Business Magazine

the Biggest Financial Risk We Face is Actually a Rapid Increase in Confidence

Posted on the 10 January 2013 by Mdelp


Mix one major recession, fresh memories of a stock market crash, a housing bust and increased unemployment and it’s no wonder investors are stockpiling massive amounts of money in their savings accounts.

These accounts essentially pay nothing in interest, yet investors have added almost $3 trillion to their bank savings accounts in the past four years. That translates into growth of over 10% per year!

FRED Graph

Since rapid increases in savings deposits tend to coincide with decreases in investors’ confidence this suggests if confidence were to improve dramatically, investors have a mountain of cash they can put to work buying anything and everything.

FRED Graph

Like the general public, banks become nervous starting in late 2008 and they began stockpiling their money in their form of “savings accounts” i.e. Excess Reserves.

Banks now hold $1.6 trillion in Reserves of which only $0.1 trillion is required to back their current deposits and fund their existing loans.

So far banks have been content to collect the 0.25% interest the Federal Reserve pays them on their Excess Reserves even though they could earn much more than that by lending to consumers and businesses but that trend is starting to change and banks are beginning to lend again.

While I welcome the improvement in lending by banks, my fear is if lending becomes too fast and loose again this mountain of reserves could quickly and easily be converted into an avalanche of loans that could overwhelm the economy much like how the “liar loans” wrecked havoc on the housing market.

FRED Graph

Here we are seeing a very strong improvement in Commercial and Industrial Loans which are up almost $300 billion from their low but are still $100 billion below the peak that was set over three years ago.

As a note, Commercial and Industrial Loans are loans that tend to be made to small and medium sized companies.

FRED Graph

Although not as strong a recovery as Commercial and Industrial Loans, banks are steadily providing more Revolving Credit such as credit cards to consumers.

FRED Graph

One piece of evidence of improving investor confidence is rising home prices. This also ties into more lending by banks since homes purchases tend to be financed.


For the economy to improve confidence needs to improve for both consumers (saving is boring…spending is better) and the banking system (making loans is fun) yet the biggest risk we all face is a rapid return of confidence and the decline of risk aversion.

More investor confidence would mean less need to sock money away in savings accounts, and that in turn would mean a virtual flood of money could enter the economy.

If the public attempted to shift trillions in cash into housing, stocks, bonds, or other investments, the consequences would likely be seen in sharply rising prices and higher inflation. Moreover, higher inflation would almost certainly lead to higher interest rates.

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