Cashin: Excess bank reserves are a worrying 1930s parallel

CNBC.com ^ | August 26, 2013 | Paul Toscano

[upbeat5]

Inflation has been notably absent from the economy this summer, despite bullish moves in gold and a continued debate over the tapering of asset purchases by the Federal Reserve.

According to Art Cashin, director of floor operations at UBS Financial Services, the central bank's effect on the financial system has worrying parallels to the period leading up to the Great Depression.

"The weak data that we've gotten, particularly the housing on Friday, hints that tapering may be held back or may not be a factor, " Cashin told "Squawk on the Street" on Monday. "Many of the proponents of gold are looking for inflationary pressure and part of that is soft money, and that's kind of what they're hoping for."

The problem for many hedge funds, Cashin said, is that a number of them bet that inflation would hit the markets after continued easing from the Federal Reserve, but the expected move hasn't materialized. "They've looked and said, 'Gee the Fed is printing money like crazy, that's got to be inflationary,' and ordinarily it has been."

However, Cashin said, much of the Fed's new money hasn't found its way to the economy, as financial institutions—the major recipients of easy money—are too nervous to put the capital to work. This nervousness is reflected in nearly $2 trillion of excess free capital reserves, he explained.

[Toddsterpatriot]

If you were a banker, would you want to lock your balance sheet into pitiful yields on your loan portfolio at today’s lending rates?

You're right. There is a small local bank that hasn't made 30 year mortgage loans for the last few years, at least.

[1010RD]

It’s a cash crunch. There isn’t enough capital being put into the marketplace. People want to borrow, good deals exist, but they can’t. Bernanke is pushing on a string.