The prospects for credit market revitalization

Today you get more Felix Salmon, who nails it:

America’s banks — and the world’s, for that matter — have had de facto
unlimited access to very cheap Fed liquidity for many months now. That
hasn’t induced them to lend. Will this latest recapitalization do the
trick? I’m far from convinced. And what’s more, the demand for loans is drying up fast: do you
really feel like buying a bigger house right now, or taking out a car
loan? Well, businesses are in the same boat. In a recession, their ROI
falls, so they borrow less.

I am, however, a little worried about Felix’s proposal to make banks lend the money.  It’s not that I have a better idea, but I suspect any scheme of compulsion will bring either higher risk or ways to game the scheme or both.  And if bank shareholders and CEOs do not wish those loans to be made, our current system of corporate governance quickly becomes unworkable.

Comments

Tyler, with debt loads at all levels of society so high, why do we want people to borrow more money? This is a serious question, not a rhetorical one. Is it just to avoid the recession that would come along with paying down debt?

Didn't the great depression happen because both banks and customers horded money, ie the mattress became the nation's greatest savings bank?

How about this, what if we let the banking sector go where it may and the Fed instead printed money by indiscriminately giving checks to everybody in America? If deflation is the big enemy, that seems to be best, if unseemly, way to fight it. Just throwing that out there by the way; it's not like I'm a huge supporter of it.

How far would $700B get us toward a nation railway system?

From reading this post and your last one on too many sentences to ponder, I get the impression that you have started to realize how wrong you have been about the crisis. Even ignoring your wrong ideas about a liquidity trap and the differences between banks and other financial firms, you have failed to apply the insights from Hayek, Hurwicz and many others about information and incentives (remember how many posts you wrote last year about them) as well as the lessons one can draw from public choice theory on how to deal with a crisis.

err... I meant MESS, not message

I'm pretty sure the pendulum has swung the other way at this point. Incenting higher risk, at least in the short term, is a good thing.

Well, there you have it. Prof. Tabarrok says in September that there is no credit crunch "despite all the talk"; today Prof. Cowen tells that we are, basically, in a liquidity trap where nothing will make the banks lend. But I'm sure both of them sit around the department office complaining that policymakers don't listen to economists.

How far would $700B get us toward a nation railway system?

We have a nationwide railway system. Your question, I assume, is more, how much would $700B be able to upgrade our railway system?

One question would be how long it would take to spend that much. The National Environmental Policy Act of 1970 and its requirements for Environmental Impact Statements come into play. If you're asking about true Japanese-style high speed rail, that would require all-new tracks and in that case a tiered EIS process. There is zero chance that anything could built until ten years in the future. Check out the history of the Southeast High Speed Rail project to see how long EISes take.

If you're talking about incremental improvements, there's a large number of service improvements that could bring various corridors up to 110 mph speeds for that much money. However, concentrating on a "nationwide" system is a bad idea; rail will not be competitive for transcontinental trips. The proper area of focus is on 100-500 mile corridor trips. Amtrak could actually be profitable over such trips. The long-distance trains are so inefficient (low loads, sleeper cars, filling up on short segments but being empty on long stretches across empty land) that Amtrak actually loses more money on them when oil goes up, as the increased passengers don't outweigh increased fuel costs.

Isn't compelling banks to make risky loans part of the reason we are in this mess?

Tyler,

The key is to lower lending standards back to where they were for subprime borrowers. Even in good times, there are literally thousands of money-losing businesses that die for lack of funding, but whose owners, managers, and employees would glady borrow any amount of money you want to lend them as long as you never actually make them pay it back.

Here is what is going to happen- sometime next year, after the inaugeration, and when the recession is at its deepest, money will begin be lent to these dying companies (already happening for the automakers) to keep them afloat, and the government will guarantee these loans on a continuing basis. As the numbers of these state supported firms increases, their competitors, previously sound money-making operations, begin to lose money, too, and they also get on the gravy train of government supplied inco....er...loans (via the banking system). Losses never need be declared. The government balance sheet doesn't really exist anyway.

People are forgetting that the government is getting something back for the 700 billion. The eventual balance sheet hit will be far less than if, say, the government gave 13.5 million people 50k jobs for one year.

I hardly need to take jabs at Tyler at this point, since others have done an adequate job already in this thread. But let me be constructive (for a change!) and address this statement:

I am, however, a little worried about Felix's proposal to make banks lend the money. It's not that I have a better idea...

C'mon Tyler, relax the constraints of what is "politically feasible." First shake off what other "responsible" people are talking about, and imagine the president comes to you for advice. Do you really not have a better idea than the government forcing banks to make loans?! I can't believe you mean that.

How about, the government pulls half its troops home and disbands them (maybe with 6 months' pay to avoid riots from trained killers), it auctions off all of the oil and natural gas deposits in OCS lands (using Vernon Smith to arrange revenue-sharing with the coastal states who fear oil spills), it cancels the Paulson bailout, and then it eliminates the income tax. All IRS employees are laid off, again with 6 months' pay to avoid riots from trained thieves.

I'm thinking the above would be pretty sweet, and it probably would only increase the federal budget deficit for a year or two, tops. After that, supply-side effects would more than pay for it (in conjunction with the revenues from auctions and lower military spending).

If you want to say, "C'mon, stop being ridiculous, Ron Paul didn't win the election," fair enough. But then you should be blogging, "I can't come up with a better idea that wouldn't get me laughed off of Fox News." But you can certainly come up with a better idea than forcing banks to lend money that the government forced them to take.

The government has enough land to give everyone, in the 300 million population, 7 acres each. I'd take 7 acres. They could even give the returning soldiers we can't afford anymore 20 acres each and take that out of our share. This would be a nice addition to Bob Murphy's plan IMO.

What if the government puts that $700B into lots of $50K jobs that are part of capital improvement projects such as the building of more efficient/secure ports, oil refineries that are less subject to interruption by hurricanes, investment in alternative fuel infrastructure to help us reduce the reliance on foreign oil?

The government will still be borrowing the $700B from somewhere. It will either be reducing the number of jobs currently by paying for it from taxes, or borrowing money from the future. For the same reason that the "rebate checks" didn't do much, it wouldn't have much of a net effect.

To get oil refineries less subject to interruption by one particular hurricane, you don't necessarily need the government to build the refineries, you just need to allow the refineries to be built. It's true that the government can often do a better job of overriding and ignoring environmental laws, if that's your interest, but not always. (See trains and the NEPA.)

All those things are investment projects with a very long payout. They would do nothing in particular to address any sort of liquidity crisis or financial panic or anything. That means that they would be equally good or bad ideas regardless of the current situation.

Banks are useful and it seems that financial crisis has hit them hard. If a bank needs a government bailout then I have to think about how serious the crisis really is. And it hasn't passed yet and it won't get any better. Well, we will wait and see how things change in the future. Accept Credit Card

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