Or establish a National Bank to lend funds directly and let the other banks fail.
peace,
Jim Davis Ozark Bioregion, USA
http://stores.lulu.com/store.php?fAcctID=141735 http://www.amazon.com/Shia-Imami-Ismaili-Muslims-Introduction/dp/1430315628/ref=pd_bbs_sr_2?ie=UTF8&s=books&qid=1218913605&sr=8-2
--- On Wed, 11/5/08, Michael Pollak <mpollak at panix.com> wrote:
> From: Michael Pollak <mpollak at panix.com>
> Subject: [lbo-talk] FT: Why Banks Aren't Lending and the options to make them
> To: lbo-talk at lbo-talk.org
> Date: Wednesday, November 5, 2008, 1:53 PM
> http://www.ft.com/cms/s/0/0efb092e-a6bb-11dd-95be-000077b07658.html
>
> October 30 2008
> Financial Times
>
> Editorial
>
> Persuading banks to lend again
>
> Memo to bankers everywhere: Taxpayers did not rescue you
> because they love you. They rescued you because they need
> you. The rescues were intended to ensure the flow of credit
> to creditworthy businesses; yet that flow of credit seems to
> be slowing to a trickle. How should governments respond?
>
> Let there be no mistake: government support for the banking
> sector was necessary. Without it, several large banks
> looked at risk of collapse, and the panic among banks and
> their creditors could have brought down the entire financial
> system. Yet just because the rescue was necessary, it was
> never guaranteed to be sufficient.
>
> It is hard to be sure quite how serious the credit squeeze
> is for small and medium-sized businesses, but the signs are
> not good. The UK growth rate collapsed in the third
> quarter, which is ominous, given that the most acute phase
> of the credit crunch -- following the failure of Lehman
> Brothers -- began just days before that quarter ended. The
> Bank of England revealed on Wednesday that corporate
> deposits of cash with UK banks are at their lowest since
> 1980. Anecdotal evidence also paints a bleak picture.
>
> Naturally, many people are wondering why the UK Treasury --
> and the US Treasury, which faces a similar situation -- is
> not doing more to force the banks to lend after their
> expensive rescue. It is easy to tell a tale of greedy banks
> and complaisant governments; but the true story is less of a
> pantomime and, sadly, more intractable.
>
> The fundamental question is why banks are reluctant to
> lend. One possibility is pure fear: the banks lent too much
> before, destroying their reputations and tens of billions of
> pounds of their shareholders' wealth, and now are erring
> on the side of caution.
>
> A second possibility is that banks face a co-ordination
> problem. No bank wants to be the only one extending
> overdrafts and rolling over loans, but each might be
> emboldened if others did likewise.
>
> If these are the only reasons why banks are not lending,
> then wheedling, cajoling and arm-twisting from the Treasury
> is not only justified, it might also do some good. Banks
> might get over their collective paralysis. Solvent
> businesses would not fail for lack of funding and the worst
> consequences of the credit crunch would be contained.
>
> The trouble is that, while fear and lack of co-ordination
> are partial explanations for the drying up of credit to
> businesses, they are not the whole story. It seems likely
> that many of the loans banks unwisely made in the good times
> are now intrinsically unprofitable. They were predicated on
> cheap credit, ample risk appetite and a growing economy. Now
> that banks cannot borrow cheaply or raise capital, those
> loans cannot be rolled over without losing money.
>
> If that is the problem -- and to some extent, it must be --
> then there are no easy options for the government. Bullying
> will make little difference. Targets can be sidestepped
> easily: a demand to lend more money to small businesses
> might well simply mean less lending to medium-sized
> businesses.
>
> The UK government could step in directly and order the
> banks to lend to small and medium-sized businesses,
> effectively nationalising the whole sector and taking both
> the credit decisions and the credit risk. That may yet be
> necessary -- but only a hopeless optimist would expect that
> story to end happily. Loans would become political, the
> government taking responsibility for who survived and who
> went under. This remains the last resort.
>
> The government could also encourage banks to lend by
> lowering the price of the capital and credit insurance
> offered to them. Taxpayers would be paying to subsidise
> loans to businesses. Some of those businesses would be
> saved, and so too might other businesses that depend on
> them. Yet much of the money would go to businesses that
> need no subsidy, or businesses that are beyond saving. There
> is no simple answer and the problem is made yet worse by the
> fact that one bankruptcy can cause an avalanche of others
> with little warning.
>
> This is the tragedy of the great deleveraging. Since
> credit was unsustainably loose, it must inevitably tighten.
> Policymakers cannot prevent that; they must aim instead to
> prevent chaos and overshooting.
>
> For now, the focus shifts instead to the Bank of England,
> whose next decision on interest rates is due on Thursday.
> With inflation worries soon to become a distant memory, a
> dramatic cut in rates is needed. Two per cent would not be
> too much.
>
> Meanwhile, the government should stick to persuasion and
> leave more drastic plans on the shelf. It might be worth
> reminding the banks that, should persuasion fail, public
> outrage will ensure that those drastic plans gather no dust.
>
> Copyright The Financial Times Limited 2008
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