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Banks Failing to Lend is Not the Problem
It's a myth that the slump persists due to the banks' squeeze on credit, so 'fixing' them will not mean escaping the downturn
One of the big myths of the current downturn is that the reason the slump persists is that banks are refusing to lend. The story goes that because the banks have taken such big hits to their capital as a result of the collapse of the housing bubble and record default rates, they no longer have the money to lend to small- and mid-sized businesses.
We then get the story about how small businesses are the engine of job creation, responsible for most new jobs. Therefore, if they can't get capital, we can't expect to see robust job growth.
This story of banks not lending is used to justify all sorts of special policies to help out small businesses and banks. In fact, the Obama administration has plans to make a special http://dailycaller.com/2010/02/03/republicans-fear-obamas-loan-program-u... ">$30bn slush fund available to banks if they promise to lend it out to small businesses.
In reality, every part of this argument is completely wrong. First, small businesses are not special engines of job growth. Small businesses do create most new jobs, but they also lose most new jobs. Half of new businesses go under within four years after being started. Jobs do get created when the businesses start, but jobs are lost when the businesses fail.
The reality is that businesses of all sizes create jobs. There is no special reason to favour small businesses in promoting job creation. We should favour businesses that create good paying jobs with good benefits and conditions, regardless of their size.
The other parts of this story make even less sense. Let's hypothesise that many banks are crippled in their ability to lend because of the large hits to their balance sheets from bad mortgage debt. Well, not all banks got themselves over their heads with bad mortgages. There are banks with relatively clean balance sheets.
If it were the case that a substantial portion of banks are now unable to issue many new loans because of their inadequate capital, we would expect to see the healthy banks rushing in to fill the lending gap. There should be accounts of dynamic banks that are taking advantage of this once-in-a-lifetime opportunity and rapidly gaining market share.
While this may be happening, there certainly have not been many accounts in the media of banks that fit this description. In other words, it does not appear to be the view among banks, including those with plenty of capital, that there are many good potential customers who are unable to borrow money.
The other missing part of the story has to do with the nature of competition between small firms and their larger competitors. We know that large firms have no difficulty attracting capital at present. They can issue bonds at near record-low interest rates. They can also borrow short-term money at extraordinarily low interest rates in the commercial paper market.
If small and mid-sized companies were being prevented from expanding due to their inability to raise capital then we should be seeing larger companies rushing in to take market share. Retail stores should be opening up new outlets everywhere. Factories should be rapidly increasing output and transportation companies should be rushing into new markets.
Of course, we don't see any of this happening. If anything, most large businesses are expanding at a slower rate than they did before the crisis. If their competitors have been hamstrung due to a lack of credit, no one seems to have told Wal-Mart, Starbucks and the rest. They have both slowed the rate at which they are adding new stores, not sped it up as the credit-shortage story would imply.
There is truth to the credit-squeeze story, but it goes in the other direction. Stores that have seen their business plummet as a result of the downturn are, in fact, worse credit risks from the standpoint of banks. Many businesses that were profitable in 2006 and 2007 are now highly unprofitable and may not be able to stay in business. As a result, the banks that were happy to lend money just a few years ago are no longer willing to lend money to the same business. This drying up of credit happens in every downturn. It is just more serious this time because of the severity of the downturn.
The moral of this story is that we should not think that "fixing" the banks will get us out of the downturn. The problem is that we have to generate demand, which means having the government spend more money to stimulate the economy. Unfortunately, the politicians in Washington are scared to talk about larger deficits, so more spending seems off the table at the moment – therefore we get this nonsense about insufficient bank lending.
But hey, at the rate we created jobs in April, we should be back at full employment in seven years anyhow. Who could ask for anything more?
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23 Comments so far
Show All"The problem is that we have to generate demand,..."
Fair enough, that would improve things but to say
"...which means having the government spend more money to stimulate the economy." is not necessarily the answer.
What if, executive compensation, dividend payments were reduced and this money was given to all employees as higher wages then this would generate real demand. Rising real wages accounted for American's economic preeminence during the 1950s and 1960s.
And of course suggesting that the government needs to spend more money says nothing as to how the money is spent, or what it should be spent on. Spending on domestic infrastructure is different than spending on foreign wars. Spending on social programs is different than funding research. Subsidizing failing or declining programs is different from promoting innovative enterprise or subsidizing wages, etc. Building a bridge into the city is different than building a bridge to nowhere...
