Posted on 08/16/2010 10:19:35 AM PDT by jackmercer
We are again looking at the same abyss we faced in the Fall of 2008.
(Excerpt) Read more at finance.yahoo.com ...
Agreed. Think no one is buying because we’ve a Congress run by the party of Charlatans and Thieves, coupled with the Manchurian President. We really need a functioning check and balance system. If the party of Responsibility takes over, things might improve somewhat, but the all-clear won’t occur until the Null Set is gone.
Actually there is a simple explanation for this, but like most simple solutions, no one likes it so it becomes complex and then the debate about Angels dancing on the head of the pin begins.
The Marginal Productivity of Debt, you can Google it, explains why money is sloshing around but you can't get any of it. It is a fascinating read. As it pertains to us, it means that no one is going to lend because no matter what happens, they will lose their capital. And, more debt just makes it worse. Ergo, capitalism locks up, no one has money to spend, so prices fall, there is your deflation. The kicker is that all the remedies that Team Kenya has tried and contemplate only serves to make all worse.
Keep your money handy is the short version. When Yugoslavia broke apart the money was worthless, right? Absolutley not; the currency collapsed but then came roaring back as you need some form of money for trade. Same thing happened in Iran, currency collapsed but then came roaring back. It wasn't until the Euro was widely available that those currencies went out of circulation. And since we are the reserve currency, there is no way that cash will continue to be king.
“I believe it’s more a credit crunch. You constantly hear of small businesses complaining about not being able to get a loan. And I have personal experience as to how difficult it is for a real estate investor to get a loan. And yet you see ads from banks offering loans at the lowest interest rates in history.
So how does one explain this seeming contradiction? My theory is that the reasons more loans aren’t being made is because the qualifications for a loan have become much more stringent (probably what they should have been all along) - taking millions of people and thousands of business out of the game.”
What you described is exactly the definition of a liquidity trap. When banks up qualifications, are more risk averse and sit on the money, it doesn’t matter how much money is thrown at them monetarily. Since they will just sit on additional Fed dollars, inflation goes nowhere. In a liquidity trap you can drop trillions from the sky into banks and its like trying to push a string, it goes nowhere, just bunches up.
It is a really shitty place to be since monetary policy is essentially dead leaving only fiscal policy. But that too is dead since the prospect of any more stimulus programs in tax cuts are DOA by democrats and any works or infrastructure programs are DOA by republicans.
From the NY Fed:
“In the modern framework, the liquidity trap arises when the zero bound on the short-term nominal interest rate prevents the central bank from fully accommodating sufficiently large deflationary shocks by interest rate cuts.”
Which is a convoluted way of saying the fed can’t lower the interest rate below zero.
“When banks up qualifications, are more risk averse and sit on the money, it doesn’t matter how much money is thrown at them monetarily. Since they will just sit on additional Fed dollars, inflation goes nowhere.”
Well from what I understand they’re not sitting on the money. They’re buying “safe” US treasuries with it.
I often hear reports of small businesses not being able to get loans. Aren’t most small business loans insured by the SBA, so if I were a bank I’d make as many of those loans as possible, since their interest rate is much better than treasuries. Or has the SBA tightened their qualifications as well so that most businesses don’t qualify?
If that’s the problem, then I would look into easing the loan qualifications for both RE, consumer and small business. They don’t have to be as lenient as they were, but they could be a bit looser.
I just heard instead that the FHA actually plans to stiffen up the lending terms - that should really sink the housing market!
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