Wednesday, December 10, 2008

Why banks aren't lending

Feel free to gloss over this post if the reasoning is also blatantly obvious to you, but it seems some [dense] people in the world are baffled that although banks have received upwards of $500 billion in direct cash injections from the government, as well as more than $2 trillion in US currency "loans" for their secret (and presumably worthless) collateral, yet private credit is still very tight, and most of the bank money is either in deposit at the Fed, or invested in Treasuries paying 0%. Well, let me explain why this is expected and easily predictable.

See, the country has been running on borrowed time/money for a while. We have destroyed our industrial base while simultaneously running up huge consumer debt. This combination has allowed people to continue living "the good life", despite the fact that our country runs a huge trade deficit, and policies which actively discourage industrial production, development, and wealth creation (eg: environmental restrictions). Add to that our large tax burden, unfunded long-term social service liabilities, and massive leveraging in the financial sector enabled by cheap money (ie: Greenspan's Fed policies, continued by Bernanke), and you have a very unstable and unsustainable system. Once it starts to crack a little, there's very little to stop the decline, until the whole system "bottoms out".

Now, there would be a number of things we could do better to stabilize the system. For example, we could encourage saving and people living within their means, instead of encouraging people to spend more than they earn, and convincing them that everyone is entitled to "the good life" without earning it. We could reduce the tax burden on individuals and private businesses, to encourage economic growth. We could encourage industrial growth and competition, to be competitive in global trade, and close the trade deficit. We could fix our long-term social liabilities in some manner. We could force the various local governments to balance their budgets, to stop deferring their liabilities with accounting tricks and relying on cheap borrowing to perpetuate their debt. We could raise the borrowing rates from the government to slow monetary expansion and discourage massive leveraging, as well as reduce tangible asset prices (such as housing prices), making those assets more affordable for everyone, while simultaneously reducing systemic risk in the financial industry. We could do any or all of those things, or other things, to make our future prosperity more viable.

Unfortunately, we have a government built on corruption and immediate gratification, and we're not doing any of those things. In fact, if you consider each of them, our government has not only chosen to not pursue any of the good plans, but has chosen to pursue exact opposite plans in most cases, which are assured to have at least no positive effects, and probably amplify the depression. But wait, that's not all! In addition to all our bone-headed policies, we the people have also elected a socialist leader to "fix" the problems by nationalizing industries, adding onerous health-care costs to private businesses, and distributing wealth away from the "evil" private businesses. In short, we've created the perfect storm of the exact wrong policies for every single element of fixing our economy and future prosperity: we have done everything possible to ensure economic failure.

Now, our economy is historically resilient despite governmental efforts to the contrary, but even optimistic people would concede that our economic suicidal obsession will probably win out this time. Banks see this clearly; it's their business after all. Why in the world would you loan money to a private business, when every short-term force and the vast power of the government are aligned to ensure that those businesses fail? Why would you loan money to individuals when most of them are already in massive debt, and the government is likely to eventually force you to forgive that debt (because you're an "evil" corporation)? It just doesn't make any sense at all.

Add to that various pseudo-government entities trying to lend money without respect to risk in order to keep asset valuations artificially inflated (eg: the FHA, because apparently non-affordable housing is a government priority worthy of spending your taxpayer money on), and you have a situation where private bank lending is not going to make sense while the government interference continues. Couple that with the government's strong desire to keep cheap credit flowing, and you'll get increasing cries for nationalization, as the banks continue to lose money because they are unable to lend in a way which makes business sense (being undercut by pseudo-government lending entities, which don't are about losing money). Some private businesses (eg: auto companies) will also be nationalized, to keep people "employed" in money-losing "industry" in a sort of unionized, above private sector employment welfare system. Eventually everything will need to be nationalized due to the inability to compete with the government (which is not concerned about making money), and outcries for equal compensation and benefits compared to previously nationalized workers. Soon thereafter we'll achieve the socialist "ideal", and we can all live happily ever after like everyone in all the previous socialist countries have.

