"the banks are hoarding cash" -- so now what happens?

[grapejelly]

http://commoditybullmarket.blogspot....-bailouts.html

Here’s how the scam operated: the Treasury borrowed our dollars via the sale of Treasury notes and deposited the cash at the Fed. The Fed used the money to relieve banks of their most toxic liabilities. But instead of lending it, the banks simply bought more Treasuries, thereby polishing up their balance sheets. This is made starkly evident by Bud’s second chart, where you can see that cash was being hoarded even as lending declined.

(boldface added)

So now, the story is as follows:

1. The US gubmint has bailed out (and continues bailing out) the banks.
2. The banks are supposed to start lending again.
3. Instead, the banks have bought US Treasury paper for risk free returns.

My observations:

1. No wonder UST short term yields have been basically zero.

2. Who is supposed to borrow all this new money? That is the bottom line.

Congress and the Administration is pressing the banks to start lending. But who is credit worthy today?

1. Not homeowners with so many under water and collateral values plummeting

2. Not big business with profits plummeting

3. Not consumers who are up to their eyeballs in debt, with defaults skyrocketing

We can see the absurdity of the situation, can't we. This mantra "the banks have GOT to start lending again" is the height of stupidity.

What the banks are doing makes sense. Soak up all this bailout money and buy US Treasuries. Why not? What else are they supposed to do with the money?

And, let's see...maybe this is INTENTIONAL. I mean, the US Gubmint has figured out a perpetual motion machine...a machine that drives their borrowing costs to near zero, drives the USD up (making imports of oil cheaper), drives commodity prices down (making imports of oil cheaper)...

What is wrong with this pitcher?

[we_are_toast]

Re: "the banks are hoarding cash" -- so now what happens?

2. Who is supposed to borrow all this new money? That is the bottom line.

Congress and the Administration is pressing the banks to start lending. But who is credit worthy today?

1. Not homeowners with so many under water and collateral values plummeting

2. Not big business with profits plummeting

3. Not consumers who are up to their eyeballs in debt, with defaults skyrocketing

We can see the absurdity of the situation, can't we. This mantra "the banks have GOT to start lending again" is the height of stupidity.

I've been wondering about this also. Not necessarily the worthiness of the borrowers, but more of why, and fear.

Why would a company want to borrow when their sales are dropping?
And why would consumers who are scared we are entering a depression want to borrow?

So I agree that the fall in credit may not be due to the banks unwillingness to lend, but rather no one wants to borrow.

Which then leads to the Poom of Ka-Poom. If I understand correctly, (and I may not), the government has the ability to print all the money we need, and even without that there is enough dollars that can be repatriated to cause a Poom. I'm convinced that the ability to supply the dollars for a Poom is there. But what about velocity?

Could we run into the same situation that credit is experiencing now? The resources are available, but the psychology of the public isn't. Could the depression (the fearful, sad attitude of the consumer) last long enough to cause a goods and services deflation?

Does this boil down to, the spender of last resort (government) must step forward and provide the velocity to get Poom going?

[grapejelly]

Re: "the banks are hoarding cash" -- so now what happens?

I've been wondering about this also. Not necessarily the worthiness of the borrowers, but more of why, and fear.

Why would a company want to borrow when their sales are dropping?
And why would consumers who are scared we are entering a depression want to borrow?

So I agree that the fall in credit may not be due to the banks unwillingness to lend, but rather no one wants to borrow.

Which then leads to the Poom of Ka-Poom. If I understand correctly, (and I may not), the government has the ability to print all the money we need, and even without that there is enough dollars that can be repatriated to cause a Poom. I'm convinced that the ability to supply the dollars for a Poom is there. But what about velocity?

Could we run into the same situation that credit is experiencing now? The resources are available, but the psychology of the public isn't. Could the depression (the fearful, sad attitude of the consumer) last long enough to cause a goods and services deflation?

Does this boil down to, the spender of last resort (government) must step forward and provide the velocity to get Poom going?

the government is stepping forward and spending more and more and more...so they are the borrower and spender that is taking the place and crowding out any private sector borrowing that would take place.

There is virtually no chance of a goods and services deflation because the government appetite to borrow and spend is without limit.

[GRG55]

Re: "the banks are hoarding cash" -- so now what happens?

the government is stepping forward and spending more and more and more...so they are the borrower and spender that is taking the place and crowding out any private sector borrowing that would take place.

There is virtually no chance of a goods and services deflation because the government appetite to borrow and spend is without limit.

