Simple economics question

[Dark Chimera]

I have a simple economics question, or two.

USA banks lost money so they had none to loan so the USA government gave them some to lend.

Correct?

However, banks are still afraid to lend money because they do not trust the ability of a business to expand and be viable or for anyone, for that matter, to pay back the loan whether it be for a car or mortgage or whatever.

Is the above correct?

Loaning money is how banks make money so what has become their source of income ?

How long can they last without lending money?

Does this mean they will stop paying interest on saving and chequing accounts?

This problem is world wide so where is the USA government getting all this money to lend?

WTF is going on here?

 

[Gyaos]

I have a simple economics question, or two.
USA banks lost money so they had none to loan so the USA government gave them some to lend. Correct? However, banks are still afraid to lend money because they do not trust the ability of a business to expand and be viable or for anyone, for that matter, to pay back the loan whether it be for a car or mortgage or whatever. Is the above correct?

Incorrect and the above is also not correct.

Gyaos Baltar.

 

[Dark Chimera]

NO NO NO NO


It is called lassez-faire capitalism or Reaganomics


Reagan was the cowboy who started deregulation

Said regulations slowed up the market

WTF?

Reagan was a B grade actor so WTF does a cowboy know about economics?

He said he wanted to make every one a millionaire??????

If every one is a millionaire who is going to do the labor????

Regan was not bright. His son runs a radio talk show he is also average intellect.


Reagan called it the trickle down effect. Give the rich money and it will trickle down to the poor.

He is also the idiot who supplied arms to Iraq.

Did not forsee global warming

Started the useless shuttle program and space lab

Could not act

Brought down Russia and all the russians are poorer because of it

Lets not mention Yugoslavia

Cant think of one good thing he did.

Oh yeah ,one thing, he died

 

[Dark Chimera]

Incorrect and the above is also not correct.

Gyaos Baltar.

OK so please tell me what is happening.

 

[Rockslinger]

People who worked at Enron and perfected energy price market manipulation didn't go down. They got hired...

I didn't read the articles/books but my guess is that the Enron folks took their show to Lehman Brothers.
Did you know that when Bear Stearns went down many of their people went to the Far East so they could replicate there what they did on Wall Street?

 

[wetnose]

However, banks are still afraid to lend money because they do not trust the ability of a business to expand and be viable or for anyone, for that matter, to pay back the loan whether it be for a car or mortgage or whatever.

Is the above correct?

It's part of the story.

Other members are free to correct me but I believe what is happening is that the affected banks are holding a lot of crap on their balance sheets. This crap is ridiculously hard to figure out so no one really knows how much this crap is worth. Thus nobody knows how sound these banks are (probably worthless....which is reflected in their stock price, e.g. BAC, C)

Interbank borrowing is huge, but doubts about each other's credit worthiness stopped banks from loaning to each other. This caused a crisis of confidence, which underpins the whole financial system. That's why Uncle Sam had to step in.

The banks are still lending money but they're very cautious now. If the borrower meets the conditions, they're still lending. E.g I don't think anybody would turn down a loan to Cisco, Exxon or Walmart. But in some cases, they've pulled credit, even from good stable clients with long credit histories.

Loaning money is how banks make money so what has become their source of income ?

How long can they last without lending money?

Their main source of income is not just the granting of new loans but also the spread from existing loans (mortgages & business loans @ 5-8% to folks like you and me) and the cost of those loans (borrowings from the Fed @ 2-4%)

The risk to them is some portion of existing loans going totally kaput but yet being stuck with the tab.

How long they can last depends on the bank's financial strength. Some are better capitalized than the others (Canadians being the best in the world), the rest need bailouts.

Does this mean they will stop paying interest on saving and chequing accounts?

Who knows. Not entirely impossible.

This problem is world wide so where is the USA government getting all this money to lend?

WTF is going on here?

The problem has mostly affected EU and US. We haven't been affected as much since our banking regulation is stricter. Some of the asian nations (net savers and exporters) have built up considerable wealth funds to buffer themselves. Brazil will do OK.

The US Government is broke (has been for quite some time) and in order to fund themselves, they have been mostly borrowing from the chinese and japanese. The day those 2 stop buying treasuries, well fuhgedaboutit.

