Let’s build our own stimulus package

Really. Let’s talk about this for a few days and figure out what would really be a good solution. Study the issue; don’t just read headlines. Share what you are learning here.

There’s value to this type of effort. A small group of Elmbrook residents really shaped the last referendum (and continuing discussion) by getting together and writing it all out. Who’s to say our ideas won’t go further up the chain?

I’ve spent the whole day researching lessons from the Great Depression. As always, I’m learning things I never knew before. While I’m not a great student of history when it comes to memorizing dates and names, I can be taught when it comes to concepts. I will concede all of my research has come off the Web, but there are reliable authors: Bernanke, Wheelock, The New Yorker.

(PS J. Strupp, this is your fault. You challenged me to a solution.)

Before we start, where do you think we are in this graphic?

First, I’m going to skip the laying of blame. It’s fun, but it won’t get us anywhere right now. I will say I’ve become more concerned with the parallel of a housing bubble in this crisis as developed from lower lending standards and that of the early 1900’s.

Then Congress passed the Federal Farm Loan Act in 1916, and banks offered 40-year loans at 6% interest to any man who had a farm to work.

Both actions by Congress created housing bubbles. The collapse in housing in the 1980’s – an era an old college professor swore would be considered depression and not recession – seemed to be brought on by a similar “honey trap.” This bubble is similar to today’s in that failed governmental regulation was at the heart of the initial lack of confidence.

It’s comforting that another major recession stands between ours and the Great Depression. Not every recession has to last forever. What brought us out of the 1980’s collapse? Oops. Another bubble, this time generated by the dotcom era. (These were Clinton’s glory years.) No, I don’t think we want that right away. What pulled us out of the Great Depression? A world war. Bad answer there as well.

So how do we get out of this one short of another bubble or a major war? Well, work has already begun in the form of tweaking monetary policy. This is Federal Reserve stuff, and Bernanke is a world-renowned student of the Great Depression. So far it seems to have served us well. Rather than waiting, the Fed stepped in right away to loosen monetary policy and attempt to get funds flowing again.

Here are two other suggestions I have:

1) stop paying interest on reserve funds

It looks like Congress in their infinite wisdom decided that in addition to Paulson’s recent plan to throw money around, they should pay interest on excess reserves. Here’s what banking reserves look like now:

Wee bit of ugly there. Remove the incentive for banks to hoard money. Hoarding creates scarcity which exacerbates collapse.

Also, I think I would:

2) set a temporary reserve maximum

Banks need to be lending, not stockpiling, cash.

Neither of these ideas cost taxpayers a dime. Both would get money moving again.

More tomorrow.

Comments

  1. Your reserves chart seemingly contradicts FRB info that “non-borrowed reserves” went NEGATIVE in October/08.

    IOW, bank reserves were “upside-down.”

    At this time, regulators are very, very, tight on Bank lending. That’s because Wisconsin banks are lending 110% of the deposits on hand (!!!) and regulators expect a LOT of losses on commercial-real-estate loans.

    So lending, unless we dream up another vehicle besides banks, is really a dead issue.

  2. Source the argument, Dad29.

    (Which reminds me – I need to ad a link for the chart above!)

  3. Ok, I linked the source.

    I don’t see how this chart is a contradiction. You are providing information for non-borrowed reserves, this is evidently all reserves.

    Banks are earning interest on this money for the first time according to the information I found. The “sure deal” is continuing to slow lending down at a time when we need to increase liquidity through lending.

    What Wisconsin banks say they are “expecting” could be a stall tactic to keep their sure thing.

  4. For some reason I posted this last night and it didn’t go threw. Oh well.

    I agree that removing incentives to hoard money is a favorable idea under certain circumstances. But you are failing to see the depths of the problem facing these guys.

    Paying interest on bank reserves to promote lending won’t do anything to solve the problem. They are insolvent. The banks have nothing left to liquidate so there will come a time in the near future where these big banks will actually have to USE federally mandated reserves to survive. They damn well know that, which is why they are hoarding. This is a survival game right now and mandating that banks lend taxpayer dollars to the marketplace is like telling the guy on the verge of bankrupcy that he has to go out and buy a new car. They are attempting to use the element of time to repair balance sheets that are leveraged many times over. Better to kill the horse now than watch it suffer for months.

