The whole premise of the Wall Street bailout was to keep banks alive so they could keep lending money to us. Remember that? It seemed like such a nice idea at the time:
Banks are now not only not lending money to us, they’re not bothering to attend meetings with the President in which he is begging them to lend money to us (because who wants to waste time going to Washington to be lectured by a bureaucrat when you can just stay home and mint money on a risk-free spread?)
And, more importantly, who wants to take the risk of lending to companies and individuals when you can make hundreds of billions of dollars lending money risk-free to the U.S. government?
The banks are just doing what any sensible lender would do right now: Taking the free money on offer from the government (taxpayers) and lending it back to the government (taxpayers) at a phenomenal markup of 3 full percentage points. And they’re taking almost no risk, to boot!
As we explained the other day, this is a super-easy way to make billions of dollars and pay yourselves huge bonuses. It’s so easy, in fact, that it’s a wonder President Obama is even bothering to keep the charade alive that banks might voluntarily choose to lend to anyone who isn’t guaranteed to pay it back.
But if the President is interested in actions instead of just words, here’s an easy way to make the banks lend again:
STOP GIVING THE BANKS UNLIMITED AMOUNTS OF MONEY FOR FREE.
Specifically, immediately raise short-term rates for government money to 3%+. The moment you do this, you will take away the banks’ ability to borrow money for free from the government and then lend it back to the government at 3%+. As long as you keep long rates low (a big “if”, but, like the banks, let’s just worry about that one later), the banks won’t be able to make hundreds of billions lending our government our money anymore. So they’ll have to lend the money to someone else. Like us!
Yes, of course, most banks still might not lend to us right away. They might just hunker down and not lend to ANYONE, even the government, and just sit there and nurse their massive loan losses. But, thankfully, those loan losses are so massive that the banks will soon have to do something to generate some offsetting income, or the loan losses will just wipe them out. And if we hold the line this time, instead of just bailing them out, maybe they’ll finally realise that the only way to save themselves is to start lending our money to us!
(Another motivation: If they don’t start lending and generating some income, they won’t get paid next year. Last year’s excuse, that banks have to pay massive bonuses even in horrendous years because otherwise their people will leave won’t fly anymore–because now it’s their money instead of the taxpayer’s).
So, how about it, Ben?