Class in session: Why aren't the bailed out banks lending??

[Miroslav]

I hear this a lot these days: "You supported the bailout. Why aren't banks lending again if we gave them the money?"

Here's a pretty good response to that:

http://finance.yahoo.com/expert/article/mortgage/133927

"Is it not shameful that our financial institutions receive capital infusions from the government and, instead of lending the money out, they hoard it?"

I hear this complaint a lot, and the government has not done a very good job of responding to it. My view of government intent is that the capital infusions were meant to be "hoarded," defining that word as adding to the firm's capital rather than adding to its loans.

A necessary backdrop: The financial crisis began in the home mortgage market and then spread like wildfire to engulf the entire financial system. The core reason for the conflagration was that financial institutions were over-leveraged -- meaning that their debt was excessive. They were also under-capitalized, which means the same thing.

The justification for the capital infusions is that it will increase capital, not loans. The goal is to avoid future shocks arising from the failure of under-capitalized firms. The fundamental purpose is to prevent the crisis from getting worse. Other measures are needed for a cure.

It's too bad that apparently no member of Congress gets any of this...

[chunky]

Re: Class in session: Why aren't the bailed out banks lending??

I'm not as clued up as some of you lot, but wasn't it giving out money to people who couldn't afford to pay it back in the first place that got them into this mess. It seems a bit stupid to make the same mistake again.

[runningman]

Re: Class in session: Why aren't the bailed out banks lending??

the bailouts in general were stupid. But once you bailout one you have to bailout many more. I'm happy to hear that the banks are hoarding. Also the CEO's making 10's of millions off of it. The US has lost its balls and just accept bank robbers now a days.

Hopefully it will become the home of the brave again one day before it is to late. We will know once media outlets and bank robbers are shot in the street. But that will never happen. So the other option is to a one world goverment with one currency. Wipe the slate clean as well as the constitution.

[Miroslav]

Re: Class in session: Why aren't the bailed out banks lending??

I'm not as clued up as some of you lot, but wasn't it giving out money to people who couldn't afford to pay it back in the first place that got them into this mess. It seems a bit stupid to make the same mistake again.

You are correct. As I always say, losses must be realized throughout the economy first before normal lending resumes. These bailouts are to enable the financial system to survive the process of realizing those losses, as it is an extremely long and painful one.

the bailouts in general were stupid. But once you bailout one you have to bailout many more. I'm happy to hear that the banks are hoarding. Also the CEO's making 10's of millions off of it. The US has lost its balls and just accept bank robbers now a days.

We'd be much worse off without the bailouts, and if another major financial institution or two implodes overnight you will start to personally experience why that is the case. But we've already discussed that. But I do agree that stronger oversight should have been applied to the funds and that CEO bonuses should have been eliminated.

[runningman]

Re: Class in session: Why aren't the bailed out banks lending??

that is how you know it is a bank robbery when the CEO's are making that much money off of a bailout. Politicians and CEO's are so in bed together that you can't tell one from the other.

[Miroslav]

Re: Class in session: Why aren't the bailed out banks lending??

^^ well, you know it's not really a bonus because of the bailout money...they would have paid it out regardless. But I agree that no bonuses should have been paid out.

The salient point from the article is that we just print money and quickly buy our way out of this problem. That's not why we did the bailout in the first place. It really does take time. I encourage you and others to read the article in full.