The success of an economy depends on innovation and productivity. The health of a nation depends on the resources and opportunities available to its citizens. And the common marketplace depends on the equitable availability of both money and wealth to the general population.
The backlog of bridges, overpasses and schools, etc needing safety upgrades is 30 years in my state. The class sizes are approaching 35-40 students and those classes most in demand are overflowing. There are many things to invest in but it takes just one sizeable earthquake or another Memphis or New Orleans disaster to cause whole regional economies to go belly up. The economists of the 30's didn't just fall out of a turnip truck. I knew a couple of them and the same stimulus and tax policies will and could turn this around. Economists working on Wall Street aided by sleazy mathematical modelling won't stimulate a damn thing except bank profits for speculators. We are very close to an " end game " where the rules and niceties of political parlour games give way to the " animal spirits " of a Somalian pirate attack. " Takin' It To The Streets " may yet give Micheal McDonald another comeback.
Sorry, but now is not then, and the "same" things will not work the same as they did before. Nothing is more common than for folks to think and act as if what they did once will work the same way the next time around - it rarely if ever does, and never exactly. And, the good ole days never were the way we romanticize about them.
We are suppose to evolve, not devolve. The "same" in the box thinking will keep us in the box.
We need to end the privatization of money and the assumption that taxes are as natural as death. We need to quash the capitalization of politics, the personhood of corporations, and the veneration of an elite class. We need to look forward, not backward, toward where we are headed, not where we've been. We need to view humanity as a process of becoming, and to realize our trials and tribulations are opportunities to learn and grow. But first and most importantly, we need to recognize how "we" are being led by false truths, and that the endgame has already been planned.
The truth is Obama didn't listen to Krugman or Stigletz and pass a robust stimulus package the first time around and now we are going to reap a double-dip recession. Public works projects and energy efficiency tax credits, etc would be a good place to start. Lowering the age to 60 for SSA and Medicare benefits would be another. This is why the anti-immigration forces and conservatives are going to make advances in 2010. They have twisted sound and proven economic models and turned them into the " gov't can't do anything right " mantras for nefarious short-term reasons. Democratic fiscal hawks are almost exclusively from very small or Southern states. There will always be low unemployment in N.&S. Dakota, Montana and Oklahoma, etc. The reason is nobody wants to live there year around. The states with big urban centers, controlled by Dems for the most part, are not exerting enough pressure on these ConservaDems. Obama's 18 state strategy for 2012 will go up in smoke if he can't or won't convince the Dems to see that adopting Republican economic policies would be a disaster for this country.
Once again, this "downturn" (it's, more accurately, the collapse of a 10 years racist ponzi scheme) is not a recession or depression... it's the result of a dramatic restructuring of the economy. As such, it's not a question of "getting back to normal". As the first 2 posts accurately point out, until this country gets the more equitable income distribution its economy requires this crime will fester. A consumer economy requires consumers. 30 years of radical income redistribution upwards has beggared the productive workers at the expense of the speculators. This isn't a bump in the road that we'll eventually, without any hard choices, pass by. It's a permanent state until we consciously restructure. [for instance, parasitic Hedge Fund managers should be taxed at confiscatory rates above some level, even $100 million]
rudyspeaks: I can't disagree with anything you've said but I am curious. How is the "10 years ponzi scheme" racist? It seems it was an attack upon us all.
Well, it WAS an attack on everyone, but then, that's how racism works. The majority of sub-prime (ie, doomed) loans were made to non-whites, with perfectly solvent black and hispanic borrowers steered to less desirable, more crash-prone, loans. That is racist by definition. That it impacts everyone makes it no different than racism on the job or in school; the principal victims are non-white, but everyone gets screwed in the end.
Has anyone considered the possibility that the 'banks' don't NEED to lend. 'Banks' are not just banks as we once knew them or thought them to be. They are not simply 'too big' in size but 'too big' in influence and directing markets.
They are keeping their money, our money and the 'bailout' money to deal amongst themselves, markets and countries. IMHO they have effectively eliminated domestic business and consumer lending as the payoffs in those areas are, or can be, so much less.
Once interest rates increase I am relatively certain you will see a renewed desire to lend to those they locked out. It is all strategic and designed to benefit their business model especially so with HFT and their Frankenstein algorithmic programming. It is now computerized financial war games. Profit at any cost ... as long as it is not their's.
There is no social responsibility or justice when it comes to money.
Precisely, sputnik...
