Wednesday, November 19, 2008

Force Them to Lend?

My restful sleep continues to be disturbed by Willem Buiter, who writes

I am in Slovenia today, talking to bankers, entrepreneurs, managers, politicians, government officials and academics. The story is the same here as in every country I have visited since mid-September 2008: the banks aren’t lending. They don’t lend to each other. They don’t lend to non-financial businesses and they don’t lend to households....The macroeconomic consequences of this lending paralysis are potentially disastrous. It could turn a global recession into a global depression, with many years of stagnation and cumulative declines of GDP of 10 percent or more.

His solution?

I propose the following form of forced lending by banks to non-financial businesses. Every loan that matures during the coming year gets extended/renewed for another year on the same terms as the maturing loan. This applies to both secured and unsecured loans. Likewise every credit line or overdraft facility that expires during the coming year gets extended/renewed for another year. Expiring loans, credit lines or overdraft facilities that had an original maturity of less than a year or more than a year will have the same interest rate for the one-year extension/renewal as the original arrangement.

Yes, force them to lend. This is a rather blunt instrument, I would say. It would roll over some loans that should absolutely not be renewed, and it would not direct financing to new, previously unfinanced projects. I think bankers won’t like it. They wouldn’t like my “Plan B”, creating a public competitive financial entity, either. So which one should it be?

Buiter’s approach has the advantage of using the existing institutions: the same personnel, the same chains of command, the same office layouts—nothing new that could create friction or delay at a time when we particularly don’t need it. My approach would be vastly less expensive for the public (and therefore more feasible in direct financial terms) and would be capable of making more rational distinctions at the micro level. But one way or the other, we have to shift the narrative quickly. What needs to be rescued are not the financial markets but the real economies, the incomes and employment, that are the substance of our standard of living.


Donald Pretari said...

"But given the capital injections, guarantees and other forms of financial support extended by the state, a lot of banks are liquid and capable of lending. They refuse to do so.

Where just a year and a half ago, hubris, recklessness, overconfidence and rampant optimism ruled, we now have fear bordering on panic, total lack of confidence, timidity and pessimism verging on institutional clinical depression. The loan officers are brow-beaten and rendered impotent by internal risk controllers. The bean counters are in charge. ‘What you don’t lend, you can’t lose’ is the new micro-prudential ethic. The macroeconomic consequences of this lending paralysis are potentially disastrous. It could turn a global recession into a global depression, with many years of stagnation and cumulative declines of GDP of 10 percent or more.

So, what is to be done? These are extraordinary times that could become desperate times."

Do you agree with this?

"They wouldn’t like my “Plan B”, creating a public competitive financial entity, either."

Would this entity actually loan money? If so, I'm willing to listen. I see things more from a human agency point of view, and, although both of you are going to get me a million more posts to stop calling myself a libertarian at all, I'm willing to listen. Of course, I'm looking at all incentives or plans to overcome what I see as a downward bubble.

Don the libertarian Democrat

Peter Dorman said...


About #1, yes I agree. I am even more of a worrywart than Buiter, in fact, because I think the bailout strategies being pursued are actually generating additional risk to the system. I am not saying disaster is foretold, but I think the risk is much, much greater than reasonable people ought to allow.

About #2, yes again, the whole point of Plan B is to get the financial juices flowing again. I try to link to earlier posts only intermittently (it seems like such crude self-promotion to me), but it is not difficult to dig up this earlier "Plan B" post and see for yourself.

Incidentally, I have libertarian ethical biases myself, but I try to be pragmatic when it comes to economics. Also, the libertarianism of my church is about minimization of hierarchy and authority in our lives and institutions, and it does not map onto "government" and "private sector" in any simple way.

TheTrucker said...

I am not real sure that I believe that the banks won't lend or that this is the root of the problem. They are looking at a very unstable situation in the real political economy. Right now the risk of deflation is real and people are very hesitant to borrow. Is it possible that the borrowers are the problem? Banks can't make people borrow money and lowering interest rates is like pushing a string.

Also, the banks can only make money by loaning money, but that is not so in a depression or a long recession or a deflation. If there is deflation they need not lend in order to gain value. Why take any risk at all?

IMHO the governments need to create money and blow it into the bottom of the economies in order to arrest deflation and to cause inflation if possible. That is what will make people that have money actually take risks. That includes the banks.

Donald Pretari said...

Thanks, I'll find the earlier post.

Don the libertarian Democrat

PS I like links.

Myrtle Blackwood said...

The problem is that in the large jobless boom 'the market' has been extended into places it has no right to be.

What proportion of the loans have been used to buy up municipal water supplies, takeovers of public companies by private individuals, pay private equity managers their extraordinary 20% fee, construct super trawlers to fish out the sea, expand electricity generation with coal and build unsafe nuclear power plants...etc?

On the consumer side how much more constructive would it be for car loans for SUVs to be called in at a time of extreme concern about climate change?

Who is holding MOST of the debt? Why did they borrow? Key questions.

kevin quinn said...

Does this seem too simple a diagnosis: My ability to get financing depends on my credit-worthiness. My credit-worthiness depends positively on the ability of others to get financing, which is in turn a function of their credit-worthiness, which depends on my ability to get financing. So there is an equilibrium where we all get financing and so are all credit-worthy; and one, the one we're in, where no one can get financing and so no one is credit-worthy. And both the Buiter and Dorman plans are designed to move us from the one to the other?

TheTrucker said...

There are no "supply side" fixes for this problem and more money thrown at the banks or even the creation of yet another lending facility will be fruitless. The GAWD almighty dollar is simply crushing everything and everybody. Those that have dollars have absolutely no need to risk them. We are looking at a worldwide deflation in which cash is king and those who spend it will be punished. No bank is going to lend because there is no benefit to lending. They will close the doors and sit on the money. And day by day the money grows in value as labor gets cheaper and cheaper. NO matter how much money they get from government the situation will not change.

The Labor Theory of Value is pretty much correct. Whether neoclassical economists like it or not, they are simply way off track. So long as more and more labor can be commanded by money then the money people will make no move to change anything at all. And to expect them to is some sort of exercise in delusion.