Yes, there is fear that some banks may fail. But there are a lot of banks in the United States, and not all of them are Citigroup. So the issue here is not that no lending is available (and this was Megan's initial point -- that a lack of lending would reduce the multiplier on the stimulus). And the Treasury has taken steps to limit the negative competitive effect of propping up zombies, by throwing open TARP money to many, many financial institutions. Is there still an argument for more intervention, in particular, to find ways to wind down the systemically important insolvent banks? Absolutely! But I don't think it's absurd to say that such actions come with intolerable risks to the financial system.
Megan says I "slam" her by saying that she's looking for a way off the Obama train. My point was this -- she said she had buyer's remorse, and given the ludicrous ideas coming out of the GOP, and John McCain, that makes no sense, economically speaking. I don't know why someone focusing solely on the policies would write that, and so I concluded that Megan was focused on something other than just the policies. Which perhaps was improper. My bad! But still, it makes no sense.
I'm still not clear on what, exactly, the argument is here. My take is that whether you simply let banks drizzle on forever with bad loans eating up good capital, or have a massive banking panic, a banking system that is substantially impaired will eat your stimulus. A bank panic is, I think, worse, but that doesn't make a Japan-style debacle all right. Impaired banks lend less. The Japanese banks poured a lot of money into the crappy construction companies that owed them money, but they didn't lend to anyone else because they needed all their capital to service the toxic sludge already sloshing around their balance sheet.
To whatever extent fiscal stimulus worked in the Great Depression, it was working hand in hand with monetary and credit expansion. Herbert Hoover ran a sizeable deficit in 1932 but the economy stayed in free fall until the bank holiday and the establishment of the FDIC. Bank deposits are important, of course, but they're hardly the only thing we use banks for--otherwise we could just set up a postal savings system and let everyone lend to the government at 1%. FDIC insurance doesn't work so well because it gives people their money; it works because it prevents bank runs.Of course, now we have the FDIC--but we also have a much more complicated financial market, with a lot of remaining run potential. Credit can--and indeed has--drained out of the system in a lot of places; the only real growth area is in lending to the Federal government at near-zero rates. The commercial paper markets are finally settling into an uneasy new normalcy. The entire financial system is still very much afraid of the fallout of a collapse of CIti or BofA, and reserving accordingly.
No one wants to make long-term committments with this much uncertainty. The stimulus doesn't erase the uncertainty; it just spends in spite of that.
But when times are uncertain, and people are not totally budget constrained, the sensible action to take is to bung as much of that government money as possible into a bank account. And as long as banks are desperately building up capital reserves at all costs for fear of another panic, that money is going to stay right there on the balance sheet, stolidly un-multiplying. Whether they are building up those reserves against a panic, or against the sucking vortex of their previous bad loans, is sort of a secondary consideration.
As for the buyer's remorse remark, perhaps it was badly phrased. I am still of the opinion that Obama was a better choice than McCain--but the terrifying pace of inactivity at the Treasury, combined with the administration's obvious focus on popular ideological activity rather than grasping nasty nettles like the banking system, is eroding that conviction. Ryan is free to believe that this is perfectly irrational, that the Obama administration's near-ideal conduct in prioritizing stimulus over bank reform and indeed, staffing the Treasury, could not possibly give anyone but a secret Obama-hater any cause for alarm. I must simply beg to differ.
Just a thought Megan, if we had let the banks fail last fall like we should have rather than doing TARP, perhaps we wouldn't have such uncertainty. Those banks would be dead the market would have absorbed and adjusted for those facts and would be on its way back and we would be a few trillion dollars less in debt. Honestly, what could have happened? The dow lose a third of its value in a month? Boy, what would we do if that ever happened?
Spare us the "I still don't regret supporting Obama" language Megan. You will never admit regretting supporting him so it is not news to continue to say you don't.
Banking is essential, its not productivity, not anymore.As for a potential failure of CITI or BofA. I don't think that is the sole reason for banking hesitancy. I think its the "I don't want to get whacked" effect. Watching closing bell right now I see two guys petitioning for a "Zeus" type financial regulator, to "look over the horizon", isn't all this code for such a macro view they can't see us screw up? Finance is a details oriented problem. Ed Yingling has a point about using the Fed as a regulator though, it would crush the Fed's independence.
Well, under President McCain, the stimulus would have been World War III.
"Well, under President McCain, the stimulus would have been World War III."
