Depending on your perspective, it’s either “getting your head around the finance industry” or “adopting a particular perspective on the finance industry,” but whichever it is, once you’ve accomplished it, standard news coverage seems to miss most of the critical observations.  Take this article by Liz Capo McCormick and Daniel Kruger:

Growth is on a tear, hiring is the strongest in decades, and households are the most upbeat since 2011. Yet banks such as Bank of America Corp. keep plowing their burgeoning deposits into U.S. government and related debt — pushing the industry’s holdings past $2 trillion — instead of lending it all out.

What is a government bond, really?  It’s the government borrowing cash now and promising to pay more for it later.  In other words, the banks are lending the money out, just to the government instead of to consumers.

So, who is the government?  Well, if we’re talking about the power that it wields, then we’re mainly talking about an aristocracy of politicians, special interests, and wealthy individuals, but if we’re talking about responsibility for the money that it spends, then the government is all of us.  It’d be more precise, in other words, to say that the banks are lending to us by way of the government, rather than directly.

Why would they do that? Lending to the government is almost risk free, so the banks don’t get a tremendous return on their investment.  Lending to consumers has some risk to it, because people can wind up unable to pay, so banks account for that by requiring larger returns on their investment.

Despite the efforts of the White House and the news media to insist otherwise, there’s still a lot of uncertainty in the economy, and with the Federal Reserve keeping interest rates so low, banks have incentive to accept the lower returns of government bonds.  With such emphasis on keeping inflation down, there’s less incentive to take some risks with money in the lower-risk parts of portfolios to try to keep the real value up.  And with so much in guaranteed returns on government bonds, banks and other investors can gamble those future earnings on stocks for the higher-risk parts of their portfolios.  (After all, much of the cash is simply money “printed” by the Federal Reserve.)

There are a number of vicious circles interlocking, here.  For one, if banks increase their consumer lending, consumers will increase their spending, and general demand will increase in the economy, which will translate into inflation, meaning those government bonds will be worth even less in real dollars.  Meanwhile, the more government debt there is, the less likely rate increases will be, because it would blow up the federal budget if it had to pay more on what it has borrowed in our name.

But hey, maybe the geniuses in government and the finance industry who brought us the mortgage-backed securities crash have really got this whole economy thing figured out and really do want what’s good for everybody, not just their own ever-divergent incomes.