In the current unregulated, low to no interest rate environment banks can make a bundle speculating on commodities and playing other financial games with little risk. Nearly a dollar of the three dollars per gallon you pay to fill up your car's gas tank has nothing to do with supply and demand and everything to do with banksters speculating using US taxpayers' money that they pay no interest on.
Loaning money to businesses is more risky than speculating and bankers have a fiduciary responsibility to maximize sharholders value.
The bankers know that Obama has turned what could have been a 3 year recession into a pardigm change from which there will be no "recovery", just more and more bankrupt businesses and familes. Why would they loan money to American businesses or families?
I posted a link some weeks ago to a Credit Union that was paying a bonus to people if they withdrew their money.
What was happening is the Credit Union was flush with deposits yet could not lend money out because the people they would typically loan to were in bad shape financially.
It was not lack of Capital or SUPPLY of cash. It was the lack of demand. People are already up to the ears in debt and do not want to borrow more in times they can lose their job or see the owners of their company impose wage cuts.
The US economy is 70 percent consumer spending. Cut that spending and all businesses start to lose money.
Meanwhile towns and cities and States are all in a crunch for cash and have to borrow to make ends meet. They are offering BONDS at a higher rate of return then a bank can typically get from a loan and are a heck of a lot more likely to be "Bailed out" then is Joe the plumber if the are unable to repay the loan.
Why the heck would JP Morgan loan someone money in order to earn a 5 percent return via interest payments when they can speculate on the silver market using derivatives and price manipulations all the while KNOWING they will get bailed out if they lose their shirts ? Or buy debt from Greece knowing if Greece defaults taxpayers in Germany, Canada and Japan will bail them out by more borrowing from the same people that loaned the money defualted on in the first place?
As to a RETURN to the consumer economy by making consumers richer again, just what will the consumer be consuming? More Gulf Oil? More tantulum from the Congo? More "Made in China" plastic toys?
If you haven't already read Michael Hudson's new article posted on counterpunch, here's the link:
http://www.counterpunch.org/hudson05112010.html
Hi Kay,
I was about to provide the same info. Quite a story, yes? An excerpt:
"Bank lobbyists know that the financial game is over. They are playing for the short run. The financial sector’s aim is to take as much bailout money as it can and run, with large enough annual bonuses to lord it over the rest of society after the Clean Slate finally arrives. Less public spending on social programs will leave more bailout money to pay the banks for their exponentially rising bad debts that cannot possibly be paid in the end. It is inevitable that loans and bonds will default in the usual convulsion of bankruptcy."
A close friend had never seen the film "Wall Street," so I suggested he rent it to understand the pathological worldview of the Banksters in charge of the FED and Treasury Dept. as represented by Gordon Gecko.
Later, Hudson says "So what is unfolding is a Social War on a global scale – not the class war envisioned in the 19th century, but a war of finance against entire economies, against industry, real estate and governments as well as against labor." One can substitute Banksters for "finance" as Hudson's overall context makes clear.
So, it's the Money Power against ALL, just as the 19th century Progressive Populists underestood. Clearly, the Money Power has brought into existence and groomed Blackwater and its ilk to fight the hot war that must be waged against it to drive it from power once and for all. If there's a Ghandian method out of this, then I'd like to know it, for I don't see one.
Obama could have made demand side work. Instead he put in just enough to keep us from a catastrophic failure, but not enough to improve things and thus in terms of public perception validate his position. Conservatives now seem to be reasonable when they say that if the markets had been left alone they would have cleared debt and restarted a boom. All my Republican acquaintances in suburban Hampton Township think so and they have more cred than I do when I say the stimulus was not big enough. So I predict they will win 2010 and I also predict that if they begin a program of financial austerity as the solution, inflicting huge pain on most of us-- they too will be discredited. Confusion follows in 2012 because both the "liberal" and the conservative approaches will by then be discredited in the public mind. And then what---
Obombya will be on the 2012 D ticket and Gunslinging Sarah will be on the 2012 R-ticket. Take your pick.
from the article:
"The moral of this story is that we should not think that "fixing" the banks will get us out of the downturn. The problem is that we have to generate demand, which means having the government spend more money to stimulate the economy."
demand for what? for demand's sake? for a thriving planet?
'you need a thneed' - the one and only
to discuss economics without ecologics is disingenuous...precisely what industries and products should we produce, and where, and suffering what damage to whose bodies and immediate surroundings?
the money world is dying, and threatening to take the living one with it...
the age of economics is ending...
the age of survival is upon us...
Poverty is terrorism.
Dean,
I have been a fan since reading your interview in the Sun a few months back. I bought both of your books on the collapse and admire your insights.