I know that war mongering bastard would have kept Gates at DOD, pledged to stay in Iraq until 2011, sent 1000s more troops to Afghanistan, escalated the war in Pakistan and continued to claim the right to detain people indefinitely because they provide support to terrorist organizations. Good thing we dodged that bullet.
Megan,
To reinforce your notion that banks might choose to accumulate cash rather than extend credit, allow me to provide some anecdotal evidence. A number of my clients are having difficulty renewing their lines of credit. Banks are reducing the size of the line by 25% or more. These are (still!) profitable businesses that have been very profitable customers for the banks. Why are the banks cutting the size of the line? Either the businesses started shopping at Walmart (I'm kidding), or the banks are trying to raise cash.
But, on balance, I'm glad Obama won. At least now, no one ever need worry about baseless charges of racism and we can all bask in the warm glow of the post-partisan goodwill that fills Washington, D.C.
"To reinforce your notion that banks might choose to accumulate cash rather than extend credit, allow me to provide some anecdotal evidence. A number of my clients are having difficulty renewing their lines of credit. Banks are reducing the size of the line by 25% or more. These are (still!) profitable businesses that have been very profitable customers for the banks. Why are the banks cutting the size of the line? Either the businesses started shopping at Walmart (I'm kidding), or the banks are trying to raise cash. "
Hold it for a second. The bank gives a business a credit line based upon what it views the future prospects of that business are. The credit lines were originally given with a given set of assumptions about the state of the economy and the state of the specific markets within which your clients operate. Those lines were given at a time when the general econmic conditions and outlook were a lot different than now.
It would seem to me to be perfectly rational for the banks to adjust their evaluation of the long term profitability of your clients' downward and their credit line downward accordingly. Who cares that they are profitable now? That is not the only factor the banks are lending on. They are lending on future performance and the current economic enviroment and your clients' expected profits are a lot lower than they were a year ago. To put it in simpler terms, it is a really bad time to be borrowing a lot of money to expand a business right now and banks are rightfully less willing to loan money for that than they were a year ago.
I don't see how your anicdote shows anything beyond the fact that we are in a recession. It certainly doesn't show the banks to be irrational or that the credit markets are broken.
John wrote:
Those are fair objections. However, in this case the businesses I have in mind are more profitable this year than last and (but for any retrenchment forced upon them for lack of access to credit) should be more profitable next year than this. (Not ALL sectors of the economy are doing poorly.) Despite the rosy outlook for the businesses, the bank is cutting their credit lines. I've spoken to the banker involved and he says he's responding to a mandate from intergalactic.This reminds me of the last time banks were in dire straights. That was in the late 1980's. I had a large agricultural co-op as a client. The co-op borrowed on it's line of credit to buy the local farmer's grain and other produce and would then sell the farm produce on the market throughout the year, paying off the credit line as it did. The CEO of the co-op called me in a panic because the bank had just told him it would not renew its line when it came up in a month. Where could the co-op get a several hundred million dollar line in a month's time? I called the banker to find out what was going on. The federal regulators had required the bank to reduce its exposure to agriculture. The co-op was the bank's largest ag customer and the bank could not meet the regulator's mandate if the co-op remained a borrower.
My point is sometimes banks don't base their lending decision one the individual business's credit worthiness. In the present environment, too many decisions seem to be based on factors other than the riskiness and profitability of the loan. Maybe I'm being fed a line of bull, but I'm being told the lines are being cut because of an internal mandate to raise cash.
I realize this is nothing but an anecdote.
McCain AND O'Bama were terrible candidates. It was a no-win scenario. When presented with the choice between a giant douche and a turd sandwich, choose not to choose. As JOSHUA said in War Games: "the only winning move is not to play."
Voting for the least worse is sort of like the condemned choosing to wear a blindfold or not when facing a firing squad. It's a choice, but it's not a free choice, It sure as hell ain't freedom.
Note that the producer price index is up in today's report. It's not a sign of recovery. It's another sign of stagflation.
Bearded Spock,
That's great and all, but speaking as someone who opposed both McCain and Obama, your attack is not much help. Most of us are trying to figure out what's going on, both with the banks and in D.C., and what should be done.
"attack"? I'm attempting to explain what appears to be going on. Generally, I think there is a bunch of unproductive finger-pointing as to the proximate cause of the trouble and not enough focus on the underlying cause.
As I see it, the underlying cause is fiat currency. Money printing at the Fed and too cozy relationships between top bankers and government officials make problems like this inevitable.