What the hell is going on? Basically the very smart guys making the rules thought that industry could self regulate and stepped back...considerably. Kinda like the hockey ref who decides that players bringing knives to the rink ain't such a bad thing. Also, policies from way back also encouraged lending to riskier candidates in the name of fairness. Chinese also played a role because they held the exchange rate artificially low. Given the rewards involved, greed took over and that's where we are now.

Where do we go from here? I dunno. Nobody does.

 

[Rockslinger]

The US Government is broke (has been for quite some time) and in order to fund themselves, they have been mostly borrowing from the chinese and japanese. The day those 2 stop buying treasuries, well fuhgedaboutit.

China has to keep lending to the U.S. so the U.S. can keep buying widgets made in China. This is the GM model. GM lends money to you so you can use the borrow money to buy GM cars. Pretty neat, eh?
The U.S. government is broke but there is immense private wealth in the U.S. Sorry, I meant there WAS immense private wealth in the U.S.

 

[wetnose]

China has to keep lending to the U.S. so the U.S. can keep buying widgets made in China. This is the GM model. GM lends money to you so you can use the borrow money to buy GM cars. Pretty neat, eh?

It can't go on forever. Here's what W. Buffett thinks...

http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html

 

[Rockslinger]

It can't go on forever. Here's what W. Buffett thinks...

Fortunately, there is a solution.
1) Raise taxes, and/or
2) Sell California to China.

 

[Meister]

It can't go on forever. Here's what W. Buffett thinks...

http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html

The article is 6 years old. Buffett has lost billions since.

 

[Doctor Zoidburg]

The US government has lent money to the banks so that the banks can lend it to people that need refinancing badly. The banks are willing to do this because the US government is gauranteeing these loans and the banks have no real risk. They are actulay paid with the interest they earn to distribute and administer these loans.

 

[fuji]

We are experiencing what some people call the "D processes", you will notice in the below a lot of words starting with "de" that explain what is going on.

What is happening to the banks is called "deleveraging" which leads to "deflation", "disinvestment", and "de-industrialization".

Banks in fact lend out more money than they actually have. A bank worth $1bil may have lent out $10bil in funds. They have just enough of their own capital, supposedly, to absorb any losses on the $10bil. What has happened recently is they got it badly wrong and the $1bil they have is not nearly enough to cover their losses.

So now perhaps the bank has been reduced to $500mil through losses, and instead of being leveraged 10x it wants to be leveraged only 5x, so it would like to have made only $2.5 bil in loans.

Unfortunately because of its previous activities instead of $2.5bil in loans the bank is sitting on $5bil (down from $10bil because of those losses and having sold off or cancelled many loans). So it has still actually loaned out twice as much money as it would like.

If the government pours in another $500mil to the bank, the bank will then have $1bil and $5bil in loans which with its new multiplier is what it wants to have--so it is content now, but it does no new lending, because it's got the leverage it desires.

In short all those bad loans have to be "unwound" and the total amount of lending scaled back in this process called "deleveraging". That means pulling money out of the economy, which leads to deflation, since as the banks pull out money there is less cash out there chasing the same number of goods.

Pulling cash out of industries also leads to "disinvestment" by firms: They don't have as much capital, as they can't borrow as much as they used to, so they reduce their investments. In the case of manufacturers, this leads to de-industrialization: Factories and plants and firms that relied on all that cash sloshing around find it isn't there any more and begin firing people and selling off assets, as the banks reduction in loans means that the average corporation must necessarily then have had less money lent to it as well, and less capital means less stuff.

The last time all this happened we called it a depression.

 

[Rockslinger]

A bank worth $1bil may have lent out $10bil in funds.

Lending money is one of the riskiest business on Earth. The profit on that $10billion loan is probably less than 1% and yet there is a risk of the bank losing 100% of the $10billion.

 

[fuji]

Lending money is one of the riskiest business on Earth. The profit on that $10billion loan is probably less than 1% and yet there is a risk of the bank losing 100% of the $10billion.

Or in the case of Lehman Brothers, AIG, E*Trade Bank, Merril Lynch, Countrywide, etc., much more than 100%.

