I understand that the extant difficulty in our economy (and the world's economy) is the 'freezing up' of the credit which banks extend to other banks. When Lehmans was allowed to fail it said to all banks,
"Although the Fed and the Treasury bailed out, countrywide, Bear Stearns, and Indymac, it let Lehmans' fail, and it could just as easily allow my bank (say, Morgan Stanley, Citi, or Goldman Sachs) to fail. Therefore I will borrow as heavily from the discount window at the Fed, get my books in the best shape they can get in, just in case my bank has a run. I ain't loaning money to anyone because they may be the next to be allowed to fail." Banks are not loaning to other banks, like they used to do, because there is no trust in the counterpart banker who tells the bank of whom is being asked to loan money, that their books are as they say they are. The
loan buisness is frozen up.
Now, with that said, for the life of me I do not know what Paulson hopes to achieve from people with the above mindset, by buying preferred stock (nonvoting shares). He has no sway over that bank other than the threat of pulling out of the government purchace to force the banker to do as Paulson wishes....that is loan to other banks.
Short of the government guaranteeing all loans, why would bankers feel compelled to not worry about giving out loans?
That is a great explanation. Business hates one thing more than hard times, and that is inconsistency. What kept the Depression so bad was the government’s unpredictable decisions.
You can imagine the mentality inside the banks. No one knows what to expect and so they play safe.