Gross to Bernanke: QE3 Will Cause Banks to Lend Less

The Federal Reserve continues to disappoint. Not only were there last two rounds of quantitative easing little more than useless, but they're planning a third round to go into effect sometime this fall. Jim Rogers believes QE3 is already underway, but the Fed's staying quiet about their activity... for now.

The Federal Reserve's FOMC is scheduled to conclude its meeting on September 13. The country is waiting on pins-and-needles to hear what the Fed's decision will officially be...

Investors are riled up and scarcely anyone is excited about the coming QE3.

Now bond-guru and co-founder of asset management firm Pimco, and manager of the largest mutual fund in the world Bill Gross argues that the Fed's latest QE efforts and bond buying programs will make borrowing so cheap that banks may not lend as readily anymore.

You see, banks get a pretty sizable cash stockpile when they lend out from depositors, to which they pay zero or little interest. Additionally, it's common for most lenders to sell mortgages to Fannie Mae or Freddie Mac, which can borrow at even lower rates and profit from enforcing a fee.

Still, even interest-free savings accounts do cost banks money. Those banks still have payrolls to keep up with and other expenses like computer systems and ATM machines. As interest rates fall to historic lows, “the spread between those fixed costs, which don't drop with interest rates, and what a bank can make lending becomes very thin.”

The Fed and other central banks have complicated the system of lending and borrowing to a catastrophic level. Bank profits could be the flaw in Bernanke's latest plan. Of course there's no guarantee that things will work out in this fashion indefinitely – this is just speculation.

From CNNMoney:

According to data recently released by the Federal Deposit Insurance Corp., banks' net interest margins, which represent the spread between what banks pay to get money and what they make when they lend it out, has shrunk to 3.5% from a recent high of 3.8% in the beginning of 2010. That's below a near 30-year average of 3.6%. The current net interest margin is even smaller for large banks, at 3.4%, which again reflects how costly it is to have all those branches.

The result: Any further drops in interest rates, which is what Bernanke seems to want, won't cause banks to lend more. Instead, Gross thinks, banks will lend less, closing up branches and removing the ATMs that are costing them so much money to run.

For the time being, financial experts haven't seen signs suggesting that banks are going to cut back on lending. However, banks will be taking on a lot of risk if they do increase lending in lieu of lower profits.

There's a lot at stake here, and the banks will surely be under a great deal of pressure to do the “right thing” for the economy, despite some profit losses.

But Gross isn't betting on that; he thinks the Fed is destroying our economy with policies like these undeniably destined for failure.

Since 2010, Gross has been telling Bernanke and our government leaders that we need to make things again, good things – not paper – if we really want to push our standard of living back up. Until then, the economy will remain stagnant and our people will struggle.

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