Loans backed by troubled assets represent 40% of US GDP. Even if the government throws money at it, that just moves the 40% of US GDP problem to the public debt from the private debt--it still eventually has to be unwound and paid off. The deleveraging will simply shift from the private account to the public one with similar results to the economy.

This is not a problem that is going to be solved quickly, it is a deep hole that has to be climbed out of. It took Japan 10-15 years to climb out of a similar hole in the 80's. It took the United States 10-15 years to climb out of a similar hole back in the 1930's.

This is different than previous recessions which were driven by inflationary concerns and the business cycle. This recession is driven by those "D proceses" and until all that deleveraging is complete--which will take a long time, and be VERY painful--it's not going to go away.

 

[so-cal]

The banks have lots of loans out already to make money on. The banks dont want to lend because they want to hold capital to make there share holders happy.

Me being one of them. I dont want them to lend more money out either.

 

[Gyaos]

2) Sell California to China.

To Vancouver, not China.

Gyaos.

 

[so-cal]

You are just anti american. Admit it. You start the thread on economics and now you are talking about the war in Iraq.

 

[Dark Chimera]

In short all those bad loans have to be "unwound" and the total amount of lending scaled back in this process called "deleveraging". That means pulling money out of the economy, which leads to deflation, since as the banks pull out money there is less cash out there chasing the same number of goods.


The last time all this happened we called it a depression.

Great response fuji thx

My take on deflation is where the costs of goods go down, as opposed to inflation where the costs go up.

This may seem good but the problem with deflation is people do not spend because they think that tomorrow they can buy the same thing cheaper. No spending = no economy.

As a result deflation is actually worse than inflation at least in inflation people buy in anticapation that tomorrow things will be more expensive.

I could be wrong

Difference between now and the depression is in the depression government felt leaving things alone and balancing the budget by raising taxes was the best way to go as this stability would encourage economic growth


They now feel the opposite is the way to go

spend money and reduce taxes thereby build a debt to be paid off when economy recovers

Truth is no one knows for sure

In this case "the truth ain't out there"

 

[The Options Menu]

Great response fuji thx

My take on deflation is where the costs of goods go down, as opposed to inflation where the costs go up.

This may seem good but the problem with deflation is people do not spend because they think that tomorrow they can buy the same thing cheaper. No spending = no economy.

As a result deflation is actually worse than inflation at least in inflation people buy in anticapation that tomorrow things will be more expensive.

I could be wrong

Difference between now and the depression is in the depression government felt leaving things alone and balancing the budget by raising taxes was the best way to go as this stability would encourage economic growth


They now feel the opposite is the way to go

spend money and reduce taxes thereby build a debt to be paid off when economy recovers

Truth is no one knows for sure

In this case "the truth ain't out there"

Fuji had some solid posts on the subject-- Recalling some some of his previous posts I suspect he's further politically right than I am, but his analysis pretty solidly represents the economic consensus, as near as I can tell. A couple of clarifications though:

-US banks are leveraged about 12:1, but they are lightly regulated and checked out borrowers poorly. Many international banks are far more leveraged, but they also tend to be far more regulated and check out borrowers far more closely.

-Short to medium term the risk is deflation, longer term there is a severe inflation risk in the United States. Federal Governments can try to 'print' their way out of this mess as a method of devaluing debt and the repayments costs... Given the American phobia of responsible taxation this might very well be the way they go since inflation is a stealth tax against the poor and middle class (the folks that can't suitably divest themselves for the economy suffering inflation.).

-The corporate media loves to deride Public Sector Debt, and Personal Debt, giving us the big pep-talk about 'personal responsibility' but the really scary whack of debt is Private Sector Debt. Basically corporations have been in a debt financed mergers and acquisitions bender since the 70s. So feel free to chuckle anytime somebody says the Public Sector should jump though hoops to emulate the Private Sector (not that there are no best practises to be shared.), or they talk about 'responsibility'. For the most part it's a crock.

Solutions wise, Fuji's been there-- no matter the mix of (neo) conservative (Well, given that their solution is to let the rich divest from any given society, we probably shouldn't go there.), (neo) liberal, or social democratic policies used there is a long road ahead for the United States, and while not as bad here, we'll get knocked around by association.