Banks have too much cash and too few loans. It will be hard to have a recession when there aren’t a lot of loans to charge off.

Part of the cause and effect of a recession is the banking system has to contract its assets.  As business conditions heat up, loans grow too fast, interest rates begin to rise, the banks’ cost of funds starts to rise, their capacity to make loans becomes constrained and the growth in the money supply slows to a trickle.  We don’t have conditions anywhere near that scenario in the banking system today.  Last week saw news of Bank of New York Mellon charging large customers who choose to store cash at the bank . . . did you get that . . . customers will have negative interest on their deposits!  As I have shown before, the growth in deposits has ballooned in recent weeks as investors/consumers have hoarded cash.  In the meantime the absolute level of loans has contracted since 2008 and is only now showing modest signs of recovery.  These are not the conditions we see at the eve of a recession.  While, they do imply a severe level of risk aversion, they are foundational for a potential prolonged recovery in productive growth.  Jeb Terry, Sr. Aug 17, 2011

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