Sentences to ponder

Is there a way out?

Buiter's argument — which applies just as much to the US as it does to the UK – is that the only way to get banks lending again is to nationalize them.  Otherwise, they'll simply hoard liquidity in a desperate attempt to avoid being nationalized.

That's Felix Salmon.  

Crying_baby

Comments

Posting that pic is surprisingly out of character for a prestigious professor. Not that it wasn't deserved...

The problem with the "banks won't lend" argument is -- how do we know this? The Fed's data show that lending by domestically chartered U. S. banks is up almost 7% year over year, and over 3% in the (roughly) third of a year since August (just before the big financial market bust). You can still build a "won't" lend" argument on these data, but it takes some work.

I think that the nipper may be hoarding liquidity.

I guess I disagree with some of the other commenters. The photo is wonderful.

so congress will decide to whom we should lend? that worked out well last time.

banks aren't lending because liquidity doesn't eradicate risk. so until their risk is gone, from their perspective, they should hoard.

how does nationalizing them lower the risk in lending?

Despite all the barriers put up against doing so, if banks are nationalized, I will abandon them for holding any financial assets. State run banks always practice the same policies- propping up unprofitable but politically connected businesses. My taxes are all you get for doing this- I won't participate beyond that.

"Buiter's argument -- which applies just as much to the US as it does to the UK" would seem to apply to any other industry as well.

So, the argument goes, "these folks (banks) aren't doing what we (the gov't) wants them to, therefore, we must take them over." As Morpheus would say "How is this different from any other day?" But it is worse. "We (the gov't) make these rules, and when the banks try to follow them, they can't do other stuff we want done, therefore, in order to preserve the rules and get our way, we must take over the banks."

Buiter: "There are many factors contributing to this reluctance of the banks to engage in new lending.
Normal, sensible commercial prudence in the face of a severe cyclical downturn is one reason. In a recession, lending is riskier.
Irrational fear and near-panic, resulting in excessive caution and risk aversion is another reason for low volumes of new lending..."

What is irrational about a fear of something that guys like this are arguing for (nationalization)?

Buiter: "Contradictory messages from the authorities are a third reason. The Treasury and the PM shout ‘lend, lend!’. They also shout ‘pass on all rate cuts fully to the borrowers’ thus ensuring that new lending won’t be profitable."

Mmmmkay, so how bout quit that? How much are capital requirements and other regs encouraging hoarding? Foreclosures are an incentive not to get behind in your payments, but when everyone is underwater, they are a perverse incentive. Capital requirements and mark-to-market are supposed to keep banks from getting underwater, but when all banks are underwater, they are likewise a perverse incentive.

This says it all:
"Buiter notes that the enormous practical problems associated with the creation of a "bad bank" simply disappear if the entire holding company is 100% owned by the government: "It would be a redistribution of wealth from one state-owned entity to another state-owned entity", with no fiscal cost at all and no problems associated with the value placed on the bad bank's assets."

So, it's not good, but at least it's a government solution! Those of us who care about such things are not impressed. What "good practice" rules does the gov't have in place that are causing the only solution to be a takeover? Get rid of those because once the government owns the banks they will all be destroying value.

What is so great about these big banks? And really, what would be great about them being run by the gov't? Remove the hobbling regulations on all the other banks and let them take over market share.

Mick,

That's exactly right. To whom should they sell a mortgage?

These bozos act like banks--even huge ones---are supposed to keep a loan on their books. But that's not how banks have been making money.

So now they are supposed to lend to the people who can't pay their current mortgages, and they aren't supposed to sell the loan either. Oh, and they are supposed to magically properly evaluate the collateral, and somehow magically determine their risk, too, and price that in.

Funny, I wouldn't have anyone to lend to right now either if I were a bank.

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