Anyway, if you're curious why banks aren't lending, that's why; it's an easily predictable and inevitable consequence of our government policies, nothing more, nothing less.


  1. I agree with most of this, except I am one of those "socialists". I want the government to tax us and use the money to try to create a more just society. That in itself does not stifle growth.

    The policies to encourage debt are completely absurd. Getting people into debt and keeping houses expensive do not help the needy and create a more just society. They do just the opposite.

    I wish my fellow "socialists" would just take a little of our money and give it directly to the needy in the form of job training and programs to provide the basics to needy children. I don’t know why they feel the need to do these things like providing healthcare to people with median income/net worth and therefore could buy it themselves. I don’t know why we have to bail out entire industries. Just give the money directly to the needy, i.e. people at or near the federal poverty line.

  2. I should state, for the record, that I am not at all against people contributing unequally voluntarily to the government, in hopes that it will do a better job distributing their money to make the society better as a whole. I also am not against the government collecting taxes: there are obvious things which the government should do for the country, which are outlined in the Constitution.

    The thing which seems fundamentally unfair to those of us who are not socialists is the people in government taking money from other people in arbitrarily disproportionate amounts, or the government collecting money directly or indirectly for wealth redistribution.

    I think you'll get your wish, though. I would be surprised if the government is not running a substantial part of the US economy after four years, as well as eventually taxing people to the point where it's no longer very beneficial to work, as opposed to being on government welfare. Then we shall see if it's possible to sustain the largest economy in the world on a closed-loop, government-run, net-zero production economic system. I'm hoping we'll have a revolt and government overthrow before then, because I don't really want to emigrate, but then again I'm probably an optimist.

  3. I think you'll get your wish, though. I would be surprised if the government is not running a substantial part of the US economy after four years

    I don't want the gov't owning the means of production, though. I just want it to provide generous benefits aimed at helping people pull themselves out of poverty or near-poverty. I don't want taxes to go up. I want the gov't to scale back the so-called "war on terrorism" and "war on drugs" in favor of less expensive approaches. I want it to keep taxes reasonable (let's say top marginal rate <= 40%) and balance the budget. I want it to stay out of middle-class people lives (i.e partially privitize Social Security, adopt most of McCain's healthcare plan) and focus its efforts on helping needy people help themselves.

    I think Obama and the Democrats will focus on programs like healthcare that end up taking middle class money and more-or-less managing it for them. The poor won't be the main focus. The focus will be middle-class people who vote and want someone to manage parts of their lives for them. I will be lobbying against this the whole time. The founders of the country were specifically against the average citizen feeling dependent on the gov't for basic needs.

  4. Lol... if I didn't know better, I'd say you were a Republican who's just kinda confused about what the two parties actually stand for and do. Bush aside, Republicans traditionally are all about smaller government, staying out of people's lives (at least financially), lower middle-class tax rates, etc. The Democrats are all about bigger government, and the government running people's welfare programs and lives "for the benefit" of the people who are presumed to be unable to take care of themselves. Neither party is overly concerned about helping the poor, although one could argue a slight edge for the Republicans, since they encourage self-reliance instead of government subsidization, which is overall more beneficial for reducing the number of people dependent on handouts.

    Really, though... Obama and the socialists are going to do most of the things you don't want. Nothing about their proposed programs to date encourage anything like self-reliance or personal responsibility, and most is the exact opposite. In fact, the private credit market is being suffocated to death currently based on the entirely rational fear that Obama's administration will effectively throw out personal responsibility for private debts, and decimate the banks in the process. Again, an entirely predictable sequence of events in my opinion.

    It will be a shame, I think, if history remembers the Obama administration and US downfall as "the people didn't realize that they had elected a socialist, and thus doomed their country to failure." It would be the ultimate ironic expression of denying personal responsibility on the part of the Democrats and their supporters.