Even if it runs trillion $ annual deficits, the US Federal government has no chance of filling the hole left by contraction in private sector demand if the savings rate rises just a few percent. There is a political ceiling to the deficits that even the USA can run. Even at a 20% unemployment rate, 8 out of 10 workers still have a job, still pay taxes, and most do understand that its their future taxes that will pay the bill. The backlash against bailing out the banks is growing all over the world; it's clear that TARP, and its supporters, are wildly unpopular in the US heartland.

The negative economic consequences of a significant rise in the US savings rate was identified by a few of the more astute observers in the aftermath of the TMT bubble [just one example is the late Leon Levy, who discusses this, and uses the word "Depression", in his 2002 memoir "The Mind of Wall Street: A Legendary Financier on the Perils of Greed and the Mysteries of the Market"]. Just like iTulip, I cannot recall any of them expecting that Sir Alan and Co. would inflate the housing market into a new bubble and drive the savings rate even lower [ultimately negative for a short period] thus compounding the problem and the ultimate consequences, by at least one order of magnitude.

In the absence of another bubble, and soon, all that fiscal policy can now do is try to cushion the fall. Given the change in tone of the rhetoric coming from D.C. [something EJ identified in a recent post], it seems reasonably certain that everyone from the President on down understands that reality, even if they cannot speak about it openly.

[grapejelly]

Re: "the banks are hoarding cash" -- so now what happens?

Even if it runs trillion $ annual deficits, the US Federal government has no chance of filling the hole left by contraction in private sector demand if the savings rate rises just a few percent. There is a political ceiling to the deficits that even the USA can run. Even at a 20% unemployment rate, 8 out of 10 workers still have a job, still pay taxes, and most do understand that its their future taxes that will pay the bill. The backlash against bailing out the banks is growing all over the world; it's clear that TARP, and its supporters, are wildly unpopular in the US heartland.

The negative economic consequences of a significant rise in the US savings rate was identified by a few of the more astute observers in the aftermath of the TMT bubble [just one example is the late Leon Levy, who discusses this, and uses the word "Depression", in his 2002 memoir "The Mind of Wall Street: A Legendary Financier on the Perils of Greed and the Mysteries of the Market"]. Just like iTulip, I cannot recall any of them expecting that Sir Alan and Co. would inflate the housing market into a new bubble and drive the savings rate even lower [ultimately negative for a short period] thus compounding the problem and the ultimate consequences, by at least one order of magnitude.

In the absence of another bubble, and soon, all that fiscal policy can now do is try to cushion the fall. Given the change in tone of the rhetoric coming from D.C. [something EJ identified in a recent post], it seems reasonably certain that everyone from the President on down understands that reality, even if they cannot speak about it openly.

Why is a rising savings rate a bad thing?

Savings are, in my acceptance of the term, defined as consumption levels below income levels.

Why is it bad to consume less than your income?

I can see that the present system has a lot of actors who count on consumers saving nothing, in order to make a profit.

But if consumers start saving again, isn't that a good thing? If we save, we can then invest some of our surplus, assuming that taxes and inflation do not eat up all our savings...

OH WHOA!!!!!! That is a big assumption. At a 5.9% of the GDP, the "stimulus" will eat up that much of your savings in a year, assuming no other currency depreciation...so even a 6% savings rate will be totally undermined by this "stimulus."

That is the reason the stimulus is 100% likely to fail completely. The present administration is copying FDR whose stimulus failed completely also.

It will eat into savings and income levels, meaning high inflation AND a depressed economy. Couldn't be a worse combination.

And it's happened before.

The Washington Post actually had a halfway decent article about this today, an op ed piece by Amity Schlaes

http://www.washingtonpost.com/wp-dyn...60.html?sub=AR

But Roosevelt the economist is unworthy of emulation. His first goal was to reduce unemployment. Of his own great stimulus package, the National Industrial Recovery Act, he said: "The law I have just signed was passed to put people back to work." Here, FDR failed abysmally. In the 1920s, unemployment had averaged below 5 percent. Blundering when they knew better, Herbert Hoover, his Treasury, the Federal Reserve and Congress drove that rate up to 25 percent. Roosevelt pulled unemployment down, but nowhere near enough to claim sustained recovery. From 1933 to 1940, FDR's first two terms, it averaged in the high teens. Even if you add in all the work relief jobs, as some economists do, Roosevelt-era unemployment averages well above 10 percent. That's a level Obama has referred to once or twice -- as a nightmare.

The second goal of the New Deal was to stimulate the private sector. Instead, it supplanted it. To justify their own work, New Dealers attacked not merely those guilty of white-collar crimes but the entire business community -- the "princes of property," FDR called them. Washington's policy evolved into a lethal combo of spending and retribution. Never did either U.S. investors or foreigners get a sense that the United States was now open for business. As a result, the Depression lasted half a decade longer than it had to, from 1929 to 1940 rather than, say, 1929 to 1936. The Dow Jones industrial average didn't return to its summer 1929 high until 1954. The monetary shock of the first years of the Depression was immense, but it was this duration that made the Depression Great.