Why can we send 50 billion to Europe, $1 trillion to the banksters and not create one decent job in America?
Where is the WPA when we need it? Infrastructure is collapse mode and we are laying off teachers across the country.
What is a poor boy to do?
Aimlow Joe was here.
http://www.aimlow.com
Pure and simple, economists are whores. The demand problem is not a government spending problem, it is a poor wage problem. Working people are so underpaid relative to their productivity that they can no longer survive in an America where prices are beyond our ability to pay for necessities.
Remember the myth of NAFTA. Sure our wages would go down but prices would fall too! Well that didn't happen.
Politicians cooked cost of living adjustments reflecting falsely low adjustments in wages.
Nafta destroyed small subsistence farms in Mexico resulting in hoards of Mexicans crossing the American border seeking work at very low wages.
Wages were separated from productivity. The rich got richer and the working poor and middle class got destroyed.
Good American jobs were exported at much too fast a pace resulting in a crashing middle class.
Taxes were cut, not for those working people in need, but for the rich who were not in need.
Corporations wrote legislation favorable to them and bought the Congress to pass their self written bills.
Banks anxious to raise their profits lent wildly with no documentation loans at higher interest rates resulting in greater profits.
Congress deregulated banking resulting in great and purposeful financial crimes in the form of insurance fraud and mortgage derivatives.
Congress bailed out the crooks in numbers as great as the total gross national product of the United States, sticking the bill squarely on the shoulders of working people.
Auto workers wages were cut while bank salaries and bonuses soared.
Millions and millions of people are losing their jobs, homes, and marriages. Where is the talk of Family Values?
This mess was purposefully orchestrated by business, politicians, and their whoring economists who even today talk of small business loans or more government spending.
The sense of market morality Adam Smith spoke of is absent in the words of businessmen, politicians, economists, priests and preachers. Don't listen to any of these pricks!
Your comments are right on the mark.
I would only add that given the conditions you describe, and very much to the point, the only alternative with the loss of so many jobs since 2000, and the stagnation of remaining wage earners' salaries, the only game left was to conjure financial devices to plunge the "working" class and those with poor credit deeper into the frying pan of extended debt.
The conundrum facing the "masters of the universe" today is they can't possibly incite the public to go back to that kind of universe; it was destructive and is still destructive.
They have no more alternatives; they can only continue playing with their "virtual" market on Wall Street which in the end will be more destructive.
All the alternatives have been rejected by the "smartest guys in the room."
Time to go from "shovel ready" to "pitchfork ready."
I'm trying to channel Obama's consciousness to replace Geitner with Baker or a reasonable facsimile
Cicero: "Freedom is participation in power."
Baker's tone in his articles lately is increasingly annoying: Coy and designed not to offend too much the PBS and more commercial round-table shows who've granted him limited but increasing access in recent years. He knows last month's bump in job numbers is an unsustainable blip but he won't come out and explain why. The $18 billion that Prezdint Obankerbombertraitor passed to stimulate small business hires won't create enough demand to sustain those jobs for more than a year if that. The larger $780 Billion dollar stimulus bill was misused by the States to preserve most of their preexisting jobs and still couldn't halt all layoffs and that stimulus effect is rapidly running out. The oil spill in the Gulf of Mexico will unemploy hundreds of thousands on economies of scale across that region. What should be discretionary money being spent on massive government job programs is being pissed away in Iraq, Somalia, Pakistan and Afghanistan with no reduction in the numbers of terrorists and terrorist events in 9 years. Bombings in Iraq already this week have killed over 100 civilians.
Over half a million unemployed will exhaust their unemployment benefits this December, which is the same month Obama chose to have his little council on entitlement reform issue their hatchet report on Social Security and Medicare. Every month thereafter, throughout 2011, another half a million on average will exhaust their unemployment benefits and Team Otraitor will use the suffering as an excuse to shove drastic cuts in those old, effective and popular social programs (and social spending in general) down our collective throats.
Show of hands: How many Americans posting here would get the hell out of this fascist economic trap called America if they had a decent paying job waiting for them in a more social democratic country elsewhere?
I'd be out of here in a heartbeat.
hey, metal!
you said:
'Show of hands: How many Americans posting here would get the hell out of this fascist economic trap called America if they had a decent paying job waiting for them in a more social democratic country elsewhere?
I'd be out of here in a heartbeat.'
this came up in conversation last night...again...
not yet, but...
oh, the ties that bind...