You’ll be as shocked as I am to learn that they are being discouraged from doing so by government policies.
16 thoughts on “Why Aren’t Banks Lending?”
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You’ll be as shocked as I am to learn that they are being discouraged from doing so by government policies.
Comments are closed.
A large part of the reason banks aren’t lending can’t be blamed on government policies however. Banks were far too highly leveraged, so a large amount of the unprecedented levels of liquidity made available by the Fed has simple gone into deleveraging. To be sure some government policies have forced that, but primarily it’s just good business sense. BTW, don’t translate this as me supporting any of the current administrations fiscal policies, I don’t, just a point of fact.
too highly leveraged
All banks? Too the same degree? If the government weren’t involved what would happen? Too highly leveraged banks would fail, resulting in a lower average leverage. So it’s self correcting.
Unless the government gets involved and screws it up.
So yes, I blame that on government as well.
I’d be willing to bet that it isn’t just bank lending that is being frozen by the “regime uncertainty” created by the Obama administration.
IPOs are way down as well. Who wants to start a new venture — or expand an existing one — when no one can be certain what taxes and regulations these insane fools will impose next?
IPOs were already decreasing due to oppressive government -ever since SOX was made law.
SOX was a factor in making it harder to go public. It increased the burden for such corporations. I know a couple which went private because of that.
Yet if it is hard to get credit, fewer businesses will be created as well, and fewer IPOs will result in the end. These are two faces of the same system.
Also a lot of startups did not bother to do an IPO simply because of the state of the financial markets. After the downturn it simply was not worth it. Elon said it himself last year regarding a possible SpaceX IPO. I do think we will be seeing a lot of companies going public until the end of the year however. The stock markets have recovered somewhat and venture capitalists will not wait forever to get a return on their investments.
The government (and the FED) also do a lot of things to make lending easier and that was one of the main causes of the problems we’re in today. Both interventions are incredibly harmful. On the whole banks probably still lend too much, given that the FED is still keeping interest rates very low.
But of course, governments are not trying to achieve optimal amounts of lending, they are trying to channel wealth to their constituencies.
IMO SOX was a mistake and should be repealed. Sometimes the medicine can be worse than the disease.
Many Western countries are piled under a mountain of debt. Citizens, government, everyone in debt. Eventually it comes time to pay. This deflation phase was necessary. However the problem remains that this credit crunch is leading to a much deeper recession.
Mr. Greenspan’s policies (which were lauded at the time by a lot of people) only contributed to magnifying the problem. It is normal for an economy to have growth and contraction phases. Even Karl Marx knew that when he described capitalism’s boom and bust cycles over a century ago? Counter cyclical policies are no panacea. Unless grounded in some way they may actually make the future recession worse.
I also think people took the wrong lessons from Keynesianism. US government policies around WWII are both a lesson of how to, and how not to get out of a global financial crisis. IMO strategic infrastructure projects (highways, hydropower, aluminum, synthetic rubber) were essential for getting out of the crisis by upgrading the economy to a new resource and usage model. The major mistake IMO was turning back to protectionism and closing the global markets.
Simply hoping that the market can solve our present situation is not good enough. We are presently facing a global problem. The entire world, including India and China, wants a Western like style of living. To provide that requires vast amounts of cheap energy. That is our present major challenge. Recent crisis are mostly echoes of that.
The fact is petroleum is getting increasingly expensive to extract. EROEI for petroleum is getting increasingly worse. Petroleum based fuels are made from increasingly lower grade resources. Even if there is some major synthetic fuels breakthrough, in the future much of the transportation energy must come from something other than petroleum. To make liquid fuel from tar sands you need to spend a lot of energy heating up and processing tar with natural gas or whatever. Oil shale needs similar processing with some kind of cheap thermal source. Presently this source is either natural gas or coal. In the future it might be nuclear or solar because these are the only major sources of thermal energy we know which are available everywhere (besides burning wood which is unsustainable given the current world population level).
Today the economic upgrade may be provided by people working on the so called green economy (I hate that expression but at least this way people know what I am talking about). Where wind and solar power are used as an energy resource and electric cars running on batteries are the common transportation mode.
