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Here's a little twist in the current situation:
The TBTF banks are telling small independent lenders to Fuck Off by charging them fees that amount to negative interest rates for deposits on 7 to 8 digit account balances.
I've heard first hand reports of banks refusing to accept money from large depositors... the TBTF are saturated by the free Benny/Timmy money windows... they have no reason to supply smaller banks and investment groups with any interest at all on deposits.
If this continues to accelerate, the entire SBA backed lending system is going to come to a grinding halt within the next year.
Because small banks are the key to local recovery.
Local recoveries are the key building blocks to a national recovery.
Macro stimulus is is bullshit and yet another variety of corruption.
All politics is local so when our Federal Government collapses in 2014 or so, our local infrastructure is what will organize and lead so that people can continue to be productive.
Credit availability does not resolve the problem of $33 trillion of private credit outstanding. This amount is unsustainable as is the public debt. Keynesian theory was for temporary pump priming to overcome business cycles ,not a fixed policy pursued for the past two decades. Furthermore most banks of all sizes were complicit in assuming this debt with phoney balance sheet accounting and loose loans and mortgages. Wall St. and hedge funds, sensing a day of reconing , invented securitization, swaps and derivatives in order to
institutionalize risk taking , further exposing the financial stytem to peril. And now Econophile believes small banks will come to the rescue ? The problem is much deeper requiring revolutionary changes in the economic/financial system. In any case, it will be painful even if the doctor recommends large doses of gold pills
Credit supply the problem?? Really, you got to be kiddin..
An interesting article, but it raises questions and ignores most of Econophile's post. If Keynesian theory admits the existence of 'liquidity traps' then why is it that Keynesians walked right into one?
It seems that your theories work perfectly...after the fact. The existence of a Keynesian name for some economic state or phenomena doesn't seem to translate into any ability to predict the consequences of policy. Isn't accurate prediction one of the attributes of good theory?
I can see why governments and central banks like Keynesian theory - it lends itself well to central planning and social engineering, thus enhancing 'control' of the economy and population. If a person's goal is 'control' the predictive ability of the theory hardly matters.
Why does a normal, thinking person embrace it? The only answer I can think of is because it's a condition of employment.
+1 as well. A very insightful post.
+1, great comment.
Keynesian theory is adopted not because of any predictive nor "efficiency" aspect. It is only relevant as a control mechanism. Further, it promotes (rationalizes) currency debasing, which every central bank and government *loves*. Literally, central banks and governments *will* currency debase, and merely grab any theory or rationalization to justify their actions. (That's what they do, that's always what they do, there is no scenario by which they don't want that because it permits them to spend what does not and will never exist.) The merits of keynesianism (or any theory adopted to rationalize their actions) are irrelevant.
True, embracing the control structure is the only benefit to this theory adoption, and a condition of employment. Like quite a few other "social theories", the fact that it is continuously demonstrably failed in theory and practice is irrelevant (because the adopters are not academics, they are merely the ruling class pretending to behave as academics).
We see the same thing with many academic models: We use them, because we can tweak them to say what we want. The fact that they have never correlated with reality, nor validated in an actual PREDICTION=>RESPONSE setting is irrelevant. (That's hard, and expensive, and would undermine our ability to promote the model.) So, we will just use the model instead of evaluate the value of the model. (I'm not kidding -- this happens far more than any sane person would like to believe.)
"Why Small Banks Are The Key To Recovery-Part 1 of 2"
Cuz it's hard to total screw and loot your friends and neighbors in flyover country without getting a ventilated cranium?
Might want to ask Neal Bush and Keating about that.
Econophile: Do continue to rock on with the long and complex articles (please).
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And speaking of smaller banks, who knows what Andy Beal is up to these days?
You can just feel the air coming out of the baloon. To the governments horror, we are deflating and there isn't much they can do about it, short of firing up the helicoptor and taking a cruise over suburbia. Nobody is spending recklessly, deadbeats can't borrow and responsible citizens, (serfs?), are deleveraging.
I don't care what kind of crap this regime tries to hand us, it ain't working. I went food shopping yesterday at my friendly neighborhood Safeway and I can tell you prices are coming down, NOT GOING UP. Pay attention and you can see it all over the place with the exception of gas and cars.
Wait and see what back to school looks like.
Econ, why are you urging banks to basically kill themselves? As we see from the BUSLOANS chart, the immediate trend is sharply upwards.
