Institutional investors, in other words, and thus not banks, are in aggregate the nation’s largest lenders.
The consequences of this trend for monetary policy are enormous. As banks have decreased their role in the area of lending, so too has the ability of the Fed to rely on them to expand the supply of credit. To accomplish this objective nowadays, institutional investors must be a driving force through the purchase of debt-backed securities. This is why the study’s authors speculate that “securitization has decoupled the link between credit and money in the United States.”
It accordingly follows that, since securitization fell off a cliff five years ago, we’ve seen little to no perceptible inflation despite the Fed’s aggressive attempts to get it going.
What does this mean for the economy in general, and individual investors more specifically? Quite simply, it means that any growth in credit (and therefore potential inflation) will be spurred not by bank lending, but by a return to the heady days of securitization.
Over the weekend, for instance, Financial Times wrote about the failed attempts at JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) to sell so-called “synthetic collateralized debt obligations.” Suffice it to say, the mere thought of a resurgence in this now-notorious security sent shivers down many an investor’s spine. Given the above discussion, however, there’s reason to believe this may actually be a good thing, inasmuch as it evidences growth in the securitization, and therefore credit, market.
The article The Printing Presses and Inflation: A Broken Relationship originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America Corp (NYSE:BAC). The Motley Fool recommends Bank of America and Wells Fargo & Co (NYSE:WFC). The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo.
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