. As the great Peggy Nooonan once remarked: “It would be irresponsible not to speculate!”
I’ll start with the Russia Today AFP story on January 25, because that’s where most of the blog coverage (and especially CT blog coverage) began:
US Federal Reserve is reporting a major deposit withdrawal from the nation’s bank accounts. The financial system has not seen such a massive fund outflow since 9/11 attacks[*].
The first week of January 2013 has seen $114 billion withdrawn from 25 of the US’ biggest banks, pushing deposits down to $5.37 trillion, according to the US Fed. Financial analysts suggest it could be down to the Transaction Account Guarantee [TAG] insurance program coming to an end on December 31 last year and clients moving their money that is no longer insured by the government.
Bloomberg, in its January 23 story, had concurred on the TAG theory:
“Customers may be moving money no longer insured by the U.S., drawing down year-end balances and investing in advancing equity markets…. What you are seeing now is probably TAG money,” Subadra Rajappa, a fixed-income strategist at New York-based Morgan Stanley, said in a phone interview. “Some of the banks’ corporate customers have said they were going to take the money out” if the program expires as it did, she said.
Unfortunately, the TAG theory seems not to be correct. From the Businessweek coverage on January 23**
But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. … Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.
So the TAG theory is wrong both on expected magnitude ($300 million tops vs. $114 billion) and expected direction (away from the big banks, not the small ones***). Businessweek goes on to present alternative reasons:
Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says. Among large U.S. banks, there have been movements of greater than $50 billion (not seasonally adjusted) during 107 different weeks since 2000. It’s not uncommon to see 11-figure swings—that is, tens of billions of dollars—from positive to negative, or vice-versa, one week to the next.
Noise can increase near the start of a year. “The first quarter is always a wacky quarter,” Miller says. And January 2013 has seen an incredible amount of change [like the Fiscal Cliff and an increase in the payroll tax].
Well, I agree that $114 vs. $50 billion isn’t an order of magnitude difference, but still Miller’s theory strikes me as a fancy way of saying “It’s a mystery!”
“If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things,” says Dan Geller, executive vice president of Market Rates Insight. “And one thing that it could tell us is that the law of elasticity is finally catching up with deposits.” In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis, even though they offer pitiful yields. Geller says that may finally be ending—though like Miller, he says not to put too much stock in just one burst of Fed data.
“If people were shifting out of bank deposits and looking for a government-type return we’d see more growth in Treasury funds,” he said. “It doesn’t seem to be happening.”
Treasuries had declined 0.31 percent this month through yesterday, Bank of America Merrill Lynch data show.
I remember, vaguely, an extremely long New Yorker story that turned out to be about not finding a thought-to-be extinct bird in a swamp. This post is a little like that story, isn’t it? Still:
1. A change of very great magnitude
2. In an unexpected direction
3. That nobody can explain
Is a story to watch, isn’t it?
NOTE * I’m not sure where this comparison comes from. “The Federal Reserve at one point injected more than $100 billion in additional liquidity, an unprecedented sum. At the core of it all was the disruption of interbank payments.” The Fed See Jeffrey M. Lacker. Payment System Disruptions and the Federal Reserve Following September 11, 2001. Federal Reserve Bank of Richmond, Richmond, Virginia, 23219, USA, November 17, 2003 [PDF] Not sure that “liquidity” is directly comparable to bank deposits, though. Maybe somebody who knows how to work the Fed’s site can give a better answer than I can.
NOTE ** The RT story propagated through the blogosphere and the foil sphere, the Businessweek story through twitter. But little overlap!
NOTE *** Not that there is any reason not to trust the big banks.