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Will be a new Real estate buble in the US-

09/10/2013

While the Fed is purchasing government securities, in parallel it is pouring cash money into the monetary system. Since the banks have deposits excess to the Minimum Reserve Rate Requirement (MRRR), this cash could be potentially used to give new credit without to cause interest rate increase. It does not happens since the potential borrowers are over exposed to old loans, backed with reduced asset values (mainly real estate). So the banks don’t have clients to whom they would like to give new loans, and the potential borrowers feeling unsecured also reduced their readiness to be exposed to new loans. The result is too liquid banks.
Yet this situation will not exist for ever. The aggregated old loans are in process of reduction. For example; (*) the mortgage loans went down from 10.5 trillion US$ in 2008 to 9.3 trillion US$ in Q2 of 2013, while the real estate value jumped since the beginning of 2013 to 21.1 trillion US$, from less than 20 trillion US$ at end of 2012. At 2006 the real estate value was about 25 trillion US$, while the mortgages values were about 10 trillion US$. If the banks feel comfortable with this ration of 2.5 US$ real-estate value to one US$ mortgage value, it means, if this trend of real estate value increase will continue while the mortgage value is declining, the banks will find the house owners again credible for new loans very soon.
And now comes the big thing. The commercial banks have excess deposits in the Fed of more than 2 trillion US$. Theoretically the banks could use these excess deposits for new credits in ration of 1 to 9, so we are talking about several trillion US$ of new potential credit. This is a perfect scene for a new credit explosion and real estate bubble.

But all this can be prevented if the banks are going to be more regulated.The interest rate paid to the bank deposits in the Fed seems to me a very weak tool while its rate is 0.25%. On the other hand if increased, it will increase the interest rate but also the banks profits and liquidity. And lets remember, the bank deposits in the Fed are without any risk. I wonder, why would the tax payers agree to such interest payments, unless they are madly in love with the commercial banks and their managers. So some other tool should be implemented to reduced the excess potential financial liquidity in the banks, like to increase the Minimum Reserve Rate Requirement from 10%, to adequate level, or implement the equity requirement (Basel). This will of course reduce the commercial banks function as money creator and will bring it back to the Fed. Is this such a big disaster?

(*) Reference; Federal Reserve statistic release, B.100 Balance Sheet of Households and Nonprofit Organizations

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