There is a problematic symbiotic relationship between the Federal Reserve (drunk #1) and large US banks (drunk #2).

• The Fed keeps interest rates at historically low levels.

• Low interest rates are paid by banks to consumers. Banks then loan at higher rates and make a profit on the interest spread.

• Leverage it up 10X, rinse, and repeat. You’ve got a cash making machine with no risk.

• In return for the gift that is the cash making machine, banks buy Treasury bonds. This improves bank balance sheets and lessen the proportional impact of their remaining toxic waste. A steady demand by banks for Treasuries also creates an artificially high demand, thus ensuring interest rates stay low.

• Neither drunk wants to stop the process since they both win. Who are the losers? Small business.

• In the short term, we need banks to get solvent so that when one fails it does not bring down our entire system of commerce & finance. But there is a cost: small business access to credit is zilch because banks still are not lending. See chart below (with thanks to The Economist).

• If this continues it will cause economic stagnation because resources (money / working capital) are not put to productive use. In particular, small business needs access to credit for working capital. Small business drives economic growth. Result: lower future earnings. Lower GDP growth. Lower stock market.

So we have a situation likened to two drunks leaning on each other. It works, but is unhealthy and risky.