From Monetary Frontline

Monetary base (or M0) is one monetary aggregate that the Federal Reserve actually controls. It exploded in the middle of 2008 as the Fed started quantitative easing and pushed rates to zero in an attempt to thaw out the credit markets that had frozen.

On the other hand, broader measure on money – M2 rose into 2009 and has then gone sideways. Normally, the stimulus of such raw money growth into M0 would have M2 exploding upward, given the money multiplier effect.

We know that a US bank can lend out about 9 times the deposits it has on hand. It can be multiplied rather quickly if banks choose to lend. If increases in central bank money may not results in commercial bank money because the money is not required to be lent out – it may instead result in a growth of excess reserves. Indeed, this described the situation with US bank excess reserves growing oer 500-fold, from under $2 billion in August 2008 to over $1,000 billion recently. What is essentially happened is that banks are not putting these funds to work but simply hold reserves – simply a substitution on the bank’s balance sheet of idle cash for old government bonds.

All those mortgage bonds and other assets the Federal Reserve has purchased have been put right back into the Fed by the banks. There has been no money multiplier. If fact, the money multiplier is at its lowest level ever. Bank lending has fallen percentage wise the most in 67 years. The actual amount of bank loans is falling each and every quarter with no signs of a bottom. Consumers are reducing their debt and leverage. Bank loans are being written off at staggering rates. Over 700 banks are officially on watch by the FDIC with more banks being closed each week.

There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off.

Effectively, the Fed had become a cash machine rather than a monetary expansion machine. At the end of last year, the multiplier had actually fallen to less than 1.0 and the trend remains downward. If someone had told you five years ago that the money multiplier would be down to 1.0, we would have laughed. The laugh, however, would have been upon us, for it is here and it is still falling.