Monday, December 14, 2009

Blaming the Banks

Today President Obama summoned executives from the nations 12 largest banks to the White House to chastise them for... operating their banks in a sound and profitable manner that does not again imperil the world financial system.  That's not what he said of course.  But whether he knows it or not, that's what he did.

Liberty Watchman encourages President Obama to learn about how the banking system works by watching this video. It's an easy to understand explanation of how banks work. The story is told through a cartoon video so even children can understand it. Even a man-child President can understand it.



In case you didn't know, dear readers, banks do not loan out depositor's money. We think that's how it works, but it doesn't.  For every one dollar on deposit, a bank can loan out $10 (or more). They create this money out of thin air.  You think I'm joking?  Watch the video.

Banks are licensed money machines.  They create money from nothing whenever a loan, mortgage, or other debt instrument is issued.  No money is created in the US (or the world for that matter) until it is borrowed.  It is at the point when it is borrowed that it is manufactured out of thin air.  No printing press prints it.  It's created electronically in the bank's computer.

Don't you wish you were a bank?  You could loan out money you don't even have, get paid interest on that money and over time even get paid 'back' the money you loaned that you never possessed in the first place.  Loan out a million dollars you don't have and get paid back 2 or 3 million  Sounds like a scam or something that should be illegal, right?  Well, it isn't illegal, it's federally licensed.

If you could loan out money you don't even have, you'd make every loan you could right?  You would only have two concerns:
  1. Make sure you loan it to people who will pay it back.  If they default on the loan, then *you* pay for the loan out of your checking account.
  2. For every $10 you loan out, you have to keep $1 under your mattress (in the vault).  If you fail to hold enough 'reserves' the government will take away your right to produce money out of thin air.
In this scenario, would you not make every loan you possibly could?  Of course you would because it's a cash generating machine like no other in the world.

Does President Obama think the bankers don't know this?  Does he think they don't know that making loans is in the banks' best interest?  If bankers aren't making loans it is for one of the two reasons above.  They either have insufficient reserves or can't find credit worthy people to make loans to.

Bank regulators recently increased the reserve requirement, drying up the amount of money banks have to loan.  The economy is struggling so there are fewer people and businesses that want to borrow money.  Less supply of money to loan out plus lower demand for credit equals the natural condition the banks are in now.  Yes, the banks aren't loaning money but there are very good reasons for that.  Sound business reasons.

The reason the financial system almost crashed around our shoulders last year is that congress thought the banks weren't 'loaning enough money' so they pressured the banks to make unwise loans which then, en masse, blew up.  Now Obama is setting up the same dynamic again by pressuring the banks to make stupid loans again.

Is Obama too stupid to know why the banks aren't lending?  It's either that or he's just grandstanding, pretending to fight 'for the people' when he knows it's all claptrap.  The latter is just distasteful while the former gravely endangers our financial future.

4 comments:

  1. You wrote:

    "If bankers aren't making loans it is for one of the two reasons above. They either have insufficient reserves or can't find credit worthy people to make loans to."

    Sorry, but insufficiently reasoned.

    They also don't make loans when borrowers don't want to borrow, presumably because they don't think they can generate enough return on the capital borrowed to justify paying the interest on the loan.

    Duh!

    Did you forget about demand, and what happens when it evaporates? When loan demand evaporates, banks don't loan -- at least they don't loan as much.

    Economics 101

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  2. What nonsense ...

    "The reason the financial system almost crashed around our shoulders last year is that congress thought the banks weren't 'loaning enough money' so they pressured the banks to make unwise loans which then, en masse, blew up."

    Congress had absolutely no role in the financial crisis -- other than turning a blind eye toward the financial industry due to a belief that the market was a virtually perfect self-regulating mechanism that would auto-correct any imbalances before they threatened the system.

    How did that belief work out, by the way?

    What you wrote above defies even aggressively vivid imagination. It's twisted and unreal enough to border on lunacy.

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  3. Just one other sane point to add here.

    The banks loaned for the oldest reason in the capitalist playbook: They had buyers for the loans, removing all risk from their own books.

    Don't you have any understanding of what happened, or do you watch too much Fox?

    The banks loaned money because it was a no-brainer to do so when the loan could immediately be sold to Wall Street. Congress forced them to loan, or pushed them? Do you drink when you write?

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  4. The phrase, "can't find credit worthy people to make loans to." certainly encompasses both sides of the supply/demand equation. You know that. You're just nit picking as usual.

    Congress most certainly was one of the biggest reasons for the financial meltdown. The Community Reinvestment Act of 1977 began the game which was accelerated when Congress pressured the GSEs (Fannie and Freddie) to buy more and riskier subprime loans. Yes, Wall Street was already buying some risky MSBs, but the GSE's accelerated that whole market and gave it legitimacy.

    Even your beloved NYT wrote in Oct 2008, "The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks."

    While you are technically correct that Congress did not pressure the *banks* to make loans, their pressure on the GSEs was intended to and achieved the very same purpose. So once again you excel at nit picking the syntax in spite of the overall truth of the post.

    Reasoned comments are welcome on this blog, but take your ad hominem remarks (drinking, lunacy, etc.) elsewhere.

    ReplyDelete