Why would entrenched policy makers favor deflation? That would result in declining tax revenues for the foreseeable future. The politicians themselves are leveraged.
Why should the banks care so much about their survival if the sector as a whole will be bailed out? The banks may be consolidated further, yes, but I see no motivation for the banks to rally around sound principles.
Yes, a hard-money fiat regime is preferable to a [hyper]inflationary one. But I think this may be a bridge to far for the current regime to follow.
The Fed has also shown willingness to bail out CRE directly and indirectly in the recent past.
I think it would be interesting to have some granularity in that loan increase number. $1.5 billion of it alone was for a Calpine bankruptcy exit loan, a good portion of it was for some other M&A activity in the IPP business, etc. In other words, I wonder how much of that lending was for genuine capital expansion, inventory building and the other productive uses that we would consider to be a sign of economic health.
+1. The only thing that I'd add is that businesses have a ton of debt on their books as well.
Getting more credit might help those keep paying on the existing loans. But they need customers first and foremost.
Now we get to watch econ eat its tail because customers are squeamish because they're worried about unemployment.
The fact is some businesses can turtle and make it through, people will still need toilet plungers even after TSHTF, and some will disappear, like the place that sells crystal sculpture in the empty malls keeping those banks up at night.
We won't crawl out of this Catch-22 until something else disrupts the dominant paradigm and gives us our WWII or personal computer explosion.
I certainly don't see blowing the shit out of people who don't have anything to pay us with for the privelege and soaking the young to pamper baby boomers in their dotage lasting much longer.
That makes sense to me. I would also like to see some specific information about this uptick in lending.
No, of course none of this is a sign of economic health. I would like deleveraging, reductions in government spending, municipal defaults, and so on. But what I want to happen is not necessarily what will happen.
I find it mistaken on a basic level when people say that the Fed and the government are incapable of altering a system that they control to fit their interests. Is it complicated? Sure. But it's mostly a matter of introducing targeted tax credits, for the Fed to start charging money on deposits, and so on to spark money creation. The housing bubble was totally premeditated in that fashion. Such an initiative can be easily re-created - and would be cheered by the populace, up until the point of the ultimate destruction of the currency.
After all, the auto-refi program started as a ZH conspiracy theory - now it's becoming policy. Who's to say that they won't introduce some crazy program to expand the SBA lending facility? Force is the whole of the law, and they have more guns than we do.
I do agree that there is a push and pull competition between those that want to stiffen the currency and those that seek to ignite a new bubble. It has introduced a degree of paralysis into the system.
Is that just a manipulation, however, to increase demand for a new expansion of money and credit? It makes sense, doesn't it? If I were elected to Evil Overlord, that's what I would do.
If the policies you advocate would work, the Fed would've already started shelling out the dough for them. What you have forgotten is that the predominant demographic in the USA has decided not to take out more loans. Under that condition, deleveraging (therefore deflation) is unavoidable, no matter what the Fed does.
Even if the Fed started taxing savings accounts (I wouldn't put it past them), people would withdraw their money and sit there in cash (more likely gold, guns, silver, etc.).
The Fed and USG are outta ammo.
Behold our new evaporating frozen-CO2 based currency...spend it while you can!
Small banks may the key to reviving banking, small business may be the key to reviving employment.
There is some lesson to be learned here -- but it won't be.
Well, that's true to a degree. But who exactly are the Banks (either big or small) going to lend to?
You have lots of people who have had their Credit Scores dinged by foreclosure. Lots of people who are without jobs. The people who can get loans are sitting on the sidelines (inspite of record low mortgage rates). And the businesses which are making a go of it want customers, not credit.
So who exactly are they going to be lending to, even if they do relax the Credit Standards?
There's only one way out of a Credit Bubble, and that's to write off the bad loans. It will suck for 2-3 years, but we will rebuild. With the current efforts, we're going to limp along a little while longer, and then have to go through the write-down. There really aren't any alternatives.
Politics should have acted more sensibly 2 years ago and declared a jubilee for people that had min. wage jobs and holding $300,000 mortgages with no chance ever of repayment.
The banks, lenders, mortgage brokers etc took advantage of Greenspan's easy money politics. There was the mistake and that should have been acknowledged. Give people a pass (with certain limitations) and keep their credit score intact. Banks that posted record profits based on these bogus mortgage backed securities and the lending frenzy should have been allowed to go down.
Government had a choice 2 years ago to do this or do the other. They chose the other and screwed up badly.
Government had a choice 2 years ago to do this or do the other. They chose the other and screwed up badly.