There's moral hazard in even having an FDIC. There's moral hazard in banks achieving "too big to fail" status. There's way too much incentive to inflate the money supply.
There are quasi-nationalized companies making decisions based on political rather than profit reasons. There's too much spending and way way way way too much debt.
Banks have to lend money or there isn't much point in them existing in the first place. To hold out indefinitely, fearing further turbulence in the market is to be of no use to anyone. Taking risks is part of life and especially part of banking.
The stimulus package may be too little too late or a big waste of cash - but without real economic activity - that is people doing things, making things, selling things, etc - then there's no need for banks. We could just barter our goods or put money under a mattress. Commerce comes before banks, not vice-versa. To suggest you need banks to grow their balls back before economic activity can resume doesn't make sense. I roll with Ryan on this one.
Obama may turn out to be a dud, the stimulus may turn out to be a turkey; but regardless, their strategy, whether it works or not, is logical.
The alternative, if you prefer the Republican response, is to do absolutely nothing and throw stink bombs at Obama all day long. Republicans have not demonstrated a coherent strategy or even evidence that they're even serious about the subject. Their only "idea" is tax cuts - their solution for everything from recessions to lazy eye. At least Obama acts like he gives a damn.
"Banks have to lend money or there isn't much point in them existing in the first place."
They'd still be a safe place to keep money. Depositors could still write checks.
What we are really discussing is not just lending, but subprime lending. Easy money. Bubble money. Banks have tightened their lending standards because they should have. We aren't going to fix the problem with more of the same thing (loose credit) that caused the problem in the first place. You don't cure alcoholism by guzzling more cheap vodka.
I really don't care about how much somebody cares. It was an excess of caring, to the detriment of thinking, in the form of constantly pushing for weaker lending standards, because every damned Congress and Administration professed to care so damn much about families owning their own homes, which incentivized ao many on all parts of the economic spectrum to, as Barney Frank put it, to "roll the dice". Fuck caring.
Bearded Spock, I stood in awe yesterday as Obama put forth his plan for aiding small businesses, which included securitizing and selling tranches of SBA loans. Presumably with AAA ratings.
Fiction is a piker compared to nonfiction these days.
Megan-
So you're having mild second thots about Obama. That's understandable. But think for a second - do you really think McCain would have been any better? Do you think he would have had better luck staffing the Treasury? What are the chances that various Republican nominees would have had tax problems? Easily just as good as Democrats having said problems. Would McCain have been able to recruit Paul Volcker and Larry Summers? Remember who Bush hired as Treasury Secretaries the first and second time around, before he hired Paulson?
At the very least, I am confident that Obama has the intellectual capacity to understand this crisis, and react accordingly. John McCain, on the other hand, is still venting about the trivial problem of earmarks.
"I stood in awe yesterday as Obama put forth his plan for aiding small businesses, which included securitizing and selling tranches of SBA loans. Presumably with AAA ratings."
Unfuckingbelievable. We are living in Bizarro world.
Spock,
We are not going to go to the gold standard anytime soon. Would you prefer a currency basket? (similar in concept to what Russia suggests)
A lot of Euros and others have argued for a tri or quad currency basket that groups several currencies together.
Whatever is done, one thing is certain, we will screw it up a lot until we understand it, and once we understand it the politicians will manipulate it to achieve whatever they want to accomplish. Whether this is gold, dollars, or a 4 currency conglomeration.
"I stood in awe yesterday as Obama put forth his plan for aiding small businesses, which included securitizing and selling tranches of SBA loans. Presumably with AAA ratings."
There's nothing wrong with securitisation as a concept. It's just one of the many misconceptions that have polluted the discourse on this crisis that securitisation is bad in and of itself.
I'm still not 'getting it' from Megan. The Fed has just engaged in massive monetary stimulus to tie in with the fiscal stimulus. OK we don't know what the long term will bring for Citi and BoA but I'm not clear why this should matter.
As Megan pointed out small time depositors at those banks are already protected by the FDIC. What Megan seems to be saying, I think, is that if Citi & BoA simply go bankrupt and are not able to pay their debts (the non FDIC debts) it will cause choas throughout the financial system.
Why? Who is it that Citi and BoA owes non-FDIC protected money too? After nearly 6 months have not these players started to take precautions to protect themselves against the chance that they will get stiffed if Citi heads to bankruptcy?
What about the players who are not holding onto debt from Citi? Why wouldn't they see this as a golden opportunity to move in on the market share that the big boys are afraid to lend too because of their massive toxic balance sheets?