Wednesday, October 29, 2008

President Bush Demands Banks Stop Hoarding Money

And I thought George W. Bush was a free market kind of guy:

An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans ... "What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.

So what does the evidence show? David Beckworth has some insights:

When thinking about the credit crisis question, I think it is useful to look at the money multiplier for the monetary base. The monetary base is a measure of money that includes currency in circulation and bank reserves. It is also a measure of money that the Fed controls and uses to alter liquidity in the banking system. In normal times, the Fed can increase the monetary base by injecting reserves into the banking system. Banks, in turn, lend out a portion of these reserves to borrowers who then spend the funds ... Banks' balance sheets are hemorrhaging and the economy is in a recession. Banks are not eager to make loans in this environment and are more likely to sit on the new reserves coming from the Fed. This development means less credit and if pronounced enough a credit crunch. One implication is that if, in fact, there is a credit crunch then the money multiplier should be sharply falling. Thus, it makes sense to look at the money multiplier. The figure below provides the money multiplier using MZM as the broad measure of money and the St. Louis Fed's monetary base measure ... This figure shows the money multiplier peaked the week of 6/4/08 and begin a sharp descent in late August. Compared to the credit crisis of 1990-1991, Y2K, and 911, this drop is huge.

It does seem that there is an increase in excess reserve demand. Why banks desire to hold more reserves might be an interesting question but I seriously doubt that this Administration are about to mandate maximum reserve holdings.


Donald Pretari said...

"There are a couple of problems with this argument"

Felix Salmon is right on the money this morning:

"Paul Kedrosky has a peculiar argument today, saying that banks shouldn't lend the money they're getting from Treasury:"

Peculiar. How about unethical?

Here's my comment:

Posted: Oct 29 2008 10:50am ET
"If banks don't onlend Treasury's money into the real economy, then they should have been allowed to fail -- with FDIC protection for depositors, of course, and maybe even with the government nationalizing unwanted banks and taking on their senior liabilities. At least that way equity holders and sub debt holders would have chipped in a large part of the cost of the bailout."

Absolutely. This was sold as a credit stimulus plan, now without the stimulus. Why can't people understand that there are moral standards to be adhered to when the taxpayer's money is used. That money was lent on a certain understanding, passed into legislation on a certain understanding, and needs to be adhered to, assessed, and accounted for. Otherwise, leave the taxpayers out.

I know that there were smart people I like who supported TARP, but my main objection to it was that as a hybrid plan, it would be subject to lobbying and revision as it went along, and end up being misspent and far more costly. It simply wasn't the best use of the taxpayer's money, nor the best deal on getting it back.

Now, when I go on blogs reminding people that TARP was supposed to apply to certain banks and certain conditions, and object to redefining what's a bank, who can be in TARP, the use of the money, I get people telling me how smart these moves are. I don't care what they think. They might be wrong. Have they checked these banks recent lending history and use of funds?

The point is, as an opponent of TARP, a taxpayer, I want TARP confined to what it was supposed to be. Is that too much to ask?

I hope I'm wrong. I hope if Bill Gross invests a bunch a money or whatever TARP does, it works out for us. But the issue is ultimately what the taxpayer's money can and can't be used for, and, in that, we, the taxpayers, through our representatives, should have the final say.

By DonthelibertarianDemocrat

Peter Dorman said...

It's actually worse than this, pgl. The Fed, by upping the rate it pays for these excess reserves, is encouraging banks to not lend in order to finance its rescue agenda. That is, credit is being constrained today in order to repair institutions in the hope they will provide credit tomorrow. But how long is tomorrow? How far will the economy drop in the meantime? How will this drop affect lenders' balance sheets and push tomorrow further out into the future?

I am coming to think that the entire strategy, even if diligently pursued, is misguided.

J.Goodwin said...

They can't lend it out. The amounts they are receiving from the government are just barely helping them fix (or improve to some minimally acceptable level) the leverage on their balance sheet so that they don't go out of business.

Lending means they're taking the capital that's making them "healthy" and putting themselves back into an "unhealthy" place.

The markets would reject attempts by the banks to lend.