Monday, May 17, 2010

Why Banks Aren’t Lending

A lot of speculation has been tossed about as to why the big 6 American banks are not lending. The TARP bailout was supposedly given to them in order to unfreeze credit and get lending going again in the US. A lot of anger and frustration has been vented on them for their total lack of doing so.

None of this anger has translated to action against the banks of course. Why is this happening? I think the answers are clear, we do not see them because we do not want to. There are five major reasons why the big 6 banks in America are not lending money to the public.

First, half of the big “banks” are not banks at all but investment houses. Goldman Sachs, Morgan Stanley, JP Morgan Chase are only banks because the Federal Reserve designated them banks so they could access the unlimited liquidity of the Fed printing presses. Only Citigroup, Bank of America and Wells Fargo were and are banks in the traditional sense. With these brokerage houses magically turned into banks they also get access to FDIC insurance. Meaning while Goldman Sachs is selling people betting share on the latest spun sugar fantasy investment, the whole load of crap is backed by the US taxpayer.

Second, they are not loaning because the spread on money borrowed from the Fed at 0.25 percent interest and then invested in 10 year Fed bonds paying 3.56 percent is better and safer than profit from traditional loans. It is a simple matter of accessing Fed funds then using those funds to buy Fed bonds and let the interest spread roll in on capital that just got created in a flash of magic.

Third, they are not loaning because they aren’t supposed to. The second item guarantees that banks will not be punished by the Federal Reserve for not loaning to Main Street because selling its debt is more important to the US government than any other priority. As long as banks are monetarizing the US debt by buying US bonds then they are fulfilling the most critical function of the Fed right now and that is pumping enough paper into the system so that our debt can be funded. This is the ultimate dues ex machine. By making investment corporations into phony banks, the Fed gave them access to borrow unlimited dollars from the government presses. This fountain of fiat capital is then invested in government bonds that no respectable source would touch and funds an insupportable US debt. The nice little interest spread on free Fed money and Fed bonds is Uncle Sam’s way of paying the banks for doing its dirty work.

A little extra problem with pumping all this created money into the system is that it must ultimately create inflation. More paper by definition lowers the currency value. This is a real problem but as long as the created wealth is used to buy debt, the capitol stays locked up and is not released as currency into the economy. This will contain the problem in the short run. The US government probably never planned beyond the short run in its history. With bankruptcy staring them in the face they certainly cannot worry about anything beyond short term fixes.

There you have it, three reasons why the banks are not loaning money to the public. They aren’t banks to start with. They don’t have to with profits from US bonds. Finally, they aren’t supposed to as long as they monetarize the US debt.

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