    Of course, politically this doesn’t make sense until the banking systems’ insolvency is completely obvious and every “free market” option has been utilitized (and billions of taxpayer dollars have been flushed down the toilet in the process.) Incidently, the Japanese chose to let their banking system die the death of a thousand swords and cost their economy 10 years of zero GDP growth. We are attempting to do the very same thing.

    As a case and point of my argument, check out this article published today regarding the accounting practices being utilized by Citi. This article will give you a little idea of what the big guys are doing to keep themselves on life support:

    http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aQdj5yq_WnDI

  5. I agree that removing incentives to hoard money is a favorable idea under certain circumstances. But you are failing to see the depths of the problem facing these guys.

    Paying interest on bank reserves to promote lending won’t do anything to solve the problem. They are insolvent. The banks have nothing left to liquidate so there will come a time in the near future where these big banks will actually have to USE federally mandated reserves to survive. They damn well know that, which is why they are hoarding. This is a survival game right now and mandating that banks lend taxpayer dollars to the marketplace is like telling the guy on the verge of bankrupcy that he has to go out and buy a new car. They are attempting to use the element of time to repair balance sheets that are leveraged many times over. Better to kill the horse now than watch it suffer for months.

    Of course, politically this doesn’t make sense until the banking systems’ insolvency is completely obvious and every “free market” option has been utilitized (and billions of taxpayer dollars have been flushed down the toilet in the process.) Incidently, the Japanese chose to let their banking system die the death of a thousand swords and cost their economy 10 years of zero GDP growth. We are attempting to do the very same thing.

  6. You missed. We ARE paying interest on bank reserves. I suggest we DON’T pay interest on bank reserves.

    All banks are not insolvent. I suppose you are advocating for nationalization of these private entities?

  7. I advocate nationalization. Let’s do it now before we waste more money delaying the inevitable.

    As a case and point of my argument, check out this article published today regarding the accounting practices being utilized by Citi. This article will give you a little idea of what the big guys are doing to keep themselves on life support:

    http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aQdj5yq_WnDI

  8. You are talking goofy proposing nationalization. I suppose you want to own the oil drilling and refining industry, too?

  9. J. I’m so sorry. I found all of your hard work in the spam filter! I’ll work to get this all sorted out. Let me know if you don’t like the outcome.

  10. J. Strupp says:

    Everything is good just how you have it. I’m strugglin’ today.

    I’m talking temporary nationalization of the banking sector to clean them up and sell them off as viable entities. The Swedes did this very successfully (I know…a socialist state). Again, the problem is our bed wetting fear of the socialization of our banking system. Everyone worries that the government is going to screw things up……you know…..better to let the current bank managers run these guys because they’ve been so very successful thus far.

    I’m talking temporary nationalization here. As I said, this is an inevitable step in my opinion. Just depends on how much time and money we want to waste between now the then.

  11. Can’t provide a link b/c it’s my S-I-L’s (MBA) research; he only sent me an Excel chart.

    Be that as it may: the banks are earning interest on “all reserves,”–but they are also PAYING interest on a good chunk of those reserves: the ones they borrowed from the Fed. IOW, it’s kind of a wash.

    Better than nationalization is just allowing the FDIC to close/redistribute the loser banks, just like they do for smaller ones.

    Reason THAT is not happening is simple: shareholders take it in the neck on closings, and there are a LOT of shareholders in BofA, Citi, USBank (etc.)

    And the Fed cannot force Banks to loan money.

  12. (Cont’d)

    At any rate, all this is somewhat academic. A2/P2, LIBOR, (et al) are moving back into line the way they should be, meaning inter-bank lending/confidence is solid, again, mostly.

  13. Anybody notice that you started out talking stimulus and ended up talking about how to fix the banks?

    I believe you are on to the heart of the matter, even if it isn’t clear exactly how to correct it. Our lawmakers in Washington should take note.

  14. I’m getting there, Jeremy. I think the monetary policy should come first. I guess that’s because it doesn’t come out of our pocket.

    BTW, I hear there’s a revised porkuless package heading our way. Maybe Sunday?

  15. J. Strupp says:

    I agree that LIBOR spreads coming back in is an encouraging developement to say the least. But this doesn’t change the deteriorating position that the big banks are in, namely, that they have no net worth.

    Closing/redistribution of loser banks may be another way to go as well. But, as you say, shareholders take it in the chin and you can bet it’s the major shareholders that have Congress and the administration’s ear right now.