Monday, November 16, 2009
Bernanke Blames Banks For Slow Recovery and High Unemployment . . . Then Gives Them a Pat on the Back and a Wink
As I have repeatedly written, unemployment will worsen because the too big to fails aren't lending. See this.
Bernanke just said the same thing:
Federal Reserve Chairman Ben Bernanke on Monday blamed banks for slowing the recovery and keeping unemployment high.
Despite hundreds of billions in dollars in taxpayer bailouts, the nation's banks have dramatically reduced their lending this year.
"Banks' reluctance to lend will limit the ability of some businesses to expand and hire," Bernanke said. "Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."
Bernanke predicted that the unemployment rate will get worse before it gets better. "The best thing we can say about the labor market right now is that it may be getting worse more slowly"...
"Access to credit remains strained for borrowers who are particularly dependent on banks," Bernanke said. "Bank lending has contracted sharply this year...[and] banks continue to tighten the terms on which they extend credit for most kinds of loans."
But as I wrote in February:
The government could have forced the banks to use their bailout money for loans.
For example, unlike taxpayers in European countries - who get voting shares in return for their bailouts - the U.S. taxpayers have no say in the management of the companies they are giving their hard-earned money to.
And European bailouts included provisions protecting against excessive dividends and executive bonuses, and requiring loans to homeowners and small businesses:
Now, the Fed is begging banks to put the money into new loans or bolster loss reserves, instead of paying dividends for shareholders."Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout — only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses.
In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What's more, golden parachutes and bonuses already promised by the banks will still be paid out to executives — all before taxpayers are paid back."
But the left hand doesn't know what the right hand is doing. For example, the Treasury Department encouraged banks to use the bailout money to buy their competitors, and has pushed through an amendment to the tax laws which rewards mergers in the banking industry.
Moreover, as the above-linked article from Huffington Post shows, Bernanke is protecting the too big to fails:
Bernanke also touched on "too big to fail." ... Bernanke said in response to a question, that "making banks smaller isn't going to do it."
So while Bernanke is criticizing the banks on the one hand, he is patting them on the back with the other hand and giving them a big wink.
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Your portrayal of the banking scene in the UK is too flattering. It is true that the UK government has taken a large shareholding in most large banks, but the UK government is not doing anything effective with these powers: apart from (like Bernanke) pleading with banks to lend more.
ReplyDeleteRBS said a few days ago that, “Our customers are generally seeking to repair their balance sheets, not to increase borrowing. As a result, the demand for our lending is muted, especially from business customers” (source: http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=366669&re=7449&ea=227150)
Businesses and households have learned their lesson from the credit crunch: don’t borrow too much. So they are now deleveraging. This rings an alarm bell in the brain of anyone who understands economics: the alarm bell is called “Keynes paradox of thrift”. Governments and central banks do not seem to have tumbled to this: far from accommodating the desire to save, i.e. the desire not to borrow, governments are trying to encourage borrowing.
Laurel and Hardy would have done better.
What this shows is that the neoliberal assumptions that underlie monetarism as a policy tool are deeply flawed, especially in a liquidity trap. Bernanke obviously feels betrayed because according to the assumptions, loose policy should incentivize lending. Instead, the banks are taking advantage of the favorable spread to leverage themselves in asset markets rather than taking on the risk of lending in a uncertain economy for much less potential reward.
ReplyDeleteThis is disconcerting because fiscal policy is stymied. In this political climate, deficit spending is virtually impossible to augment since it requires congressional passage and approval by the president, when the polls show that the number one priority of the public is deficit reduction, on the false analogy that government finance is like household finance.
Meanwhile, the country is increasing savings and deleveraging, decreasing consumption and reducing aggregate demand. Without the government making up for the shortfall by either spending or reducing taxes, the output gap will increase and so will unemployment.
At this point, only reducing taxes seems politically feasible, but even that may be difficult, since the wealthy pay most of the taxes and the vast majority of people who are not wealthy are hurting. Reducing taxes on business and the rich would further enrage an already angry mob.
So there are no good options that seem doable given the prevailing mindset. As a result, this ship is dead in the water. All we need is a shock, and the ship will be taking on water again.
How many faces does Bernanke have? All of them Lie!
ReplyDeleteEnd the Fed.