[GRG55]

Re: "the banks are hoarding cash" -- so now what happens?

Why is a rising savings rate a bad thing?

I didn't say that saving was a "bad" thing.

I merely pointed out that there will be immediate negative economic consequences to a rising savings rate in the USA, not the least of which is much higher unemployment. That is irrefutable.

And if the savings rate rises materially, the Federal government's fiscal stimulus abilities won't come anywhere near offsetting these effects because, contrary to your earlier assertion, it does not have infinite ability to run deficits, tax and spend.

Savings are, in my acceptance of the term, defined as consumption levels below income levels.

Why is it bad to consume less than your income?

I can see that the present system has a lot of actors who count on consumers saving nothing, in order to make a profit.

But if consumers start saving again, isn't that a good thing? If we save, we can then invest some of our surplus, assuming that taxes and inflation do not eat up all our savings...

You are describing a critical element of the needed restructuring of the US [and by extension, global] economy. btw I don't see anything inconsistent with what you describe and iTulip's view of what is required to rebuild the US economy on a better model. However, as with any significant restructuring the costs [pain? :eek: ] are immediate, the invoice potentially huge, but the benefits are realized only over time. In this case it is likely to be quite a long time - well beyond the 4-year duration cycle of an Administration, and certainly beyond the attention span and pain threshold of a typical voter.

Which raises the question...Is it [restructuring] politically feasible?

OH WHOA!!!!!! That is a big assumption. At a 5.9% of the GDP, the "stimulus" will eat up that much of your savings in a year, assuming no other currency depreciation...so even a 6% savings rate will be totally undermined by this "stimulus."

That is the reason the stimulus is 100% likely to fail completely. The present administration is copying FDR whose stimulus failed completely also.

You are coming at this with a firmly held ideology. I disagree with you about the results of FDR's New Deal. You, and the commentators you cite, measure both the New Deal and the present fiscal efforts against a benchmark of completely reversing or offsetting the consequences of the credit bubble implosion...anything less is deemed "failure".

"...In the 1920s, unemployment had averaged below 5 percent. Blundering when they knew better, Herbert Hoover, his Treasury, the Federal Reserve and Congress drove that rate up to 25 percent. Roosevelt pulled unemployment down, but nowhere near enough to claim sustained recovery. From 1933 to 1940, FDR's first two terms, it averaged in the high teens. Even if you add in all the work relief jobs, as some economists do, Roosevelt-era unemployment averages well above 10 percent..."

Unfortunately that expectation is utterly unrealistic. Just as FDR couldn't bring unemployment back to 5% in the face of a debt deflation, there is today no policy prescription that can completely offset the effects of the implosion of FIRE Economy v.2. The best they can do is try to cushion the worst effects and, if any common sense remains in Washington, alter the regulatory, tax and economic policy framework of the country to support productive investment...the last being something that I am certain you and I do agree on.

[vinoveri]

Re: "the banks are hoarding cash" -- so now what happens?

Not understanding the specifics of the USA's demographics on debt and savings, only generally that we are "over-indebted" and "under-saved", I offer the following observations/comments to the questions that are being posed - namely what if the consumer starts saving more and stops borrowing and spending (both good things in my view by the way)

1. why would one save when they realize that either their savings will be inflated away or directly taxed away?

2. why would not the average consumer borrow more as they see the bail-outs happening, not only to the banks, but to corps and ultimately consumers-i.e., they borrow more with rational decision that default is a legitimate option. This is something I don't think Hudson recognizes, private consumer debt is starting to be forgiven, and I think will accelerate with some sort of means testing resulting in the most over indebted (and in some cases the most irresponsible) having their debts forgiven, either in principal forgiveness or in ch 7 with generous exemptions.


What is and will go, bailing out banks, the then business, and then some subset of consumers, all on the backs of the taxpayers, raises the ultimate moral hazard to the level of "hazard due to lack of morals", when the general populace understands there is no ethical standards or justice, and they see they've been outright ripped off they will simply game the system.

I see very little evidence so far in my town of ~25000 of a recession; the shops are not empty and the restaurant parking lots are full.

[Supercilious]

Re: "the banks are hoarding cash" -- so now what happens?

We can see the absurdity of the situation, can't we. This mantra "the banks have GOT to start lending again" is the height of stupidity.

