Momentum: The One Word Problem with the Economy

The Provocateur ^ | 01/23/2009 | Mike Volpe

[fiscon1]

In yesterday's City Journal, Nicole Gelinas has a piece that argued about the limitations of current monetary policy however the piece also illustrates the problems of our economy in the process.

Banks are hoarding much of their new government capital against future losses, rather than using it to make new loans. This behavior isn’t irrational, as many government officials seem to think—among them House Financial Services Committee chairman Barney Frank, who has chastised the banks for their reluctance to lend. The banks just aren’t sure how many existing borrowers—from credit-card holders to big corporations—are going to default, and they’re also unsure whether there’s more federal money on tap if borrowers keep defaulting in large numbers. Banks also want to hoard capital because their private investors—those few left—want them to. It’s unlikely that the market will look favorably any time soon on banks that lend as aggressively as they did a few years ago.

[yefragetuwrabrumuy]

Banks must return to the old principle that they don’t lend money except to those that don’t need it. And this also means that they want assurance that 100% collateral *means* 100% collateral.

For example, while you might have paid $500k for your house, your equity in that house might only be 10%, or $50,000. And with a falling housing market, you might not be able to sell your house for $250k. It would only sell *right now* at $200k. In six months, maybe $150k. It’s hard to tell.

So if a bank was feeling generous, and they aren’t, they would calculate that you could back your 100% collateral only to $15k with your house. And that, only if you had other things of value to support that collateral with.

Pretty soon, even trying to get a loan isn’t worth it.

[MainFrame65]

What the banks are doing is not hoarding. They are finally evaluating bank assets (loans) and collateral for those assets at realistic values, and maintaining proper reserve levels with legitimate reserves instead of phony paper.

But the multiplier effect of reserve requirements works both ways, and there is a tremendous surplus of multiplied money out there without the collateral value to back it up.

[Blood of Tyrants]

Instead of massive new government spending, I suggest a massive corporate tax cut retroactive to 2008.

I have been saying that for months. Giving a poor person $500 to spend is going to boost the economy by $500. Give corporations a huge tax cut will cause them to start new projects and give them some breathing room. Instead of going under, they just might be able to hold on for a few more months and ride the recession through.