It may turn out someone figures out how to make synthetic petroleum in a more energetically efficient fashion and electric cars will never be important. However I do not see it happening in any expedient way.
Mr. Greenspan’s policies (which were lauded at the time by a lot of people) only contributed to magnifying the problem.
Monetarism is a failed experiment in outsourcing the implementation of Keynesianism to the private sector.
Simply hoping that the market can solve our present situation is not good enough
So far I’d say the evidence is the government is screwing things up. What evidence is there that the market left alone wouldn’t correct the problem?
To provide [a western style of living globally] requires vast amounts of cheap energy
This is not really a problem. The main reason for the high cost of energy is again, government intervention. In some places in the world today you can fill your tank for ten cents a gallon, but I’m paying close to $3 and many are paying more. Why?
Government.
“Come and listen to a story ’bout a man named Jed
Poor mountaineer barely kept his family fed
Then one day he was shooting for some food,
And up through the ground come a bubbling crude
(Oil that is, black gold, Texas tea)”
What is all this about EROEI? Don’tcha know that if you poke a hole in the ground in the right place, up through the ground come a bubblin’ crude? I mean oil that is . . . black gold . . . Texas tea?
Don’t believe me? What about that hole they have in the Gulf of Mexico? They got more oil than they can handle, and they can’t even put a cap over it without it blowing out the cap. And it just keeps on coming as we see every hour of every day on CNN.
If monetarism is a failed experiment, then Keynesianism is a failed theory. Austrian theory has a better predictive track record, AND it avoids Keynes’ moral cesspool that says it’s ok to stiff your grandchild for the bill since you’ll be long dead. Not to mention how it is a enabler of out of control gov’t spending.
If monetarism is a failed experiment, then Keynesianism is a failed theory.
Yeah, that’s what I meant. Simply privatising its implementation doesn’t solve a fundamentally flawed system.
I think the whole thing boils down to a lack of humility. The whole idea that central planning can fix the problem is a crock. First, the central bank does not create money. It’s the secondary banks that actually loan out money that do that and it all depends on how many banks there are and their fractional reserve. Left alone, banking is a profitable venture and new banks will come into existence in response to demand.
I don’t know, but I imagine bank runs are not common these days although I’m sure they do occasionally occur. When the government doesn’t force banks to make bad loans they operate pretty well and there are many examples. It’s the big financial institutions that are in trouble and it can be traced back, in every case, to government intrusion. The point of derivatives wasn’t greed, it was trying to make the toxic assets the government saddled them with, less toxic (didn’t work.)
People become cautious financial when they don’t trust the governments actions. Obama has been doing everything he can to lose the public trust. Increasing debt by out of control spending being number one.
The correction is less government and no bailouts. That alone will fix the problem. I don’t care what they try to do about the money supply. The fed doesn’t control the money supply (no matter how much they print, money is only created when loaned. Government spending doesn’t increase the money supply, it lowers it because of the offsetting debt.)
Get rid of the marxist in chief and his cronies. Stop the out of control spending and reduce the size of government (with the exception of the military which has grown too small) and things will improve.
One area where banks do perhaps need regulation is that they are no longer just lenders. So their lending money is competing with their investment money. No wonder lending is taking a hit.
One area where banks do perhaps need regulation is that they are no longer just lenders.
Hard to tell. The first thing we’d need to do (but won’t) is to return to sound money. Then we’d need to get rid of deposit insurance to stop lulling people into a false sense of security. Then people would insist on solid banks and banking would become a normal industry. You know, it’s not that hard to keep money safe if you put it in a safe.
I’m not sure what you mean by sound money. All money is a form of debt. As far as deposit insurance, the trend to raise it is a bad thing, IMHO. It is a false sense of security, but when it was $100k per account, it at least may have contributed to spreading money around.
Lending and service fees used to be a banks main income. Now, suppose they sell a variable annuity. They could cover the cost of a fixed annuity by lending, but a variable is going to be tied to some speculative investment, reducing the amount they loan by several times the cost of the annuity depending on their fractional reserve. That seems to me to be a huge hit to lending.