But economic improvements do “not mean that hard times are over — 2009 will continue to be a difficult year for America’s economy. The severity of this recession will cause more job loss, more foreclosures and more pain before it ends.”
Obama also is expected to warn that “credit is still not flowing nearly as easily as it should” and that the ongoing process “for restructuring [insurance giant American International Group] and the auto companies will involve difficult and sometimes unpopular choices.”
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That sounds about right, especially on jobs and foreclosures. And, yes, credit remains a sticking point. So here’s an idea: Why not reduce banks’ capital requirements a bit?
Boom — credit is created out of thin air, and the weaker banks get a little extra breathing room. If people and business are ready to assume some risk, they’ll have the opportunity, and without running up a bunch more federal debt.
During the Depression, we responded to a deflationary spiral by increasing capital requirements, and sucked even more money out of the system. That was a huge mistake. So why not reduce the required levels today?
Because the banks already have tons of relief money.
The reason we aren’t seeing high inflation right now is that the same banks just aren’t issuing credit/extending loans; they’re holding onto the money. Why? Because of uncertainty; most of which comes from the Obama administration, their lack of leadership in the Treasury (did they fill all those positions yet?), and Stupid Human Tricks like firing the General Motors CEO.
Long time reader, first time commenter:
The main reason credit isn’t “flowing” is the paucity of creditworthy demand, rather than a lack of lending capacity. WFC, JPM and USB – three of the five largest banks in the country, just to cite some obvious ones with an aggregate geographic reach covering most of the country – have sufficient capital to make any loan they deem prudent. But many loans that might have been prudent in 2006, with unemployment at 4% and stable, are not today with unemployment at 8% and rising – every consumer’s risk of default is materially higher due to elevated risk of protracted loss of income, and in most cases significantly reduced net worth (and there have been no really credible signs of a bottoming in residential RE prices as yet). In the commercial loan market, demand is weak and the value of the most common collateral – commercial real estate – is in free fall.
A secondary reason is that in the case of banks with potentially large losses gestating in their loan portfolios, reducing capital requirements would be an echo of the “regulatory forbearance” that ultimately made the 1989-1991 credit cycle much worse than it would otherwise have been.
Although there’s definitely something unseemly about banks getting billions and holding on to it (or buying other banks with it,) I am not at all convinced that a good idea right now would be to allow them to have more unsecured loans since I still am not convinced that they understand the mess that was created the last time unsecured debts got out of control. When there’s good debt out there the banks will jump to finance it. There just really isn’t much of that, since homes in relation to incomes are still very much overpriced, jobs are not as secure as before, incomes are going down because inflation is going to happen, and at the same time we’re going through a massive contraction of our entire debt-riding good-timey gravy train of an economy.
Too much easy money (made possible the Feds Gone Wild) got us into this mess in the first place. And you want more?
Uh-uh. We need to flush the system. Let credit dry up for a while. Once the markets balance themselves (assuming, of course, that Obama suddenly gets free markets :*/ ), the lending will start again. As businesses start innovating again, the credit will be available for them to expand their markets, and their payrolls.
And fractional reserves should be banned. That’s caused more problems than just about anything else. You can’t have a run on a bank if they’re not loaning out at 9x reserves. It simply can’t happen.
Nukem: You’re right that you can’t have a run on a bank if you don’t have a fractional reserve system. That’s because full-reserve systems don’t have banks in any sense that you’d recognize.