I'm going to agree with Rocky on this one - and take it further. Government had a choice 96 years ago (as I recall that's when the Fed was created) and they screwed up badly.
The problem, as I see it, is not that the Central Govt choose the wrong policy, but rather that they HAVE A POLICY. Creation of the Fed to keep booms and busts from happening (How has that worked out?) was just the first of many Central Govt experiments. Now there is virtually no aspect of life that is not in some way effected by Central Govt social engineering.
I can agree up to a point with you, walkure, but think that we need to look for the underlying issues for any real fix. Imagine for a moment that we are all rats in a Keynesian laboratory. Is our problem one of unclean cages, bad diet or lack of excercise? Hardly. Our problem is that there exists a Keynesian laboratory and we are in it!
Government should not have been or be doing shit... but we're stuck with their interventions. Perhaps the problem is not that government is or is not doing what they should, but that they should be doing anything -- or even exist in its present state.
you are the smallest link bu-bye.
Should have posted this here instead of the other thread... as it is more appropriate here......
I have just been watching a 1948 film, and it had a shot of a bank window and in big letters under the bank name showed
ASSETS $350,000 and on the other side of the window LIABILITIES $400,000
no wonder the 50's and 60's were boom years! Banks did what they were supposed to do!
I am of the opinion that one can not get healthy if one starts from a broken foundation. Fractional reserve banking and the practice of usury are two of many practices used in the present banking system that are broken.
You (and others) mention usury a lot. I assume this beef extends beyond the payday loan industry. Right now a 30yr. fixed rate mortgage can be had in the mid-4's, what's so usurious about that? Should real or perceived repayment risk not be reflected in higher rates? Really?
"Right now a 30yr. fixed rate mortgage can be had in the mid-4's, what's so usurious about that? Should real or perceived repayment risk not be reflected in higher rates? Really?"
Butting in...and speaking for myself only...and not being flippant...but...
The system, as it is, has put those who were not in any two party transaction (such as you describe) on the hook for the real or percieved risk of others.
Seeing as how all borrowers are already on the hook for all bailouts (risk of default) why would anyone at the retail level pay 4.50% on .25% money?
Just a thought exercise on the bottomless pit of moral hazard ;-)
At this point the 'usury' is more in the reeheeeheediculous principal required in some areas of the country to buy a hovel.
Blame this on the mort deduction, CRA, or the Fed as best suits your predilections.
A. True but sloppy due diligence, bad assumptions about risk, stupid government mandates and a pervasive belief in free lunch are not the same as usury.
B. Because later on you might be able to legally pay the loan back with funny money or not at all and in the meantime you could use the loan (or other funds thereby freed-up) to buy something that will increase in value when TSHTF.
I don't have a problem with charging interest per se. My point was, charging someone 18 times the value of X (the thing in question) is criminally usury in my opinion.
And signing a contract with the intent to not pay it back is no different than Timmy foisting AIG's obligation's on an unencumbered third party...or GM...or C or...
I'm thinking a bank doubling it's money should be more than enough profit. So let's say the money "comes to life" bearing .25%. Double it or even triple it to allow for the risk free "money handling charges" before it goes into a productive use for Joe Sixpack.
If Joe borrows, at retail, shouldn't he be paying no more than 2.00-2.50%?
I'm thinking a bank doubling it's money should be more than enough profit.
Over what period of time? Are all Joe Sixpacks to be considered equal default risks?
If you're willing to lend at 2% I'll take an application.
"Are all Joe Sixpacks to be considered equal default risks?"
Were AIG, Citi, Morgan, WaMu, LEH, Bear etc. ?
Again, my point is, their cost of capital is zero essentially....25%. These are some of the same banks who got into Joe's back pocket. Joe is backstopping their loaning money to him. In affect, it's his money they are lending to him and charging him interest for the use of his own money.
This is where we started...usury and moral hazard. If it were their money it wouldn't be an issue.
While it's a given the bank making the loan to Joe is not getting it's money at .25% the cost of that money has been deflated. No one can deny that! But the cost of delivery of newly printed money is 4.50%? We both know why...it's the law that the Fed make 5%...but Joe ain't biting...LOL.
Your looking at this static. It's not.
4.50% is not a rate anyone is comfortable with in a deflationary enviroment...4.50% is only relative to what the cost of money used to be, from that prism it is a low interest rate.
It will not be in the future. It can and will go lower. Much lower. To worthlessness. It is all they know.
