The Fed is pouring money into banks in hopes that the banks loan the money out. The banks aren't loaning the money out because people are out of work and don't have the money to re-pay their loans, and loaning money to someone who can't re-pay their loan is hardly what any fiscally responsible lending officer is going to do (and with the threat of a Fed takeover hanging over their head, they're hardly going to be fiscally irresponsible right now).
What this is called, in Bernanke terms from his papers about the Great Depression, is "pushing on a string". You can flood the banking system with all the money you want, but if this money is just sitting in the bank because nobody can afford to borrow it, then it's useless. It's like pushing on a string. You're pushing all this money, but it's never making it down to the other end of the string (the consumers) to get them consuming because, well, you can't make the other end of a string move by pushing on one end. You have to pull on the other end too.
If people don't have money because they don't have jobs, then the practical way to get money into their hands so they can afford to start consuming again is to get them jobs. Whether this is done via job credits (paying employers to hire people), via public works projects (which, alas, today would likely only enrich Mexico because contractors refuse to hire Americans because Americans have rights and will report them if they violate federal labor laws), or via directly hiring these people in a CCC/WPA style Depression-era organization to clean up our roadsides and build park benches and trails and such, it's clear that the Bushevik/Bernanke plan of injecting liquidity into the banking system hasn't been enough to solve the problem because, well, people need jobs to borrow money and they don't have jobs or are fearing for their jobs thus can't/aren't borrowing.
We'll have to see whether President Obama will listen to the practical people who are telling him about strings and pushing upon, thereof. But until there's some pull from the consumer side of strings, pushing money into the banking system is pushing on a string and it's not going to work. Republican ideology, which is against programs that employ Americans, is the problem rather than the solution here. Let's hope Obama is ready and willing to ditch Republican ideology and return to pragmatic practicality, one aspect of which is that if people aren't consuming because they don't have jobs, then (duh) get them jobs. Yikes! Common sense! Too bad it ain't too common...
-- Badtux the Stringy Penguin
Yet most people do have jobs. But they can't get loans. Student loans don't hinge on current employment, yet I know dozens of students who have seen student loans disappear. They're having to drop out. I think much of what you say is true, but I also think the financial industry is much more interested in buying up weak competitors than in providing credit.
ReplyDeleteThe unemployment rate in my Cali county is over 10%.
ReplyDeleteThe banks are hoarding the money is what I have read in a few economists blogs..so what do we do then?
I think Lockwood is right...they are willing to buy up competitors instead of loaning it.
I've got a deep conceptual question, and you seem to have some deep perceptualisations. It's about "banks lending to each other." Why the hell is that so important?
ReplyDeleteDoes it refer to Federal Reserve banks? Are they afraid to lend to local banks to finance homes? Substitute "business" or "leveraged buyout" for "homes" as necessary. The amount of money the Fed is shoveling out there -- "bulldozing on a string" might be a better metaphor -- makes me think that's not it.
Does it refer to one bank, like the one where I get my home loan, not wanting to put out money to the bank where the person I'm buying the home has their account?
Or is "banks lending to other banks" something more sinister? This is my suspicion -- that it's all a giant check-kiting scheme. Bank A loans to Bank B, which uses that as leverage to do fractional reserve lending to loan to Banks C through L? Is that why it's a worry -- because the nature of the puffed-up economy depends on the churn?
Bukko, part of the problem is that Federal Reserve deposits do not pay interest. Banks generally have reserves beyond the federally-required ones because they need a buffer in order to keep them from going below the reserve requirement (and thus taken over by the FDIC) in the event that they hit a cashflow crunch such as, say, 20% of their mortgages suddenly going into default. So rather than leave the money on deposit in the Federal Reserve, banks would prefer to loan it out to other banks where they can get interest paid on it. And banks whose reserves have fallen below where they'd like them to be would prefer to borrow some more money for their cash reserves rather than risk falling below their reserve requirement with the Fed.
ReplyDeleteSo it's a way of spreading liquidity around between banks with excess liquidity and banks with less liquidity. If inter-bank lending clogs up because banks aren't sure that the receiving banks can repay the loans and thus raise the interest rate to cover the risk of default, then the banks with less liquidity can't lend due to lack of excess liquidity above their reserve requirements and end up in trouble, and the banks with more liquidity lose the income they were getting from inter-bank lending, *plus* it's an effective raise in the reserve ratio for the bank with more liquidity and thus a decrease in the money supply, as you inferred. So this churn decidedly does have a money supply effect, for much the reason you imply, except it's not really a "scheme" so much as it is a mechanism for maximizing use of banks' reserves.
- Badtux the Financial Penguin
Thanks for the explicification. I had known about these factors in isolation, like how the Fed didn't pay interest on reserves (although they have now changed that) but you connected the isolated info-dots to gove me a better take on the Big Picture.
ReplyDeleteYou know what all this overnight lending and fine balance of reserves sounds like? The Japanese "just-in-time" inventory delivery system. Only here, the inventory arrived not a moment before it's needed isn't auto parts; it's money.
Good analogy, Bukko. It really *is* "just in time" inventory delivery of money, at least, when the system is working right.
ReplyDeleteAs for the Fed paying interest on its deposits, that is one that is baffling to me. On the one hand, it puts money into banks that they currently don't have, therefore expanding the money supply (since the Fed is printing this money out of thin air). On the other hand, it encourages banks to keep their money on file at the Fed rather than out there seeking lenders, therefore shrinking the money supply. I have no idea what Bernanke was thinking with this one, or whether he has any data to support this program that says that the amount of money being created will outweigh the amount of money being destroyed.
- Badtux the Monetary Penguin