the bailouts were all about stimulating the economy ... in a few years.

[unblock]

the bailouts were all about preservation of institutions and insulating these major institutions from the excessive risks they undertook. not so much the direct recipients of government largesse, but the creditors behind them, as well as those further downstream.

and the idea that the money will be used for lending? fools! giving money to banks that overlent is the LAST place you would put your money if you wanted it used for new lending. if they already have too many loans on the books, all new capital will do is lower their ratios. these banks are zombies, incapable of serious new lending until they work down their existing pool of loans.

so if they're likely to be zombies for 4 years without help, then a bailout means they're zombies for 3 years or 2 years instead. it's an improvement, but it's not immediately helpful as far as new lending goes. it merely move forward the time when the zombies come back to life.



if they really wanted new lending, they should create a new bank to do the lending. possibly pay a fee to the private banks (zombies or otherwise) to use their infrastructure, but not simply giving them the money.

if they DID give the banks money directly, it needs to be in an explicitly segregated fund, mandated for new lending, not to be combined with the existing portfolio.

[freemarketer6]

1. You got it. Great post.

dd

[dkf]

2. Banks are lending, its the other sources of capital that have fallen sharply

due to the lack of appetite for the securitization that funded the economy much more than banks ever did.

The problem is you would have to GROW bank lending from where it was to make up for all the funds that have since dried up.

[unblock]

3. i'm using the term "bank" fairly loosly, i meant "all lending institutions

this would include conduits, and other securitization generating facilities.

the banks are lending, but mostly to very high credit corporates who don't really need the money. they in turn are not expanding, except by acquisition. lending to finance consolidation is not exactly what the government had in mind to get the economy going again.

[dkf]

4. But many of the sources used leverage to buy these securities.

The capacity to provide all those funds simply isn't there anymore.

That is why Obama and others have acknowledged the Federal Government is the only entity capable of ramping up to make up even part of the difference.

[unblock]

5. true enough

which is why starting with a CLEAN balance sheet is far more immediately helpful than pumping money into zombie institutions.

the federal government is not exactly wasting its money by putting it into the zombies, but it's not a plan that helps the economy today.

fnma2 is a good idea template. start new government sponsored entities, well funded with a mandate to lend today, and let the existing institutions work out the mess they got themselves into. the new institutions are the protection against the collateral damage from the mistakes of the old institutions. this at least has the benefit of avoiding the moral hazard issues.

[dkf]

6. Actually its more important to show the world that

our system isn't a fraud.

Its all nice to capitalize everything properly but if they don't believe in our rating systems and in our ability to find good prospects to lend to they won't buy securities like they used to.

When you look at all the screwed up balance sheets the world over, it becomes obvious that our system only operates with massive investment from the international committee. If we have nothing good to sell them, how can we provide the funding that Americans expect to perpetuate our way of life?