Monday, December 14, 2009

Banking Lending – the President Today and Paul Samuelson Over 60 Years Ago

President Obama expects our banks to expand lending:
President Obama pressed Wall Street bankers at the White House on Monday, urging them to make more loans and modify mortgages to help taxpayers who propped their banks up with federal bailouts. "My main message in today's meeting was very simple: America's banks received extraordinary assistance from American taxpayers to rebuild their industry," Obama said. "Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy." The president was expected to pressure the nation's top dozen bank chief executives to open up the lending spigots to help the economic recovery.

It is true that the Federal Reserve is doing all it can to increase bank loans and the money supply and the Federal government did institute that TARP “bailout” of our major banks. Yet, banks have chosen to let reserves skyrocket. Paul Krugman notes that the recently departed Paul Samuelson sort of predicted this back in 1948:
Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected. By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves.

Samuelson was arguing back then that we might need more vigorous fiscal stimulus in situations like the one we have today. I think our President understands this as well but then there certain members of Congress who do not.

5 comments:

gordon said...

Washington's Blog has an old post describing what Paul Volcker did during the Peso crisis of the 1980s.

http://www.washingtonsblog.com/2009/10/fed-economist-american-banks-went.html

"The way that Volcker approached the problem was that he allowed U.S. banks to keep their lending rates relatively high, while the central bank brought short-term rates down. The spread between the two (the "fat spread") became revenue for the banks, and the banks used the high fat spread to gradually write off problem loans and to repair their balance sheets".

I can't help wondering if Pres. Obama's jawboning represents an attempt to recycle that strategy, only this time with US borrowers.

TheTrucker said...

This "spread" stuff is pretty stupid in that is just another gift to the banks and the people who have all the money. New money needs to be injected into the bottom of the economy thus devaluing the money in the mattresses of the banks and the rich people. The Fed is currently paying the banks some interest on "reserves". So long as the Fed does this the banks can just sit on the money and shoot the finger at the rest of us. Meanwhile, the rich people just buy more government debt. No reason for them to invest either.

Why does the economic profession not challenge this thievery?

Brenda Rosser said...

The emergency climate change meetings in Copenhagen are a warning about the need to be careful with actions that affect the real economy.

Be careful what you stimulate. (Less use of fossil fuels, cease deforestation, limit the global fish catch etc).

Brenda Rosser said...

The emergency climate change meetings in Copenhagen are a warning about the need to be careful with actions that affect the real economy.

Be careful what you stimulate. (Less use of fossil fuels, cease deforestation, limit the global fish catch etc).

TheTrucker said...

The simple solution is stimulus checks like the checks that went out in early 2008 along with major tax increases in transportation fuels and increased import tariffs.

Pay people to stay at home and NOT buy Chinese crap. That helps the middle class and the environment at the same time.