Monday, March 1, 2010

Private loans and government guarantees

Felix Salmon adds more voice to the ‘loans growth is not affected by the size of deposits’ meme: The size of a bank’s deposit base is not a meaningful constraint on the amount of lending it does. And what’s more, if you have an adequately-capitalized bank, like say JP Morgan Chase, then throwing money at it either through fiscal policy (Troubled Asset Relief Program) or through monetary policy (cutting interest rates) is by no means guaranteed to change the amount of lending that the bank engages in.

If you want to get banks lending again, governments can try a bit of moral suasion, but ultimately it’s a decision that any bank is going to have to make on its own economic merits….When the government guarantees loans, for instance through the Small Business Administration, that might do more to help increase lending — but only by transferring credit risk out of the banking sector and onto the taxpayer.

If a bank is long on loans but deposits short, it has alternative funding channels, so it can go ahead and make the loan. But if it’s deposits long but loans short, there is nowhere it can go to get that creditworthy alternative (except in the government bonds market, or yes, loans guaranteed by government)

So if government wants lending to be more robust, focusing accommodating policies just on the banking side is not going to be very enough. More focus on supporting private industry and the consumers is needed (But yes, government guarantees will likely be a necessary component in this, to boost the economic merits of lending to these sectors.)

There is currently a large pent up opportunity globally just waiting to unrestrained (if the proper supports are in place). I said it before, I’ll say it here again: Global rebalancing will be the greatest source of growth, as well as the greatest challenge, for capitalism in the coming decade. The developed world needs to rebuild its manufacturing base, while the developing nations need to develop a thriving consumer economy. Much capital investment for production needs to be rebuilt in the developed countries, while much more advanced distribution chains and financial networks need to be established in the developing nations. The best guarantee is a government commitment to this rebalancing. Government has to support the profitable growth of manufacturing in previously hollowed out economies, and to support consumer social safety nets in previously export surplus countries.

1 comment:

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Jeff Watcerson
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