What the banks are doing makes sense. Soak up all this bailout money and buy US Treasuries. Why not? What else are they supposed to do with the money?

And, let's see...maybe this is INTENTIONAL. I mean, the US Gubmint has figured out a perpetual motion machine...a machine that drives their borrowing costs to near zero, drives the USD up (making imports of oil cheaper), drives commodity prices down (making imports of oil cheaper)...

What is wrong with this pitcher?

Here is the answer

http://www.thebailoutgame.us/


I believe the game is actually much simpler. This "crisis" has put the whole global financial system in distress and since H&B are ubermasters of the dollar they are the ones who dole the financial parachutes and they can let a bank die or live.

This game is not extended only to banks. Whole countries are in the same situation. China can peg its currency to 30 yuans to the dollar, but if J6B is scared and starts saving (or stops over spending) nobody will buy all that cheap plastic crap... and so on from the Russian oil to the exquisite financial cod of Iceland.

And you are right ... of course is intentional ...

[politicalfootballfan]

Re: "the banks are hoarding cash" -- so now what happens?

----nm----

[c1ue]

Re: "the banks are hoarding cash" -- so now what happens?

Just a comment: a lot of people conflate 'savings' with 'interest income'.

In the past, savings was just that: some pile of money you could use in case you got in trouble, or as an accumulation toward a future large purchase.

Today a lot of people associate savings with income.

[GRG55]

Re: "the banks are hoarding cash" -- so now what happens?

Just a comment: a lot of people conflate 'savings' with 'interest income'.

In the past, savings was just that: some pile of money you could use in case you got in trouble, or as an accumulation toward a future large purchase.

Today a lot of people associate savings with income.

Don't understand that last sentence c1ue.

I'd been under the impression that people had been associating "savings" [like "saving" for retirement] with "asset" appreciation [like "my house just went up another 20%, so why would I be an idiot and put money in the bank when I can buy another property..."]

[c1ue]

Re: "the banks are hoarding cash" -- so now what happens?

GRG,

Just a random comment.

It struck me that many people - both from iTulip and real world experiences - associate savings with income production.

I used interest income as an example, but rental income and dividend income is no different.

While getting income on savings is nice, ultimately the true function of savings is not passive investment income but rather a combination of future capital expenditure, emergency funds, and security.

One of the biggest mental hurdles I suspect many people are failing to jump over right now is this association of savings with profit/income.

And why is this important? Because the subtle deformation of the meaning of savings from 100+ (or even 50+) years ago means many people take on a lot of extra risk without intending to - thinking that it is a necessary part of saving.

In fact passive income is not a necessary part of saving.

[vanvaley1]

Re: "the banks are hoarding cash" -- so now what happens?

The public retains possession of their property and does not voluntarily vacate without due process of law. Let's see if the banks can produce clear title on these properties and meet the obligations of legal ownership according to the letter of the law.

For some reason, this post triggered a long lost memory. Consequently, I'm gonna get the details and other stuff wrong as long and short term memory are off playing somewhere in Davos or some other god forsaken site. They're been foreclosed on and have left that area of memory. So I'll need some assistance if you know of the legal case that was argued in Minnesota about this issue. I don't recall where I read this article either. It may even have been on this board. So any help will be appreciated.

As I partially recall, the issue was whether any earnest money had been exchanged in a contract for a mortgage. No money was given. All that occurred was a computer input detailing the terms of the mortgage, etc. and that this was creating more money for the system of money creation but actual 'money' for the transaction never was used...thus the contract was null and void as that was what was called for.

I'm not an attorney and out here in drought ridden California we use deeds of trust. So I don't know if this case, which I vaguely recall was won by the person who got the mortgage, is valid, was appealed, or stood. Any help would be appreciate...any water too.

[grapejelly]

Re: "the banks are hoarding cash" -- so now what happens?

http://www.bloomberg.com/apps/news?p...niVQk&refer=us

eb. 2 (Bloomberg) -- President Barack Obama will require banks to boost lending to consumers and companies in return for taxpayer aid from the $700 billion bailout fund, in a departure from Bush administration policy, a key lawmaker said. “You’re going to see the Obama administration,” learning lessons from the first phase of the program, “push for much more lending,” House Financial Services Committee Chairman Barney Frank, who helped write the financial-rescue law, said yesterday on ABC television’s This Week program. “There are going to be some real rules in there.”

Geithner Message
During his confirmation hearing last month, Geithner told the Senate Finance Committee that he would expect banks to step up their lending activities in exchange for receiving government funding, particularly if the banks were in good shape to start.

“As a condition of federal assistance, healthy banks without major capital shortfalls will increase lending above baseline levels,” Geithner said.