>> To what extent can the current imbroglio be accurately described as a
>> capital strike?
Doug replied:
> Not much at all. Banks are refusing to lend to each other. If they're on
> strike, it's against their own kind.
C.G.E posted:
Corporate America sits on its cash By Justin Baer in New York Published: September 23 2008
[...] =============================================== The major hedge funds are also cash-rich and waiting. Blackstone's Stephen Schwartzman says "our businesses were set up to benefit from market turmoil and scarce capital...in the aftermath of the current situation, virtually all of our businesses will benefit once the dust settles" ( "Private-Equity and Hedge-Fund Players Stand Poised to Capitalize on Shakeout", WSJ, September 23, 2008). There have been similar reports about the Mideast, Asian, and other sovereign wealth funds and the large Chinese state banks who are also poised to invest after prematurely trying to catch falling knives last year. The leading commercial banks like JPMorgan Chase and Bank of America are also well capitalized and will emerge strengthened from the current crisis at the expense of the now defunct investment houses.
If the banks have not been lending to each other, it's because they can't be sure what kind of asset-backed junk paper is weighing down their counterparties, have been protecting themselves against runs, and have had alternative access to new lending windows opened by the Fed. US and European bank borrowing from the central banks has soared to record levels as interbank lending has shrivelled.
What the banks have been lobbying for is a taxpayer bailout to take all the crap off their books so they can make loans and investments with some assurance again. The Paulson plan is the response. What seems to me to be unique about it is that it is equally aimed at the good banks as well as the insolvent ones. If it were just a matter of cleansing the system of bankrupt institutions as is normally the case, the government would seize them and dispose of their bad assets. That's what happened in the S&L and previous bailouts.
But the Paulson plan proposes to BUY rather than seize bad assets from the banks - equally from HEALTHY as well as the shaky ones. AFAIK, that marks a real departure. In fact, the plan seems primarily aimed at the strong banks, designed to relieve them of their opaque (hence, unpriceable) assets in order to restore confidence in interbank lending and to encourage them - in concert with the outside hedge funds, SWF's, and other institutional investors who have been sitting on the sidelines - to recapitalize and shake out the rest of the industry and to resume more controlled lending to the housing and other sectors.