Joe is essentially saying fuck off to them. I'll wait, it looks shitty to me...he doesn't even know what his tax rate will be next year. Any value derived by relative low rates can be lost through other "usury" games.
I don't know how much clearer I can be Merc.
But it was a good rap.
I'll give you the last word my friend.
I wish to apologize at the start for publishing long articles as this piece and my Dodd-Frank white paper have been. But I chose to tackle rather large and significant economic issues that aren't easy to explain in light their complexity. This current article is done in only two pieces, so maybe I am improving. Please bear with me.
First, no need to apologize. You do the work; it's up to us to read or ignore as we see fit.
Second, whoever junked this comment is an idiot.
But finally: how can you write this without a single mention of the velocity of money? I am always amazed how this fundamental element of macroeconomics is ignored by pundits, who relying on the crutch/fallacy of cet.par., develop fantastic explanations when the most simplistic is ignored.
In times of uncertainty and fear, such as exist today, consumers hunker down. Everyone praises businesses for shoring up their balance sheets, but seems to think that consumers aren't subject to the same pressures, and would come to the same conclusions. If you're worried your job might disappear, aren't you going to cut spending, pay down debt, and build up savings? If you own a small business, are you going to hire another employee (with uncertain knowledge about what it might cost you to in payroll taxes, health benefits, etc.)? If you have money to invest, are you going to put in risky ventures, or try to keep your powder try (i.e. Treasuries) until prospects improve? And what's the result? Velocity plummets.
Anyone with a basic understanding of physics understands "momentum". It's the product of mass times velocity, and it's the reason why a 20 gram bullet - less than an ounce - fired from a gun at 1,000 fps can kill you, while a five pound weight dropped on your foot just hurts. I believe there is a financial analogue - "money momentum" - the product of money supply (mass) times money velocity.
Now, the slow, silent killer of momentum in the physical world is friction. Once you get your car to 60 mph, almost all your engine's energy is spent overcoming friction. And, at this time, in the global economy, the slow, silent killer of money momentum is fear. It's fear of losing your job, fear of losing your home, fear of losing your savings, fear of living in penury and squalor when you're no longer able to work. FDR's most perceptive comment may have been "the only thing we need to fear is fear itself".
Keynes, so misunderstood, so maligned, and so misinterpreted, knew this. He didn't call the phenomenon "fear"; he referred to it as "animal spirits". Regardless, he knew that if the people were afraid, that if business was lacking in animal spirits, then no matter how accomodating the fiscal policy, no matter how stimulative, that economic activity would continue to fall. That's why his policy was to nip such fears in the bud, through government stimulus, with the complicit understanding that, once the fears were ovecome, and the economy recovered, that the government would recoup the stimulus and retire debt. It is the latter point that has been so ignored and abused by so-called "Keynesians" who have brought JMK into such disfavour, touting his policies while completly ignoring them.
It's ironic to me that, after living most of my life in what I call "bomb fever" - the fear that we might be annihiliated by an idiot pressing a button - we emerged into a brief window of hope and prosperity, only to be plunged back into fear of worldwide economic collapse, brought on by electorates and politicians who squandered our long-term futures for their short-term gratifications.
What can restore faith and trust? What will help us regain our animal spirits? Some say gold, some say changes in the governing party, some say religion. I fear - and I truly mean fear - that we will choose the age-old trick of substituting patriotism for faith, of hate for love, of destruction over creation, and plunge ourselves again into all-out war.
We are at war with Eastasia. We have always been at war with Eastasia.
Long form articles on financial blogs are required by the nature of the material and development of insightful discourse.
Short form finance blurbers lend themselves to CNBC.
Keep on the course you are heading, and never apologize for the conceit of the artist, you create, it is up to the audience to have the aptitude to value your work.
An excellent article as were the previous ones. The apology is not needed with me.
Very reminiscent of the line I heard from the small businessman "Don't send me credit! Send me customers!"
Good material. Raising capital through banks doesn't seem to be a problem. The problem is nobody sees the need for more cash and expansion.
Maybe government is already planning to send interest free cash direct to companies and cover payrolls which would keep people employed instead of paying people to stay at home?
You know what that is? Communism. Government "creates and saves" jobs by covering payroll expenses directly instead of suggesting a corporation goes to the bank and asks for funding.
Bank doesn't make a vig, must be communism?
So say govt doesn't 'save' jobs and neither do corporations.
Mmmmmm feudalism loaf!
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