Tuesday, February 24, 2009

The Poop

The first grandiose statement of my return:
The government doesn't really want the banks to lend all that money.
How can I say this? Well think about it. The first thing that happens during a credit crisis is that people take money out of circulation, they stop spending. In order to float the economy and keep money moving (even accelerating) the mint has to print a dollar for every dollar that is removed from circulation.

This is why printing buckets might not necessarily be inflationary.

Then as people start spending again the mint must print less at the same pace to keep from having a flood of dollars in circulation (definite inflation).

Well, should the banks, tomorrow, start lending the hundreds of billions that they got as part of the TARP funds the fed will immediately lose control, the economy will be flooded with dollars and a loaf of bread will cost $17.50.

What are the banks supposed to do with the funds? Nothing.

That's right, nothing. They are supposed to sit on them. It is capitalization: nothing more, nothing less.

Now the banks don't like sitting on funds, so it was only natural that, under the previous administration, they would dole it out --massive parties, billion dollar bonuses, private jets. (Big head shake) The simple fact is that the banks lent out a multiple of their capitalization that was unsustainable and as they are not able to reduce the loans (how many houses can a bank own?) they have to correct the equation by increasing the other side of the balance sheet --their capitalization.

I think Citi gets this. BoA? I am not so sure.

One thing I can tell you is that they will not be nationalized before healthcare --can you imagine?

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