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The usual nonsense once again..

August 19th, 2010 · No Comments

“Recovery is stalled by uncertainty over regulation derailing credit supply…”  Yea, right.. 
In a lengthy post with useful data (you can read the whole post here), a certain Econophile (on ZeroHedge) argues that only if the government would get out of the way, recovery would happen like magic. It really is curious how one can go so astray when the central problem is literally screaming from the figure he himself uses in the article..

It doesn’t start off too promising:

I look at these issues quite differently from Keynesian and Neo-classical economists. As we have seen the Fed has been unable to stimulate money growth through zero interest rate policy (ZIRP) or through quantitative easing (QE). This is something that their theories not been able to adequately explain

No? Really? Ever heard of the Keynesian liquidity trap, Econophile? Could it be that the increase in bank reserves are just sitting there because there is no credit demand (see below, as this is the main point of difference between Econophile and us).

Anyway, as we’ve argued extensively, one cannot say the policies haven’t worked as we don’t know what would have happened in the absence of these policies (but there are numerous clues to what would have happened, see article here and that isn’t exactly comforting..).

The real problem of the economy is presented in this figure (it’s right under Econophile’s nose, but he turns his nose at it), consumers are de-leveraging, cutting back debt and lending, restoring balance sheets and savings.

Not according to Econophile:

Consumers are doing all the right things now to help the economy recover. Their deleveraging and savings will help fuel new growth.

How’s that? He doesn’t enlarge but we suspect it will be the old ‘loanable funds’ stuff that doesn’t work under present conditions (increased savings is would reduce the interest rate, which would increase borrowing and investment, but interest rates are already rock bottom and despite that, the credit demand simply isn’t there, see below).

If consumer spending (70% of the economy) is not the barrier to recovery, then what is?

It’s credit supply, according to Econophile:

The process by which banks would start lending and create real, organic economic growth requires two things to happen:

1. Banks need to get rid of bad debt on their books, which is mainly CRE debt, and raise capital and return to sound banking practices.

2. Businesses need to see “regime certainty” and steady economic recovery before they borrow and expand their businesses.

As to No. 1, the government has been doing everything they can to prevent banks from liquidating bad investments. And as to No.2, the government’s barrage of new legislation is creating uncertainty for businesses (“regime uncertainty”). That, plus the stimulus seesaw and new banking policies (No. 1) are inhibiting economic growth which makes businesses reluctant to borrow. It is obviously much more complex than this, but these are the brightline issues.

Yes, of course! Banks are unwilling to loan because they’ve been bamboozled by government…

We have a different, far simpler explanation:

  • Credit demand (rather than supply) is weak because the consumers are de-leveraging (see graph below), so they increase savings, reduce debts, borrowing, and spending, which also happens to translate into lower demand for products, which is why, until that picture changes, companies have little reason to invest, even more so because existing plant utilization is very low to historical standards (if companies cannot even fully occupy their existing plant, why build new ones?) and they’re sitting on a pile of cash (earnings are pretty good and investment is low, translating into a stack of cash). So why would credit supply rather than credit demand by companies be the problem?? That doesn’t make sense at all. Isn’t it entirely logical to expect low credit demand in the present economic environment? Banks sitting on at least a trillion of excess reserves, thanks to the Fed. They could lend considerably more, if the credit demand was there. But it isn’t.

However, the government actually did some good! Rare is the occasion where you can read something positive about Dodd-Frank on the pages of ZeroHedge, but Econophile ascribes the recent uptick in lending to that:

But there is a reason they are easing credit for small borrowers that doesn’t have anything to do with lending standards. Rather, it is because the big banks now realize that the Dodd-Frank Act took away some of their big profit centers and they understand that they will now be more like banking utilities providing garden variety services to borrowers and savers. Consequently the big banks are now aggressively going after as much business as they can get and this includes small business borrowers. As a result of this competition, credit has eased.

If he’s right here, we would very much welcome that. Banks should be banks, not casino’s playing the markets with other people’s money.

Tags: Credit Crisis · Opinion