Billionaire investor George Soros gave an insightful interview on CNBC today at the World Economic forum with Maria Bartiromo (who is much easier on the ears than Dylan Ratigan)…
It’s interesting how he says that we shouldn’t put money into creating banks for bad assets, but recapitalize the good ones. Good point, but it strangely made me imagine him with a Good Bank/Bad Bank list, smoking a pipe and talking to elves.
Our problem is two pronged: banks ain’t lending, and people ain’t spending.
The overriding reason for all of this is fear.
Do you remember when Lehman collapsed? Didn’t that make you want to hide your money in little cans all over your house?
No doubt that scared you into wanting to hold onto your money, but it also scared commercial banks. Banks have feelings too, y’know.
Banks need deposits and loans from other banks in order to meet their overnight capital requirements. Once the amount of cash in their vaults goes below a certain level, they either need to get more money (via deposits and borrowing) or shut their doors.
In return for your deposit, banks offer you a nice interest rate on your accounts and CDs (e.g., your deposits). They then lend out your money at a higher interest rate to folks wanting a mortgage or car, and as that person pays back the loan, they pay you the promised interest and pocket the difference.
Now, imagine the scenario where they give cousin Ray Ray a car loan, and Ray Ray is late paying it back. On top of that, imagine that you the depositor want to pull your money out of your account in order to stuff it in your mattress.
And the cherry on top would be if the bank could not get a loan from another source (like another bank) in order to replenish its cash reserves after you take out your money and Ray Ray disappears?
Imagine no more–scenarios like this happened to IndyMac and Countrywide, which are both no more.
And to make matters worse, what if a source of capital for you the commercial bank was the interest that you were earning on the mortgage-backed securities your bank owned? Now, imagine that those became worthless.
Where can you get the money to keep your doors open? These days, there aren’t many places. So all you can control is lending–e.g., no more lending, just in case you run into a Ray Ray or Pookie, or even a nice hardworking couple who just ran upon hard times. And just in case the economy gets worse, no lending may put you less at risk of having to close your doors one day.
What a mess. It’s like our capitalist system was a machine that became overheated and busted a gasket. Heck it’s blowing steam and spurting out screws. And I think a small rat just ran away with a guilty look its face. It’s just not working right now.
So the TARP stimulus is intended to give banks on Wall St the cash and confidence to lend, and the ARRP stimulus by President Obama is intended to give Main St the confidence to do business and spend money.
Whether it means disbursing stimulus money according to whose been naughty or nice, folks like Soros have it right. We need government money in order to help restore confidence.
It’s going to kill the dollar in the long run and our kids’ kids will be holding the bill long after we’re gone, but the alternatives (private sector funding, letting the economy fix itself, etc.)…well, I disputed that in an earlier post.
Ho ho ho.
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