New World for Money, Banking & the Economy

Transcription

1 New World for Money, Banking & the Economy Lawrence Goodman President Center for Financial Stability Banking New York Conference Tarrytown, NY April 2, 2015 Copyright 2015 CFS as an unpublished work. All rights reserved.

2 Ideas New uses of money and technology will reshape the banking industry and business cycle. I. Challenges for the economy II. The impact of Fed policy and markets on banks III. Technology and Finance: Risks and Opportunities 2

3 Money and banking restraints on GDP growth Source: Bureau of Economic Analysis and Center for Financial Stability Inc. 3

4 It s the Financial System that Matters: Monetary Ease and CFS Divisia Financial Data (y/y) 8% Emergence from Liquidity Trap 40% 35% 6% 30% 25% 4% 20% 15% 2% 10% 0% -2% Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Stall in Financial System CFS Divisia M4 - lhs Growth Threshold (DM4) - lhs Monetary Base - rhs Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 5% 0% -5% -10% With thanks to William Barnett, Director of Advances in Monetary and Financial Measurement at the Center for Financial Stability Inc. Source: Federal Reserve Board, Bankrate, and the Center for Financial Stability. 4

5 About money, banking and growth today Until banks and financial institutions grow the economy will be flying on one engine. Total Money Supply in the US (Dec 2006) Total Money Supply in the US (Feb 2015) Monetary base 5% Monetary base 17% Money Created by the Private Sector 95% Money Created by the Private Sector 83% Source: Federal Reserve and Center for Financial Stability. 5

6 Net Interest Income, % net operating revenue Community Banks: 80% Noncommunity Banks: 67% Source: FDIC. Demand for U.S. Debt Is Not Limitless The Wall Street Journal March 28, icles/sb Fed influence on long-term interest rates: Community banks are more vulnerable Purchase of Treasury Debt, % of Treasury Net Issuance 100% 80% 60% 40% 20% 0% -20% -40% 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 Federal Reserve 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4-60% Private Sector Source: Federal Reserve Board and the Center for Financial Stability. 6

7 1/ Cyclical peak-to-trough in months. Plunge in market finance (shadow banking): Vital for smaller institution assets too 8,000 7,000 Recessions Linear Trend Excessive growth of "Market Finance" Shadow-Credit Rise is Good Sign The Wall Street Journal March 23, cles/shadow-credit-rise- is-good-sign ,000 5,000 4,000 3,000 2,000 1, ,000 Jan-67 Feb-69 Mar-71 Apr-73 May-75 Jun-77 Jul-79 Aug-81 Sep-83 Oct-85 Nov-87 Dec-89 Jan-92 Feb-94 Mar-96 Apr-98 May-00 Jun-02 Jul-04 Aug-06 Sep-08 Oct-10 Nov-12 Dec-14 Real February 2015, USD millions Overlysteep slide in "Market Finance"...yet stabilization may be finally occuring! Note: The CFS definition of market finance includes: money market funds, repurchase agreements, and commercial paper. Source: Federal Reserve Board, Bankrate, and the Center for Financial Stability. 7

8 Technology and Finance: Virtual Currencies and Bitcoin I. Virtual Currency doubt, enthusiasm, and intrigue. II. Payment Systems money, technology, and costs. III. Risks trust, network, tech, incentives, and regulatory. IV. History and the long term Ned Gramlich, airline miles, and League of Legends. 8

9 Conclusion I. Policy response has restrained growth. II. The future will be determined by evolution of the symbiotic relationship between banks and economy. III. Revolutionary change in money and technology will reshape banks at an increased pace. 9

10 About CFS and Disclosure The Center for Financial Stability is an independent, nonpartisan, and nonprofit think tank dedicated to financial markets for the benefit of investors, officials, and the public. This publication reflects the judgments and recommendations of the author(s). They do not necessarily represent the views of Members of the Advisory Board or Trustees, whose involvement in no way should be interpreted as an endorsement of the report by either themselves or the organizations with which they are affiliated. The organization s website is The Center for Financial Stability is a non-profit 501(c)(3) organization formed for educational purposes. 10